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UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
December 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
EXCHANGE ACT OF 1934
For the transition period from
 
________
 
to ________
Commission File Number
1-15583
DELTA APPAREL, INC.
______________________________
(Exact name of registrant as specified in its charter)
Georgia
58-2508794
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
2750 Premier Parkway
,
Suite 100
Duluth
,
Georgia
30097
(Address of principal executive offices)
(Zip Code)
 
(
678
)
775-6900
______________________________
(Registrant’s telephone number, including area code)
______________________________
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01
DLA
NYSE American
 
Indicate by
 
check mark
 
whether the
 
registrant (1) has
 
filed all
 
reports required
 
to be
 
filed by
 
Section 13 or
 
15(d) of
 
the Securities
 
Exchange Act
 
of 1934
 
during the
preceding 12 months (or
 
for such shorter
 
period that the
 
registrant was required
 
to file such
 
reports), and (2) has
 
been subject to
 
such filing requirements
 
for the past
90 days. Yes
☑
 
No
☐
 
Indicate by check mark whether the
 
registrant has submitted electronically every Interactive Data File required to
 
be submitted pursuant to Rule 405 of
 
Regulation S-T
during the preceding 12 months (or for such shorter period that
 
the registrant was required to submit such files).
Yes
☑
 
No
☐
 
Indicate by check mark whether
 
the registrant is a large
 
accelerated filer, an accelerated filer, a non-accelerated
 
filer, a smaller reporting company, or an emerging
 
growth
company. See the definitions
 
of “large accelerated filer,”
 
“accelerated filer”,
 
“smaller reporting company”
 
and "emerging growth
 
company" in
 
Rule 12b-2 of the
 
Exchange
Act.
 
 
Large accelerated filer
☐
Accelerated filer
☑
Non-accelerated filer
☐
Smaller reporting company
☑
Emerging growth company
☐
 
If an emerging
 
growth company,
 
indicate by check
 
mark if the
 
registrant has elected
 
not to use
 
the extended transition
 
period for complying
 
with any new
 
or revised
financial accounting standards provided pursuant to Section 13(a)
 
of the Exchange Act
☐
 
Indicate by check mark whether the registrant is a shell company
 
(as defined in Rule 12b-2 of the Exchange Act). Yes
☐
 
No
☑
 
As of January 27, 2023,
 
there were outstanding
7,001,020
 
shares of the registrant’s
 
common stock, par value of $0.01
 
per share, which is the
 
only class of outstanding
common or voting stock of the registrant.
 
TABLE OF CONTENTS
 
 
 
Page
PART
 
I.
 
 
 
 
Item 1.
 
 
 
 
 
3
 
 
 
4
 
 
 
5
 
 
 
6
 
 
 
7
 
 
 
8
8
 
8
 
8
 
9
 
9
 
9
 
10
 
10
 
10
 
11
 
12
 
12
 
13
 
13
 
13
 
13
 
 
Item 2.
15
 
 
Item 4.
18
 
 
PART
 
II.
18
 
 
Item 1.
18
 
 
Item 1A.
18
 
 
Item 2.
18
 
 
Item 5.
18
 
 
Item 6.
18
 
 
 
21
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
PART 1.
 
FINANCIAL INFORMATION
 
Item 1.
 
Financial Statements
 
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 
(Amounts in thousands, except share amounts and per share data)
(Unaudited)
 
December 2022
September 2022
Assets
Cash and cash equivalents
$
327
$
300
Accounts receivable, less allowances of $
63
 
and $
109
, respectively
57,755
68,215
Other receivables
2,396
1,402
Income tax receivable
1,363
1,969
Inventories, net
258,891
248,538
Prepaid expenses and other current assets
4,114
2,755
Total current assets
324,846
323,179
Property, plant and equipment, net of accumulated depreciation of $
111,194
 
and $
108,565
, respectively
72,771
74,109
Goodwill
37,897
37,897
Intangibles, net
23,427
24,026
Deferred income taxes
1,342
1,342
Operating lease assets
49,313
50,275
Equity method investment
9,045
9,886
Other assets
2,800
2,967
Total assets
$
521,441
$
523,681
Liabilities and Equity
Liabilities:
Accounts payable
$
79,844
$
83,553
Accrued expenses
20,808
27,414
Income taxes payable
321
379
Current portion of finance leases
8,603
8,163
Current portion of operating leases
8,585
8,876
Current portion of long-term debt
9,514
9,176
Total current liabilities
127,675
137,561
Long-term income taxes payable
2,841
2,841
Long-term finance leases
18,465
16,776
Long-term operating leases
42,015
42,721
Long-term debt
148,899
136,750
Deferred income taxes
2,232
4,310
Total liabilities
$
342,127
$
340,959
Shareholder's equity:
Preferred stock - $
0.01
 
par value,
2,000,000
 
shares authorized, none issued and outstanding
-
-
Common stock $
0.01
 
par value,
15,000,000
 
authorized,
9,646,972
 
shares issued, and
7,001,020
 
and
6,915,663
shares outstanding as of December 2022 and September
 
2022, respectively
96
96
Additional paid-in capital
60,559
61,961
Retained earnings
163,035
166,600
Accumulated other comprehensive income
210
141
Treasury stock -
2,645,952
 
and
2,731,309
 
shares as of December 2022 and September 2022,
 
 
respectively
(43,896)
(45,420)
Equity attributable to Delta Apparel, Inc.
180,004
183,378
Equity attributable to non-controlling interest
(690)
(656)
Total equity
179,314
182,722
Total liabilities and equity
$
521,441
$
523,681
 
See accompanying Notes to Condensed Consolidated Financial
 
Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
 
(Amounts in thousands, except per share data)
(Unaudited)
 
Three Months Ended
December 2022
December 2021
Net sales
$
107,295
$
110,746
Cost of goods sold
93,672
87,743
Gross profit
13,623
23,003
Selling, general and administrative expenses
18,870
17,482
Other (income), net
(2,621)
(395)
Operating (loss) income
(2,626)
5,916
Interest expense, net
2,890
1,598
(Loss) earnings before provision for income taxes
(5,516)
4,318
(Benefit from) provision for income taxes
(1,917)
648
Consolidated net (loss) earnings
(3,599)
3,670
Net (loss) income attributable to non-controlling interest
(34)
25
Net (loss) earnings attributable to shareholders
$
(3,565)
$
3,645
 
 
Basic (loss) income per share
$
(0.51)
$
0.52
Diluted (loss) income per share
$
(0.51)
$
0.51
 
Weighted average number of shares outstanding
6,954
6,999
Dilutive effect of stock awards
-
86
Weighted average number of shares assuming dilution
6,954
7,085
 
See accompanying Notes to Condensed Consolidated Financial
 
Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Amounts in thousands)
(Unaudited)
 
Three Months Ended
December 2022
December 2021
Net (loss) income attributable to shareholders
$
(3,565)
$
3,645
Other comprehensive income related to unrealized gain
 
 
on derivatives, net of income tax
69
212
Consolidated comprehensive (loss) income
$
(3,496)
$
3,857
 
See accompanying Notes to Condensed Consolidated Financial
 
Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(Amounts in thousands, except share amounts)
(Unaudited)
 
Accumulated
Additional
Other
Non-
Common Stock
Paid-In
Retained
Comprehensive
Treasury Stock
Controlling
Shares
Amount
Capital
Earnings
Income
Shares
Amount
Interest
Total
Balance as of
September 2022
9,646,972
$
96
$
61,961
$
166,600
$
141
2,731,309
$
(45,420)
$
(656)
$
182,722
Net loss
-
-
-
(3,565)
-
-
-
-
(3,565)
Other comprehensive
income
-
-
-
-
69
-
-
-
69
Net loss attributable to
non-controlling
interest
-
-
-
-
-
-
-
(34)
(34)
Purchase of common
stock
-
-
-
-
-
-
-
-
-
Vested stock awards
-
-
(2,067)
-
-
(85,357)
1,524
-
(543)
Stock based
compensation
-
-
665
-
-
-
-
-
665
Balance as of
December 2022
9,646,972
$
96
$
60,559
$
163,035
$
210
2,645,952
$
(43,896)
$
(690)
$
179,314
 
Accumulated
Additional
Other
Non-
Common Stock
Paid-In
Retained
Comprehensive
Treasury Stock
Controlling
Shares
Amount
Capital
Earnings
(Loss)
Shares
Amount
Interest
Total
Balance as of
September 2021
9,646,972
$
96
$
60,831
$
146,860
$
(786)
2,672,312
$
(42,149)
$
(658)
$
164,194
Net income
-
-
-
3,645
-
-
-
-
3,645
Other comprehensive
income
-
-
-
-
212
-
-
-
212
Net income attributable
to non-controlling
interest
-
-
-
-
-
-
-
25
25
Purchase of common
stock
-
-
-
-
-
74,232
(2,143)
-
(2,143)
Vested stock awards
-
-
(1,766)
-
-
(76,460)
674
-
(1,092)
Stock based
compensation
-
-
140
-
-
-
-
-
140
Balance as of December
2021
9,646,972
$
96
$
59,205
$
150,505
$
(574)
2,670,084
$
(43,618)
$
(633)
$
164,981
 
See accompanying Notes to Condensed Consolidated Financial
 
Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 
Three Months Ended
December 2022
December 2021
Operating activities:
Consolidated net (loss) earnings
$
(3,599)
$
3,670
Adjustments to reconcile net (loss) earnings to net cash
 
used in operating activities:
Depreciation and amortization
3,844
3,629
Amortization of deferred financing fees
84
81
(Benefit from) provision for deferred income taxes
(2,101)
754
Change in inventory market reserves
163
851
Non-cash stock compensation
665
140
Gain on disposal of equipment
58
2
Other, net
(89)
(390)
Changes in operating assets and liabilities:
-
-
Accounts receivable
9,466
1,993
Inventories, net
(10,516)
(22,206)
Prepaid expenses and other current assets
(1,443)
(1,449)
Other non-current assets
1,188
699
Accounts payable
(3,723)
7,584
Accrued expenses
(5,030)
(7,572)
Net operating lease liabilities
(35)
206
Income taxes
(854)
(140)
Other liabilities
-
(1,050)
Net cash used in operating activities
(11,922)
(13,198)
Investing activities:
Purchases of property and equipment, net
(2,081)
(1,822)
Proceeds from equipment under finance leases
4,417
-
Cash paid for intangible asset
-
(51)
Cash paid for business
-
(583)
Net cash provided by (used in) investing activities
2,336
(2,456)
Financing activities:
Proceeds from long-term debt
133,918
138,543
Repayment of long-term debt
(121,431)
(121,293)
Repayment of capital financing
(2,332)
(1,783)
Repurchase of common stock
-
(1,718)
Payment of withholding taxes on stock awards
(542)
(1,092)
Net cash provided by financing activities
9,613
12,657
Net increase (decrease) in cash and cash equivalents
27
(2,997)
Cash and cash equivalents at beginning of period
300
9,376
Cash and cash equivalents at end of period
$
327
$
6,379
Supplemental cash flow information
Finance lease assets exchanged for finance lease liabilities
$
4,461
$
20
Operating lease assets exchanged for operating lease liabilities
$
1,807
$
1,401
 
See accompanying Notes to Condensed Consolidated Financial
 
Statements.
 
 
 
 
 
 
 
 
8
Delta Apparel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Note A— Description of Business and Basis of Presentation
 
Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and other subsidiaries, "Delta Apparel," "we," "us," "our," or the "Company") is
a vertically-integrated, international apparel company with approximately
8,500
 
employees worldwide. We design, manufacture,
 
source, and market a diverse portfolio
of core activewear and lifestyle apparel products under our primary brands of Salt Life®, Soffe®, and Delta. We are a
 
market leader in the on-demand, digital print and
fulfillment industry,
 
bringing DTG2Go's proprietary
 
technology and innovation
 
to our customers'
 
supply chains.
 
We
 
specialize in selling
 
casual and
 
athletic products
through a variety of distribution
 
channels and tiers, including outdoor
 
and sporting goods retailers,
 
independent and specialty stores,
 
better department stores and mid-tier
retailers, mass merchants, eRetailers, the U.S.
 
military, and through our
 
business-to-business digital platform. Our products are also
 
made available direct-to-consumer
on our ecommerce sites
 
and in our
 
branded retail stores.
 
Our diversified go-to-market
 
strategy allows us
 
to capitalize on
 
our strengths in providing
 
activewear and lifestyle
apparel products to a broad and evolving customer base whose
 
shopping preferences may span multiple retail channels.
 
We design and internally manufacture the majority
 
of our products, with more
 
than 90% of the apparel
 
units that we sell sewn
 
in our own facilities.
 
This allows us to
 
offer
a high degree of
 
consistency and quality, leverage
 
scale efficiencies, and react quickly
 
to changes in trends within the
 
marketplace. We have
 
manufacturing operations
located in
 
the United
 
States, El
 
Salvador, Honduras,
 
and Mexico,
 
and we
 
use domestic
 
and foreign
 
contractors as
 
additional sources
 
of production.
 
Our distribution
facilities are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products and weekly
 
replenishments
to retailers. We
 
were incorporated in Georgia in 1999, and
 
our headquarters is located in Duluth, Georgia.
 
Our common stock trades on the NYSE
 
American under the
symbol “DLA."
 
We operate on a
 
52-53 week
 
fiscal year
 
ending on
 
the Saturday
 
closest to
 
September 30.
 
Our 2023 fiscal
 
year is
 
a 52-week
 
year and
 
will end
 
on September
 
30, 2023 ("fiscal
2023"). Accordingly, this Quarterly Report on Form 10-Q presents our results for our first quarter of fiscal 2023. Our 2022 fiscal year was a 52-week year and ended on
October 1, 2022 ("fiscal 2022").
 
For presentation purposes herein, all references to period
 
ended relate to the following fiscal years and dates:
 
Period Ended
Fiscal Year
Date Ended
December 2021
Fiscal 2022
January 1, 2022
March 2022
Fiscal 2022
April 2, 2022
June 2022
Fiscal 2022
July 2, 2022
September 2022
Fiscal 2022
October 1, 2022
December 2022
Fiscal 2023
December 31, 2022
 
We prepared the accompanying interim Condensed Consolidated
 
Financial Statements in accordance
 
with the instructions for Form
 
10-Q and Article 10 of Regulation S-
X. Accordingly, they do not include all of
 
the information and footnotes required
 
by U.S. generally accepted accounting
 
principles ("U.S. GAAP") for complete
 
financial
statements.
 
We
 
believe
 
these
 
Condensed
 
Consolidated
 
Financial
 
Statements include
 
all
 
normal
 
recurring
 
adjustments considered
 
necessary
 
for
 
a
 
fair
 
presentation.
Operating results for the three months ended December 2022 are not necessarily indicative of the results that may be expected for our fiscal 2023. Although our various
product lines are
 
sold on a
 
year-round basis,
 
the demand for
 
specific products or
 
styles reflects some
 
seasonality. By
 
diversifying our product
 
lines and go-to-market
strategies over
 
the years,
 
we have
 
reduced the
 
overall seasonality
 
of our
 
business. Consumer
 
demand for
 
apparel is
 
cyclical and
 
dependent upon
 
the overall
 
level of
demand for soft goods, which may or may not coincide with the overall level of discretionary consumer spending. These levels of demand change as regional, domestic
and international economic conditions
 
change. Therefore, the distribution
 
of sales by quarter in fiscal
 
2023 may not be indicative
 
of the distribution in future
 
years. These
Condensed Consolidated Financial Statements should be
 
read in conjunction with the
 
audited Consolidated Financial Statements and
 
footnotes included in our Annual
Report on Form 10-K for our fiscal 2022, filed with the United
 
States Securities and Exchange Commission (“SEC”).
 
Our Condensed Consolidated Financial Statements include the accounts of Delta
 
Apparel and its wholly-owned and majority-owned domestic and foreign subsidiaries.
We apply the equity method of accounting for our investment
 
in
31
% of the outstanding capital stock
 
of a Honduran company. During the three months ended December
2022 and December 2021, we received dividends
 
from this investment of $
0.9
 
million and $
0.6
 
million, respectively. Our Ceiba Textiles manufacturing facility is leased
under
 
an
 
operating
 
lease
 
arrangement with
 
this
 
Honduran
 
company.
 
During
 
the
 
three
 
months
 
ended
 
December
 
2022
 
and
 
December
 
2021, we
 
paid
 
approximately
$
0.4
 
million under this arrangement.
 
 
We make
 
available copies of materials we file
 
with, or furnish to, the SEC free
 
of charge at https://ir.deltaapparelinc.com.
 
The information found on our website is
 
not
part of this, or any
 
other, report that we
 
file with, or furnish to,
 
the SEC. In addition, we
 
will provide upon request, at no
 
cost, paper or electronic copies of our
 
reports
and other filings
 
made with the
 
SEC. Requests should be
 
directed to: Investor
 
Relations Department, Delta
 
Apparel, Inc., 2750 Premiere
 
Parkway, Suite
 
100, Duluth,
Georgia 30097. Requests can also be made by telephone to 864-232-5200,
 
or via email at investor.relations@deltaapparel.com.
 
Note B—Accounting Policies
 
Our accounting policies are consistent with those described
 
in our Significant Accounting Policies in our Annual
 
Report on Form 10-K for our fiscal 2022, filed with
 
the
SEC. See Note C for consideration of recently issued
 
accounting standards.
Note C—New Accounting Standards
 
Standards Not Yet Adopted
 
In June 2016, the FASB
 
issued ASU No. 2016-13,
Financial Instruments - Credit Losses
 
(Topic 326):
 
Measurement of Credit
 
Losses on Financial Instruments
(“ASU
2016-13”), which requires an entity to assess impairment of its
 
financial instruments based on the entity's estimate of expected credit losses. Since the
 
issuance of ASU
2016-13, the FASB released several amendments
 
to improve and clarify
 
the implementation guidance. These
 
standards have been collectively
 
codified within ASC Topic
326,
Credit Losses
(“ASC 326”). As a smaller reporting company as defined by
 
the SEC, the provisions of ASC 326 are effective
 
as of the beginning of our fiscal year
2024. We are currently evaluating the impacts of the provisions of ASC 326 on our financial condition,
 
results of operations, cash flows, and disclosures.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9
Note D—Revenue Recognition
 
Our Condensed Consolidated Statements of Operations
 
include revenue streams from retail sales
 
at our branded retail stores; direct-to-consumer
 
ecommerce sales on our
consumer-facing websites; and sales from wholesale channels, which includes our business-to-business ecommerce sales and sales in
 
our DTG2Go business.
 
The table
below identifies the amount and percentage of net sales
 
by distribution channel (in thousands):
 
Three Months Ended
December 2022
December 2021
Retail
$
3,455
3
%
$
2,903
3
%
Direct-to-consumer ecommerce
1,509
2
%
1,345
1
%
Wholesale
102,331
95
%
106,498
96
%
Net sales
$
107,295
100
%
$
110,746
100
%
 
The table below provides net sales by reportable segment and
 
the percentage of net sales by distribution channel for
 
each reportable segment (in thousands):
 
Three Months Ended December 2022
Net Sales
Retail
Direct-to-consumer
ecommerce
Wholesale
Delta Group
$
97,010
0.1
%
0.2
%
99.7
%
Salt Life Group
10,285
33.0
%
12.7
%
54.3
%
Total
$
107,295
 
Three Months Ended December 2021
Net Sales
Retail
Direct-to-consumer
ecommerce
Wholesale
Delta Group
$
101,921
0.2
%
0.3
%
99.5
%
Salt Life Group
8,825
30.4
%
12.0
%
57.6
%
Total
$
110,746
 
Note E—Inventories
 
Inventories, net of reserves of $
17.8
 
million and $
17.7
 
million as of December 2022 and September 2022, respectively, consisted of the
 
following (in thousands):
 
December 2022
September 2022
Raw materials
$
22,166
$
22,603
Work in process
20,352
23,501
Finished goods
216,373
202,434
$
258,891
$
248,538
 
Raw materials include finished
 
yarn and direct materials for
 
the Delta Group, undecorated
 
garments for the DTG2Go
 
business, and direct embellishment
 
materials for the
Salt Life Group.
Note F—Debt
 
Credit Facility
 
On May 10, 2016,
 
we entered into
 
a Fifth Amended
 
and Restated Credit Agreement
 
(as further amended,
 
the “Amended Credit
 
Agreement”) with Wells
 
Fargo Bank,
National Association
 
(“Wells Fargo”), as Administrative
 
Agent, the Sole
 
Lead Arranger and
 
the Sole
 
Book Runner, and
 
the financial
 
institutions named
 
therein as Lenders,
which are Wells Fargo,
 
PNC Bank,
 
and Regions
 
Bank. Our
 
subsidiaries M.J.
 
Soffe, LLC, Culver
 
City Clothing
 
Company, Salt Life,
 
LLC, and
 
DTG2Go, LLC
 
(collectively,
the "Borrowers"), are co-borrowers under
 
the Amended Credit Agreement.
 
The Borrowers entered into amendments
 
to the Amended Credit Agreement
 
with Wells Fargo
and the other lenders on November 27, 2017, March 9, 2018, October
 
8, 2018, November 19, 2019, April 27, 2020, and August
 
28, 2020.
 
On June 2, 2022, the Borrowers entered into a Seventh Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo Bank (the “Agent”) and the
other lenders
 
set forth
 
therein (the
 
“Seventh Amendment”).
 
The Seventh
 
Amendment, (i)
 
removes LIBOR
 
based borrowing
 
and utilizes
 
SOFR (Secured
 
Overnight
Financing Rate) as the primary pricing structure, (ii) amends the
 
pricing structure based on SOFR plus a CSA (Credit Spread Adjustment)
 
defined as
10
 
bps for 1 month
and
15
 
bps for
 
3-month tenors, (iii)
 
sets the
 
SOFR floor to
0
 
bps, (iv)
 
reloads the fair
 
market value of
 
real estate and
 
intellectual property within
 
the borrowing base
calculation and resets their respective amortization schedules, (v) sets
 
the maturity date to
5
 
years from the closing date, and
 
(vi) updates the requirement for our Fixed
Charge Coverage Ratio (“FCCR”) for the preceding 12-month period
 
must not be less than
1.0
 
(previously
1.1
).
 
The Amended Credit Agreement allows us to borrow
 
up to $
170
 
million (subject to borrowing base limitations), including
 
a maximum of $
25
 
million in letters of credit.
Provided that no event of default exists,
 
we have the option to increase the
 
maximum credit to $
200
 
million (subject to borrowing base limitations),
 
conditioned upon the
Administrative Agent's ability to secure
 
additional commitments and customary closing conditions. The
 
Amended Credit Agreement contains a
 
subjective acceleration
clause and a “springing” lockbox arrangement (as defined
 
in ASC 470, Debt ("ASC 470")) whereby
 
remittances from customers will be forwarded to our general
 
bank
account and
 
will not
 
reduce the outstanding
 
debt until
 
and unless
 
a specified event
 
or an
 
event of
 
default occurs. We
 
classify borrowings under
 
the Amended
 
Credit
Agreement as long-term debt with consideration of current
 
maturities.
 
As of December 2022, we had
 
$
142.3
 
million outstanding under our U.S. revolving credit facility
 
at an average interest rate of
6.7
%. Our cash on hand combined with
the availability under the
 
U.S. credit facility totaled $
27.2
 
million. At December 2022 and September 2022, there was $
23.1
 
million and $
24.9
 
million, respectively, of
retained earnings free of restrictions to make cash dividends
 
or stock repurchases.
See Note P—Subsequent Events for a discussion of the Eighth and Ninth Amendments to the Fifth Amended and Restated Credit Agreement entered into on January 3,
2023, and February 3, 2023, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
Honduran Debt
 
Since March 2011, we have
 
entered into term loans and a
 
revolving credit facility with Banco Ficohsa, a
 
Honduran bank, to finance investments in both
 
the operations
and capital expansion of our
 
Honduran facilities. In December 2020, we
 
entered into a new term
 
loan and revolving credit facility with
 
Banco Ficohsa, both with
five
-
year terms, and
 
simultaneously settled
 
the prior term
 
loans and revolving
 
credit facility with
 
outstanding balances
 
at the time
 
of settlement of
 
$
1.1
 
million and
 
$
9.5
 
million,
respectively. Additionally, in May 2022, we entered
 
into a new term
 
loan with a
five
-year term with a
 
principal amount of $
3.7
 
million. These loans are
 
secured by a first-
priority lien on the assets of our Honduran operations and are not guaranteed by our U.S. entities.
 
These loans are denominated in U.S. dollars, and the carrying value of
the debt approximates its fair value. As the revolving
 
credit facility permits us to re-borrow funds up
 
to the amount repaid, subject to certain
 
objective covenants, and we
intend to re-borrow funds, subject to those covenants,
 
the amounts borrowed are classified as long-term debt.
 
El Salvador Debt
In September 2022, we entered into
 
a new term loan with
 
a
five
-year term with a principal amount of
 
$
3.0
 
million with Banco Ficohsa, a Panamanian
 
bank, to finance
investments in our
 
El Salvador operations.
 
This loan is secured
 
by a first-priority lien
 
on the assets
 
of our El Salvador
 
operations and is
 
not guaranteed by
 
our U.S. entities.
The loan is
 
denominated in U.S.
 
dollars, and the
 
carrying value of
 
the debt approximates
 
its fair value.
 
Information about this
 
loan and
 
the outstanding balance
 
as of
December 2022 is listed as part of the long-term debt schedule
 
above.
Additional information about these loans and the outstanding balances
 
as of December 2022 is as follows (in thousands):
 
December 2022
Revolving credit facility with Banco Ficohsa, a Honduran bank,
 
interest at
7.25
%, due August 2025
$
3,083
Term loan with Banco Ficohsa, a Honduran bank, interest at
7.5
%, quarterly installments which began September 2021 and
 
are due through
December 2025
6,086
Term loan with Banco Ficohsa, a Honduran bank, interest at
7.5
%, quarterly installments beginning March 2023 through May
 
2027
3,656
Term loan with Banco Ficohsa, a Panamanian bank, interest at the prevailing market rate
 
within the Panamanian Banking Market, monthly
installments which began October 2022 and are due through
 
August 2027
2,878
 
Note G—Selling, General and Administrative Expense
 
We include in selling, general and administrative ("SG&A") expenses the costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as
the cost of stocking,
 
warehousing, picking, packing,
 
and shipping goods for
 
delivery to our customers.
 
Distribution costs included in
 
SG&A expenses totaled
 
$
5.4
 
million
and $
5.5
 
million for the December 2022 and December 2021 quarters, respectively. In addition, SG&A expenses include costs related to sales associates, administrative
personnel, advertising and marketing expenses, retail store
 
build-outs, and other general and administrative expenses.
Note H—Stock-Based Compensation
 
On February 6, 2020, our shareholders approved the Delta Apparel, Inc. 2020 Stock Plan ("2020
 
Stock Plan") to replace the 2010 Stock Plan,
 
which was previously re-
approved by our shareholders on February 4, 2015,
 
and was scheduled to expire by its terms
 
on September 14, 2020. The 2020 Stock Plan is substantially
 
similar in both
form and substance to the 2010 Stock
 
Plan. The purpose of the 2020 Stock
 
Plan is to continue to give our Board
 
of Directors and its Compensation Committee
 
the ability
to offer a variety of compensatory awards designed to enhance the Company’s long-term success by encouraging stock ownership among its executives, key employees
and directors. Under the 2020 Stock Plan,
 
the Compensation Committee of our Board of
 
Directors has the authority to determine the
 
employees and directors to whom
awards may be granted, and
 
the size and type of
 
each award and manner in
 
which such awards will vest. The
 
awards available under the plan
 
consist of stock options,
stock appreciation rights, restricted stock, restricted
 
stock units, performance stock, stock performance
 
units, and other stock and
 
cash awards. Unvested awards, while
employed by the Company or serving as a director, become fully vested under certain circumstances as defined in the 2020 Stock
 
Plan. Such circumstances include, but
are not limited to, the
 
participant’s death or disability. The Compensation Committee
 
is authorized to establish the
 
terms and conditions of awards
 
granted under the 2020
Stock Plan, to
 
establish, amend and
 
rescind any rules
 
and regulations relating
 
to the 2020
 
Stock Plan, and
 
to make any
 
other determinations
 
that it deems
 
necessary. Similar
to the 2010
 
Stock Plan, the 2020
 
Stock Plan limits the
 
number of shares that
 
may be covered by
 
awards to any participant
 
in a given
 
calendar year and also
 
limits the
aggregate awards of restricted stock, restricted stock units and performance stock granted in a given calendar year. Shares are generally issued from treasury stock upon
the vesting of the restricted stock units, performance units
 
or other awards under the 2020 Stock Plan.
 
Compensation expense is
 
recorded within SG&A
 
in our
 
Condensed Consolidated Statements
 
of Operations
 
over the
 
vesting periods.
 
During the
 
December 2022 and
December 2021 quarters,
 
we recognized $
0.5
 
million and $
0.4
 
million in stock-based
 
compensation expense, respectively.
 
Associated with this
 
compensation cost are
income tax benefits recognized of $
0.2
 
million and $
0.1
 
million, respectively, for each of the three-month periods ended December 2022 and
 
December 2021.
 
During the December 2022 quarter, restricted stock
 
units representing
105,000
 
shares of our common stock
 
vested with the filing of
 
our Annual Report on Form
 
10-K for
fiscal 2022 and were issued in accordance with their respective
 
agreements. Of these vested awards, all were payable in
 
common stock.
 
During the
 
December 2022 quarter,
 
performance stock units
 
and restricted stock
 
units representing 5,000
 
and 18,000
 
shares of our
 
common stock, respectively,
 
were
forfeited.
As of December
 
2022, there was $
3.3
 
million of total
 
unrecognized compensation cost
 
related to unvested
 
awards granted under
 
the 2020 Stock
 
Plan. This cost
 
is expected
to be recognized over a period of
1.9
 
years.
Note I—Purchase Contracts
 
We
 
have entered into agreements,
 
and have fixed
 
prices, to purchase yarn,
 
finished fabric, and finished
 
apparel and headwear products.
 
At December 2022, minimum
payments under these contracts were as follows (in thousands):
 
Yarn
$
22,294
Finished fabric
4,435
Finished products
9,517
$
36,246
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11
Note J—Business Segments
 
Our operations are managed and reported in
two
 
segments, Delta Group and Salt Life Group, which reflect the manner in which
 
the business is managed, and results are
reviewed by the Chief Executive Officer, who is our chief operating decision maker.
 
The Delta Group is comprised of the following business
 
units, which are primarily focused on core activewear styles:
 
DTG2Go and Delta Activewear.
 
DTG2Go is a
 
market leader in the
 
on-demand, direct-to-garment digital print
 
and fulfillment industry,
 
bringing technology and innovation
 
to the supply
 
chains of our
many customers. Our ‘On-Demand DC’ digital solution provides retailers
 
and brands with immediate access to utilize DTG2Go’s broad network of print and fulfillment
facilities, while offering
 
the scalability to integrate
 
digital fulfillment within the
 
customer's own distribution facilities.
 
We use
 
highly-automated factory processes and
our proprietary software to deliver on-demand,
 
digitally printed apparel direct to
 
consumers on behalf of our customers.
 
Via our multi-facility fulfillment footprint across
the United States, DTG2Go offers
 
a robust digital supply chain
 
shipping custom graphic products
 
within 24 to 48 hours
 
to consumers in the United
 
States and to over
 
100
countries worldwide. DTG2Go has made significant investments in its “digital first” retail model providing digital graphic prints that meet the high-quality standards of
brands, retailers and intellectual property holders.
 
Through integration with Delta Activewear, DTG2Go also services
 
the eRetailer, ad-specialty, promotional and screen
print marketplaces, among others.
 
Delta Activewear is a preferred supplier of
 
activewear apparel to regional and global
 
brands as well as direct to retail and
 
wholesale markets. The Activewear business
 
is
organized around three key customer
 
channels – Delta Direct, Global
 
Brands, and Retail Direct –
 
that are distinct in their
 
go-to-market strategies and how
 
their respective
customer bases
 
source their
 
various apparel
 
needs. Our
 
Delta Direct
 
channel services
 
the screen
 
print, promotional,
 
and eRetailer
 
markets as
 
well as
 
retail licensing
customers that sell through to many mid-tier and mass market retailers. Delta Direct products include a broad portfolio of apparel and accessories under the Delta, Delta
Platinum, and Soffe
 
brands as well
 
as sourced
 
items from
 
select third
 
party brands.
 
Our fashion
 
basics line
 
includes our Platinum
 
Collection, which
 
offers fresh, fashionable
silhouettes with a luxurious look and feel,
 
as well as versatile fleece offerings.
 
We offer innovative
 
apparel products, including the Delta Dri line of
 
performance shirts
built with moisture-wicking material
 
to keep athletes dry
 
and comfortable; ringspun
 
garments with superior
 
comfort, style and durability;
 
and Delta Soft, a
 
collection with
an incredible feel and price. We also offer our heritage, mid-
 
and heavier-weight Delta Pro Weight® and Magnum Weight® tee shirts.
 
The iconic Soffe brand offers activewear for spirit
 
makers and record breakers and
 
is widely known for the original "cheer
 
short" with the signature roll-down waistband.
Soffe carries a wide range of activewear for the entire family. Soffe's heritage is anchored in the military, and we continue to be a proud supplier to both active duty and
veteran United States
 
military personnel worldwide.
 
The Soffe men's assortment
 
features the tagline
 
"anchored in the military, grounded
 
in training" and
 
offers everything
from physical training
 
gear certified by
 
the respective branches of
 
the military,
 
classic base layers
 
that include the
 
favored 3-pack tees,
 
and the iconic
 
"ranger panty."
Complementing the Delta and Soffe
 
brand apparel, we offer
 
customers a broad range of
 
nationally recognized branded products including polos,
 
outerwear, headwear,
bags and other accessories. Our Soffe products are also available
 
direct to consumers at
www.soffe.com
.
 
Our Global
 
Brands channel
 
serves as a
 
key supply chain
 
partner to
 
large multi-national
 
brands, major branded
 
sportswear companies, trendy
 
regional brands, and
 
all
branches of the United States armed forces,
 
providing services ranging from custom product development
 
to the shipment of branded products with “retail-ready”
 
value-
added services including embellishment, hangtags, and
 
ticketing.
 
Our Retail Direct
 
channel serves brick
 
and mortar and
 
online retailers by
 
providing our portfolio
 
of Delta, Delta
 
Platinum, and
 
Soffe products directly
 
to the retail
 
locations
and
 
ecommerce fulfillment
 
centers of
 
a
 
diversified customer
 
base including
 
sporting goods
 
and
 
outdoor retailers,
 
specialty and
 
resort shops,
 
farm and
 
fleet
 
stores,
department stores, and
 
mid-tier and mass
 
retailers. As a
 
key element of
 
the integrated Delta
 
Group segment, each
 
of Activewear’s
 
primary channels offer
 
a seamless
solution for replenishment strategies, small-run decoration
 
needs, and quick reaction programs with on-demand digital
 
print services, powered by DTG2Go.
 
The Salt Life Group is
 
comprised of our Salt Life business, which
 
is built on the authentic, aspirational Salt Life
 
lifestyle brand that represents a passion for
 
the ocean,
the salt air, and, more importantly, a way of life and all it offers, from surfing, fishing, and diving to beach fun and sun-soaked relaxation. The Salt Life brand combines
function and fashion with a tailored fit for the active lifestyles of those that “live the Salt Life.” With increased worldwide appeal, Salt Life has continued to provide the
cotton graphic tees and logo decals that originally
 
drove awareness for the brand, and expanded
 
into performance apparel, swimwear, board shorts, sunglasses, bags,
 
and
accessories. Consumers can also seamlessly experience the Salt Life
 
brand through retail partners including surf shops, specialty stores,
 
department stores, and outdoor
merchants or by accessing our Salt Life ecommerce site
 
at
www.saltlife.com
.
 
Our Chief Operating Decision Maker and management evaluate performance
 
and allocate resources based on profit or loss from operations before
 
interest, income taxes
and special charges ("segment operating earnings").
 
Our segment operating earnings may not be
 
comparable to similarly titled measures used
 
by other companies. The
accounting policies
 
of our
 
reportable segments
 
are the
 
same as
 
those described
 
in Note
 
2 in
 
our Annual
 
Report on
 
Form 10-K
 
for fiscal
 
2022, filed
 
with the
 
SEC.
Intercompany transfers
 
between operating
 
segments are
 
transacted
 
at
 
cost and
 
have been
 
eliminated within
 
the
 
segment amounts
 
shown in
 
the
 
following table
 
(in
thousands).
 
Three Months Ended
December 2022
December 2021
Segment net sales:
Delta Group
$
97,010
$
101,921
Salt Life Group
10,285
8,825
Total net sales
$
107,295
$
110,746
Segment operating earnings:
Delta Group
 
$
123
$
8,438
Salt Life Group
218
156
Total segment operating earnings
$
341
$
8,594
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
The following table reconciles the segment operating earnings
 
to the consolidated (loss) income before provision for income
 
taxes (in thousands):
 
Three Months Ended
December 2022
December 2021
Segment operating earnings
$
341
$
8,594
Unallocated corporate expenses
2,967
2,678
Unallocated interest expense
2,890
1,598
Consolidated (loss) income before provision for income taxes
$
(5,516)
$
4,318
 
Note K—Income Taxes
 
The Tax
 
Cuts and Jobs
 
Act of 2017
 
(the “2017 Tax
 
Legislation”) enacted on December 22,
 
2017, significantly revised the
 
U.S. corporate income tax
 
code by,
 
among
other things, lowering
 
federal corporate income
 
tax rates,
 
implementing a modified
 
territorial tax
 
system and imposing
 
a repatriation tax ("transition
 
tax") on deemed
repatriated cumulative earnings of foreign subsidiaries
 
which will be paid over
 
eight years. In addition, new
 
taxes were imposed related to
 
foreign income, including a
tax on global intangible low-taxed income (“GILTI”) as well as a limitation on the deduction for business interest expense (“Section 163(j)"). GILTI is the excess of the
shareholder’s net controlled foreign corporations
 
("CFC") net tested income over
 
the net deemed tangible income.
 
GILTI income is eligible for a deduction of
 
up to 50%
of the income inclusion,
 
but the deduction is
 
limited to the amount
 
of U.S. adjusted
 
taxable income.
 
The Section 163(j) limitation
 
does not allow
 
the amount of deductible
interest to
 
exceed the
 
sum of the
 
taxpayer's business interest
 
income and 30%
 
of the
 
taxpayer’s adjusted
 
taxable income. We
 
have included in
 
our calculation of
 
our
effective tax rate the estimated impact of
 
GILTI and Section
 
163(j). In addition, we have elected to account
 
for the tax on GILTI
 
as a period cost and, therefore, do
 
not
record deferred taxes related to GILTI on our foreign subsidiaries.
 
Our effective income tax rate on operations for the three-months
 
ended December 2022 was
35.0
% compared to a rate of
15.1
% in the same period of the prior year, and
an effective rate of
17.9
% for fiscal 2022. We
 
generally benefit from having income in
 
foreign jurisdictions that are either exempt
 
from income taxes or have tax
 
rates
that are lower than those
 
in the United States.
 
As such, changes in the
 
mix of U.S. taxable income compared
 
to profits in tax-free or
 
lower-tax jurisdictions can have a
significant impact on our overall effective tax rate.
Note L—Derivatives and Fair Value Measurements
 
From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These
financial instruments are
 
not used
 
for trading
 
or speculative purposes.
 
We
 
have designated
 
our interest
 
rate swap
 
contracts as
 
cash flow
 
hedges of
 
our future
 
interest
payments. As a result, the gains
 
and losses on the swap contracts
 
are reported as a component
 
of other comprehensive income and are
 
reclassified into interest expense as
the related interest payments
 
are made. As of December
 
2022, all of our other
 
comprehensive income was attributable
 
to shareholders; none related to
 
the non-controlling
interest.
 
Outstanding instruments as of December 2022 are as follows:
 
Effective Date
Notional Amount
Fixed LIBOR
 
Rate
Maturity Date
Interest Rate Swap
July 25, 2018
$
20.0
 
million
 
3.18%
 
July 25, 2023
 
The following table summarizes the fair value and presentation in the Condensed Consolidated
 
Balance Sheets for derivatives related to our interest swap agreements as
of December 2022 and September 2022 (in thousands):
 
December 2022
September 2022
Deferred tax assets
$
(70)
$
(48)
Other non-current liabilities
280
189
Accumulated other comprehensive loss
$
210
$
141
 
From time to time, we may purchase
 
cotton option contracts to economically
 
hedge the risk related to market fluctuations
 
in the cost of cotton used in
 
our operations. We
do not receive hedge accounting
 
treatment for these derivatives. As such,
 
the realized and unrealized gains and
 
losses associated with them are
 
recorded within cost of
goods sold on the Condensed Consolidated Statement of Operations.
 
No such cotton contracts were outstanding at December
 
2022 and September 2022.
 
ASC 820, Fair Value
 
Measurements and Disclosures (“ASC
 
820”), defines fair value,
 
establishes a framework for measuring
 
fair value and expands
 
disclosures about
fair value measurements.
 
Assets and liabilities measured
 
at fair value
 
are grouped in
 
three levels. The
 
levels prioritize the
 
inputs used to
 
measure the fair value
 
of the
assets or liabilities. These levels are:
 
Level 1 – Quoted prices (unadjusted) in active markets for
 
identical assets or liabilities.
 
Level 2 – Inputs other
 
than quoted prices that are
 
observable for assets and
 
liabilities, either directly or indirectly. These
 
inputs include quoted prices for
 
similar
assets or liabilities in active markets and quoted prices for
 
identical or similar assets or liabilities in markets that are less active.
Level 3 – Unobservable
 
inputs that are supported
 
by little or no market
 
activity for assets or
 
liabilities and includes certain
 
pricing models, discounted
 
cash flow
methodologies and similar techniques.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
The following financial liabilities are measured at fair
 
value on a recurring basis (in thousands):
 
Fair Value Measurements Using
Quoted Prices
in
Significant
 
Active Markets
 
Other
Significant
for
Observable
Unobservable
Identical Assets
Inputs
Inputs
Period Ended
Total
(Level 1)
(Level 2)
(Level 3)
Interest Rate Swaps
December 2022
$
280
-
$
280
-
September 2022
$
189
-
$
189
-
 
The fair value
 
of the interest rate
 
swap agreements was
 
derived from a discounted
 
cash flow analysis
 
based on the
 
terms of the contract
 
and the forward
 
interest rate curves
adjusted for our credit
 
risk, which fall in
 
Level 2 of the
 
fair value hierarchy.
 
At December 2022 and September 2022,
 
book value for fixed rate
 
debt approximated
 
fair
value based on quoted
 
market prices for the
 
same or similar issues
 
or on the current
 
rates offered to
 
us for debt of
 
the same remaining
 
maturities (a Level 2
 
fair value
measurement).
 
Note M—Legal Proceedings
 
At times,
 
we are
 
party to various
 
legal claims,
 
actions and
 
complaints. We believe
 
that, as
 
a result
 
of legal
 
defenses, insurance
 
arrangements, and
 
indemnification provisions
with parties believed to be financially capable, such actions
 
should not have a material adverse effect on our operations, financial
 
condition, or liquidity.
Note N—Repurchase of Common Stock
 
As of September 28, 2019,
 
our Board of
 
Directors authorized management to
 
use up to
 
$
60.0
 
million to repurchase stock
 
in open market
 
transactions under our Stock
Repurchase
 
Program. We
 
did
no
t
 
purchase
 
any
 
shares
 
of
 
our
 
common
 
stock
 
during
 
the
 
December
 
2022
 
quarter.
 
Through
 
December
 
2022, we
 
have
 
purchased
3,735,114
 
shares of
 
our common
 
stock for
 
an aggregate
 
of $
56.4
 
million under
 
our Stock
 
Repurchase Program
 
since its
 
inception. All
 
purchases were
 
made at
 
the discretion
of management and pursuant
 
to the safe harbor provisions
 
of SEC Rule 10b-18.
 
As of December 2022, $
3.6
 
million remained available for future
 
purchases under our
Stock Repurchase Program, which does not have an expiration
 
date.
Note O—Goodwill and Intangible Assets
 
Components of intangible assets consist of the following
 
(in thousands):
 
December 2022
September 2022
Accumulated
Net
Accumulated
Net
 
Economic
Cost
Amortization
Value
Cost
Amortization
 
Value
Life
Goodwill
$
37,897
$
-
$
37,897
$
37,897
$
-
$
37,897
N/A
Intangibles:
Tradename/trademarks
$
16,000
$
(4,984)
$
11,016
$
16,000
$
(4,851)
$
11,149
20
 
–
30
 
yrs
Customer relationships
7,400
(3,398)
4,002
7,400
(3,213)
4,187
20
 
yrs
Technology
10,083
(2,834)
7,249
10,083
(2,610)
7,473
10
 
yrs
License agreements
2,100
(966)
1,134
2,100
(940)
1,160
15
 
–
30
 
yrs
Non-compete
 
 
agreements
1,657
(1,631)
26
1,657
(1,600)
57
4
 
–
8.5
 
yrs
Total intangibles
$
37,240
$
(13,813)
$
23,427
$
37,240
$
(13,214)
$
24,026
 
Goodwill represents the acquired goodwill net of
 
the $
0.6
 
million impairment losses recorded in fiscal year
 
2011. As of December 2022, the Delta Group segment assets
include $
18.0
 
million of goodwill, and the Salt Life Group segment assets
 
include $
19.9
 
million.
 
Depending on the type
 
of intangible asset, amortization is
 
recorded under cost of goods
 
sold or selling, general and
 
administrative expenses. Amortization expense for
intangible
 
assets
 
for
 
the
 
December
 
2022
 
and
 
December
 
2021
 
quarters
 
was
 
$
0.6
 
million
 
and
 
$
0.6
 
million,
 
respectively.
 
Amortization
 
expense
 
is
 
estimated
 
to
 
be
approximately $
1.4
 
million for the year ended September 2023,
 
approximately $
1.4
 
million for the year ended September 2024,
 
and approximately $
1.4
 
million for the
years ended September 2025, 2026, and 2027.
Note P—Subsequent Events
 
On January 3, 2023, Delta Apparel, Inc. and its
 
subsidiaries, M.J. Soffe, LLC, Culver City Clothing Company (f/k/a Junkfood Clothing Company), Salt Life,
 
LLC, and
DTG2Go, LLC (f/k/a Art
 
Gun, LLC) (collectively, the “Borrowers”)
 
entered into an Eighth
 
Amendment to the Fifth
 
Amended and Restated Credit
 
Agreement with Wells
Fargo Bank (the
 
“Agent”) and
 
the other lenders
 
set forth therein
 
(the “Eighth
 
Amendment”). The Eighth
 
Amendment essentially
 
clarifies the Amended
 
Credit Agreement’s
provisions regarding the inclusion of eligible in-transit inventory in the borrowing base and amends the definition of Increased Reporting Event to include 12.5% of the
lesser of the borrowing base and the maximum revolver
 
amount as opposed to 12.5% of the line cap.
 
On February 3, 2023, the
 
Borrowers entered into a Ninth
 
Amendment to the Fifth
 
Amended and Restated Credit
 
Agreement with the Agent and
 
the other lenders set forth
therein (the “Ninth Amendment”). The Ninth Amendment adds an Accommodation Period beginning on the amendment date and continuing through the date following
September 30, 2023, upon which Borrowers satisfy minimum availability thresholds and during which: (i)
 
the minimum borrowing availability thresholds applicable to
the Amended Credit
 
Agreement are (a)
 
through (and including)
 
April 1, 2023,
 
$
7,500,000
, (b) on
 
and after April
 
2, 2023 through
 
(and including) June
 
4, 2023, $
9,000,000
,
(c) on and after June 5, 2023, through
 
the date following September 30, 2023,
 
upon which Borrowers satisfy minimum availability
 
thresholds, $
10,000,000
; and (d) at all
14
times thereafter, $
0
; (ii) the Fixed
 
Charge Coverage Ratio (“FCCR”)
 
covenant is suspended;
 
(iii) Borrowers must
 
maintain specified minimum
 
EBITDA levels for
 
trailing
three-month periods starting March 4, 2023; (iv) the Applicable Margin with respect to loans under the Amended Credit Agreement is increased by
50
 
basis points; and
(v) a Cash Dominion
 
Trigger Event occurs if
 
availability is less
 
than $
2,000,000
.
 
The Ninth Amendment
 
also, among other
 
things, (i) amends
 
the FILO maximum
 
amount
calculation by reloading
5
% of eligible accounts receivable (capped at $
3,000,000
) and deferring the applicable amortization schedules to August 1, 2023; (ii) defers
 
the
monthly amortization payments for
 
real estate, machinery
 
and equipment, and intellectual
 
property assets to August
 
1, 2023; (iii) requires weekly
 
reporting of availability
through the date following
 
September
 
30, 2023, upon which
 
Borrowers satisfy minimum availability thresholds;
 
and (iv) prohibits certain
 
restricted payments through
the date following September 30, 2023, upon which Borrowers
 
satisfy minimum availability thresholds.
 
The foregoing summary of the Eighth and Ninth Amendments and the
 
transactions contemplated thereby does not purport to be complete and is qualified
 
in its entirety
by reference to the text of the
 
Eighth and Ninth Amendments, which are filed herewith as
 
Exhibits 10.1 and 10.2 to this
 
Quarterly Report on Form 10-Q and which are
incorporated herein by reference.
 
We
 
expect the Eighth
 
and Ninth Amendments will
 
enhance our borrowing base
 
and allow us to
 
access more of our
 
availability under the Amended
 
Credit Agreement
while easing the financial covenant restrictions for the remainder
 
of fiscal 2023.
 
See Part II, Item 5. Other Information for additional
 
detail regarding the Ninth Amendment.
 
15
Item 2. Management's Discussion and Analysis of Financial
 
Condition and Results of Operations
 
Cautionary Note Regarding Forward-Looking Statements
 
The Private Securities Litigation Reform Act of
 
1995 provides a safe harbor for forward-looking
 
statements made by or on behalf
 
of the Company. We may from time to
time make written or oral statements that
 
are “forward-looking,” including statements
 
contained in this report and other filings
 
with the SEC, in our press releases,
 
and in
other reports to our shareholders.
 
All statements, other than
 
statements of historical fact,
 
which address activities, events
 
or developments that we
 
expect or anticipate will
or may
 
occur in the
 
future are forward-looking
 
statements. The words
 
“plan”, “estimate”, “project”,
 
“forecast”, “outlook”, “anticipate”, “expect”,
 
“intend”, “remain”,
“seek", “believe”, “may”, “should” and similar expressions, and discussions
 
of strategy or intentions, are intended to identify forward-looking
 
statements.
 
Forward-looking statements
 
are neither
 
historical facts
 
nor assurances
 
of future
 
performance. Instead,
 
they are
 
based on
 
our current
 
expectations and
 
are necessarily
dependent upon assumptions, estimates and data that we believe are reasonable and accurate but may
 
be incorrect, incomplete or imprecise. Forward-looking statements
are subject to a number of business risks and inherent uncertainties, any of which could cause actual results to differ materially from those set
 
forth in or implied by the
forward-looking statements. Therefore,
 
you should not rely on
 
any of these forward-looking
 
statements. Important factors that
 
could cause our actual results
 
and financial
condition to differ materially from those indicated in forward-looking
 
statements include, among others, the following:
 
●
the general U.S. and international economic conditions;
●
the
 
impact of
 
the
 
COVID-19 pandemic
 
on
 
our
 
operations,
 
financial condition,
 
liquidity,
 
and
 
capital investments,
 
including recent
 
labor
 
shortages,
inventory constraints, and supply chain disruptions;
●
significant interruptions or disruptions within our manufacturing,
 
distribution or other operations;
●
deterioration in the financial condition of our customers and suppliers
 
and changes in the operations and strategies of our customers
 
and suppliers;
●
the volatility and uncertainty of cotton and other raw material
 
prices and availability;
●
the competitive conditions in the apparel industry;
●
our ability to predict or react to changing consumer preferences
 
or trends;
●
our ability to successfully open and operate new retail stores in
 
a timely and cost-effective manner;
●
the ability to grow, achieve synergies and realize the expected profitability of acquisitions;
●
changes in economic, political or social stability at
 
our offshore locations or in areas in which we, or our suppliers
 
or vendors, operate;
●
our ability to attract and retain key management;
●
the volatility and uncertainty of energy, fuel and related costs;
●
material disruptions in our information systems related to our
 
business operations;
●
compromises of our data security;
●
significant changes in our effective tax rate;
●
significant litigation in either domestic or international jurisdictions;
●
recalls, claims and negative publicity associated with product
 
liability issues;
●
the ability to protect our trademarks and other intellectual
 
property;
●
changes in international trade regulations;
●
our ability to comply with trade regulations;
●
changes in employment laws or regulations or our relationship
 
with employees; or our ability to attract and retain
 
employees;
●
negative publicity
 
resulting from violations
 
of manufacturing standards
 
or labor
 
laws or
 
unethical business practices
 
by our
 
suppliers or independent
contractors;
●
the inability of suppliers or other third-parties, including those providing key equipment, transportation, and other services, to perform their obligations
or fulfill the terms of their contracts with us;
●
restrictions on our ability to borrow capital or service our
 
indebtedness;
●
interest rate fluctuations increasing our obligations under our
 
variable rate indebtedness;
●
the ability to raise additional capital;
●
the impairment of acquired intangible assets;
●
foreign currency exchange rate fluctuations;
●
the illiquidity of our shares; and
●
price volatility in our shares and the general volatility of the stock
 
market.
A detailed discussion
 
of significant risk
 
factors that have
 
the potential to
 
cause actual results
 
to differ materially
 
from our expectations is
 
set forth in
 
Part 1 under
 
the
subheading "Risk Factors" in our
 
Annual Report on Form 10-K
 
for fiscal 2022, filed with
 
the SEC. Any forward-looking statements
 
in this Quarterly Report on
 
Form 10-
Q do not purport to be predictions
 
of future events or circumstances and
 
may not be realized. Further, any forward-looking
 
statements are made only as
 
of the date of this
Quarterly Report on Form 10-Q, and we do not undertake to
 
publicly update or revise the forward-looking statements,
 
except as required by the federal securities law.
 
 
16
Business Outlook
 
We were pleased to start our 2023 fiscal year
 
with double-digit sales growth across
 
four of our five go-to-market
 
channels, including record sales
 
and almost 20% growth
in our DTG2Go
 
digital print channel
 
as well as
 
record sales
 
and 17% growth
 
in our Salt
 
Life lifestyle
 
brand channel.
 
Our topline performance
 
this quarter
 
further illustrates
the resiliency of our multi-pronged business
 
model, which allowed us to overcome
 
the soft demand for basic
 
tees impacting the mass retail supply
 
chain and our Delta
Direct channel for the last several quarters.
 
The
 
milestone
 
sales
 
in
 
our
 
Delta
 
Group
 
segment’s
 
DTG2Go
 
channel
 
highlight the
 
market’s
 
growing
 
interest in
 
our
 
digital
 
print
 
and
 
fulfillment
 
strategies and
 
its
appreciation for the reduced working capital
 
investment; lower inventory risk; faster order-to-porch
 
cycle; replenishment and quick activation
 
capability; unlimited color
and design choice; and other
 
benefits they provide. DTG2Go continues
 
to effectively leverage two very
 
unique advantages that differentiate
 
it in the market
 
– a multi-
facility footprint facilitating one-to-two day shipping speed to 99% of United States consumers and priority access to our Delta Direct channel’s
 
low-cost vertical blank
tee and
 
fleece supply.
 
DTG2Go’s “Digital
 
First” strategy continues
 
to generate substantial
 
new customer demand
 
and we are
 
encouraged with the
 
productivity gains
achieved on the new technology. Further improvements in
 
machine efficiency, quality and production rates are
 
necessary for us to realize our long-term
 
objectives in this
business.
 
Our Delta Group segment’s Global Brands channel delivered double-digit sales growth for the quarter and continues to add value to the supply chains of multi-national,
regional and major sportswear brands and the United States armed forces as a preferred supplier of custom decorated products. We also achieved double-digit growth in
our Delta
 
Group segment’s
 
Retail Direct
 
channel where
 
we provide
 
decorated and
 
“retail ready”
 
products directly
 
to the
 
brick and
 
mortar locations
 
and eCommerce
fulfillment centers of sporting goods and outdoor retailers,
 
farm and fleet stores, department stores, and mid-tier
 
and mass retailers.
 
The growth in our
 
Global Brands and
 
Retail Direct channels was
 
accelerated by new
 
business resulting from
 
the Activewear industry’s burgeoning emphasis
 
on nearshore
sourcing strategies like those offered
 
by our vertical platform in
 
Central America coupled with our
 
ability to meet the service
 
and compliance requirements of the
 
world’s
leading brands and
 
retailers.
 
We expect
 
the focus on
 
U.S. proximity sourcing strategies
 
to continue and believe
 
that both of
 
these channels are positioned
 
to generate
growth opportunities across our Delta Group segment over
 
time.
As expected, our Delta Group segment’s
 
results for the quarter were impacted by
 
the reduced demand in the mass retail
 
supply chain and the associated manufacturing
shutdowns that we, like many
 
across the industry,
 
initiated to recalibrate output as
 
well as elevated raw material, energy
 
and labor costs.
 
Although the price of cotton,
one of our key raw materials, has moderated from last year’s notable highs, that high-cost cotton continues to flow through our cost of sales due to production cadences
and pressures margins accordingly.
 
We expect to cycle through most of that higher-priced cotton in our
 
second quarter and begin to see the benefit of lower input costs
in our results as
 
we progress through the
 
second half of our
 
fiscal year. We
 
will continue to leverage
 
the flexibility of our
 
vertical manufacturing strategy until we
 
see
better equilibrium between inventories and demand and also focus on opportunities in higher
 
margin areas of our Delta Direct channel outside
 
of the mass retail supply
ecosystem.
 
The momentum in our Salt Life Group segment continues with this quarter’s record sales
 
and excellent bottom line performance as it moves into its traditionally strong
Spring selling season. The
 
escalating growth across
 
Salt Life’s direct-to-consumer retail
 
and eCommerce channels
 
should continue as
 
it expands its brick
 
and mortar retail
and digital footprints to
 
keep pace with the
 
brand’s consumer base
 
stretching across the country.
 
Salt Life is targeting
 
six to eight new
 
store openings this fiscal
 
year,
including debut locations
 
in New
 
Jersey and Virginia,
 
bringing its total
 
store count to
 
approximately 30 locations
 
across nine states
 
spanning the U.S.
 
coastline from
California to Florida to New Jersey.
 
Salt Life’s consumer
 
eCommerce site,
 
www.saltlife.com, now ships
 
to all
 
50 states,
 
including significant
 
order flows
 
to states outside
 
of the brand’s
 
traditional southeastern
base, and its wholesale business also continues to expand.
 
There are now approximately 1,800 customer retail doors across 48 states and foreign countries offering Salt
Life products.
 
We continue to see a tremendous runway for growth for the Salt Life brand across the United
 
States and internationally.
 
Looking ahead, we
 
will further rely on
 
the versatility of
 
our multiple go-to-market
 
strategies and focus on
 
organic growth through
 
both new customer
 
acquisition and
expansion of existing relationships. We see outstanding opportunities deriving from our investments in DTG2Go’s
 
digital technology platform and Salt Life’s authentic
lifestyle brand
 
positioning. Moreover,
 
we are
 
now seeing
 
some welcome
 
cost stabilization
 
in our
 
Delta Group
 
segment and
 
expect these
 
trends to
 
positively impact
profitability as we progress
 
throughout the year.
 
Along the way,
 
we will continue to
 
prudently manage our working capital
 
and expenses while pursuing
 
opportunities
generated by our diversified business model.
Results of Operations
 
Financial results included herein have been presented on a generally accepted accounting principles ("GAAP") basis.
 
Net sales were $107.3 million in the first quarter of fiscal
 
2023, a decrease of 3.1% compared to the prior year first quarter net sales
 
of $110.7 million.
 
 
Net sales in the Delta Group segment declined 4.8% to $97.0 million in the first quarter of fiscal 2023 compared to $101.9 million in the prior year first quarter.
We saw record first quarter sales in our DTG2Go business and
 
growth in our Global Brands and Retail Direct
 
channels, offset by diminished demand in the mass
retail supply chain driving reduced sales in our Delta Direct
 
channel.
 
The Salt Life Group segment first
 
quarter fiscal 2023 revenue grew
 
16.5% to $10.3 million compared to
 
$8.8 million in the prior year
 
first quarter. The segment’s
record first quarter sales were driven by growth in both direct-to-consumer
 
and wholesale channels.
 
 
Gross margins were 12.7% for the first quarter of fiscal 2023, declining
 
810 basis points from the prior year first quarter gross margin of 20.8%.
 
The Delta Group segment gross margins were 8.0%
 
for the first quarter of fiscal
 
2023, a decline of 100 basis points
 
from the prior year first quarter
 
margins of
18.0%. Gross margins were primarily impacted
 
by higher inventory costs from inflationary
 
raw material and other input pricing
 
in fiscal 2022 flowing through
sales during the quarter, in addition to $3.4 million in plant curtailment costs.
 
 
The Salt Life Group segment gross margins improved to 57.0% in the first quarter of fiscal 2023, an improvement of 370 basis points compared to 53.3% in the
prior year first quarter resulting from a favorable mix
 
of sales, including increased Salt Life branded retail store
 
and ecommerce sales.
 
 
Selling, general, and administrative expenses ("SG&A") were $18.9 million in the first
 
quarter of fiscal 2023, or 17.6% of sales, compared to $17.5 million,
 
or 15.8% of
sales, in the prior year first quarter.
 
The increase in SG&A expenses of $1.3 million compared to the prior year first quarter
 
was primarily driven by higher selling costs
driven by our expanded Salt Life retail footprint, in addition
 
to increased distribution and administrative costs.
 
 
Other income for the 2023 and 2022 first fiscal quarters includes
 
profits related to our Green Valley Industrial Park equity method investment. Additionally, in the first
quarter of fiscal 2023, we recognized a discrete gain of
 
$2.5 million from the settlement of a commercial litigation matter.
 
Operating loss in the first quarter of fiscal 2023
 
was $2.6 million.
 
This compares to operating income of $5.9 million
 
in the prior year first fiscal quarter.
 
 
 
17
 
The Delta Group segment had operating income of $0.1 million in the first fiscal quarter of 2023, or 0.1% of net sales, compared to $8.4 million,
 
or 8.3% of net
sales, in the
 
prior year first
 
quarter. The decrease in
 
operating profit was
 
driven by declining
 
gross margins due
 
to increased inflationary
 
costs and plant
 
curtailment
costs.
 
 
The Salt Life Group segment had operating income of $0.3 million in the first fiscal
 
quarter of 2023, or 2.5% of net sales, compared to $0.1 million,
 
or 1.5% of
sales, in the prior year first quarter.
 
The increase in operating profit was driven by higher sales volume and increased gross
 
margins offset by higher selling and
distribution costs.
 
 
Net interest expense for the first quarters of each of fiscal years
 
2023 and 2022 was $2.9 million and $1.6 million,
 
respectively.
 
 
Our effective tax rate on operations for the three-month period ended December 2022 was 35.0%. This compares
 
to an effective tax rate of 15.1% for the same period in
the prior year
 
and 17.9% for
 
the full fiscal
 
year 2022. Changes
 
in the mix
 
of U.S. taxable
 
income compared to
 
profits in tax-free
 
or lower-tax jurisdictions
 
drove this
change in our effective tax rate.
 
Net loss attributable to shareholders for the first fiscal quarter of 2023
 
was $3.6 million,
 
or a loss of $0.51 per diluted share, compared to net income of
 
$3.6 million, or
$0.51 per diluted share, in the prior year.
 
Accounts receivable were $57.8 million
 
at December 2022, compared
 
to $68.2 million as of September
 
2022. Days sales outstanding ("DSO")
 
as of December 2022
 
were
47 days compared to 52 days at September 2022.
 
Net inventory as of December 2022 was
 
$258.9 million,
 
an increase of $10.4 million from September 2022 and
 
$75.8 million from December 2021. The increase from
September 2022 stemmed primarily from timely Salt Life first
 
quarter inventory deliveries compared to last year’s supply
 
chain delays pushing scheduled deliveries into
the second quarter.
 
Total net debt, including capital lease financing and cash on hand,
 
was $185.2 million as of December 31, 2022, an increase of $14.6 million from September 2022 and
$39 million from
 
December 2021. Cash on
 
hand and availability under
 
the Company’s
 
U.S. revolving credit facility
 
totaled $27.2 million as
 
of December 31, 2022,
 
a
decrease of $7.5 million from
 
September 2022 and $5.8 million from
 
December 2021, with the increase from
 
September 2022 principally driven by investments in the
business to support working capital needs.
 
 
Liquidity and Capital Resources
 
Operating Cash Flows
 
Operating activities resulted in a cash usage
 
of $11.9 million for the three
 
months ended December 2022 compared to $13.2
 
million of cash used in the
 
prior year. The
improvement in cash used in operating cash flows in the current year are due to the timing of payments from customers and to vendors, in addition to reduced inventory
in the first quarter of fiscal 2023 compared to the prior
 
year as a result of reduced customer demand.
 
Investing Cash Flows
 
Cash outflows for capital expenditures were $2.1 million during the first three months of 2023 compared to $1.8 million in the same period in the prior year. During the
three-months ended June 2022, there were $0.1 million of capital expenditures
 
financed under a capital lease arrangement. We
 
currently expect to spend less on capital
expenditures in 2023 as
 
compared to 2022, with
 
our expenditures expected to focus
 
on digital print equipment,
 
information technology, manufacturing
 
efficiency, and
direct-to-consumer investments,
 
including new Salt Life retail store openings.
 
Financing Activities
 
During the three months ended December 2022, cash provided by financing
 
activities was $9.6 million and primarily related to funding
 
our operating activities, working
capital needs, and certain capital investments offset by scheduled loan
 
principal payments.
 
Future Liquidity and Capital Resources
 
See Note F – Debt to the Condensed
 
Consolidated Financial Statements for a discussion
 
of our various financing arrangements,
 
including the terms of our revolving U.S.
credit facility.
 
Our credit facility, as well as cash flows
 
from operations, are intended
 
to fund our day-to-day working
 
capital needs, and along with
 
capital lease financing arrangements,
to fund our planned capital expenditures. However,
 
any material deterioration in our results of
 
operations may result in the loss
 
of our ability to borrow under
 
our U.S.
revolving credit facility and to issue letters of credit to suppliers, or may cause the borrowing availability under that facility to be insufficient for our needs. Availability
under our credit facility is primarily a function of the levels of our accounts receivable and inventory. A significant deterioration in our accounts receivable or inventory
levels could restrict
 
our ability to
 
borrow additional funds
 
or service our
 
indebtedness. Additionally,
 
a significant deterioration in our
 
business results could
 
cause our
availability to
 
fall below
 
minimum thresholds, thereby
 
requiring us
 
to maintain
 
the minimum
 
FCCR specified in
 
our credit
 
agreement, which
 
we may
 
not be
 
able to
maintain. Refer to Item 5. Other Information for
 
further information regarding our current financial covenants. While
 
our availability at December 2022 was
 
above the
minimum thresholds
 
specified in
 
our credit
 
agreement, a
 
significant deterioration
 
in our
 
business could
 
cause our
 
availability to
 
fall below
 
such thresholds,
 
thereby
requiring us to maintain the minimum FCCR specified in
 
our credit agreement.
 
Share Repurchase Program
 
The Company did not
 
purchase any shares under
 
our previously announced share
 
repurchase program in the
 
first quarter of fiscal
 
2023. The total amount
 
repurchased
during the life of
 
the program is $56.4 million.
 
At the end of
 
the first quarter of
 
fiscal 2023, the Company had
 
$3.6 million of remaining repurchase capacity under
 
its
existing authorization.
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which were prepared
in accordance with
 
U.S. GAAP. The preparation of
 
our Condensed Consolidated
 
Financial Statements requires
 
us to make estimates
 
and judgments that
 
affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting periods. We base our estimates and judgments on historical experience and various other
 
factors that we believe to be reasonable under the circumstances,
the results of which form the basis for
 
making judgments about the carrying values
 
of assets and liabilities that are
 
not readily apparent from other sources. Actual
 
results
 
 
 
18
may
 
differ
 
from these
 
estimates under
 
different
 
assumptions or
 
conditions. The
 
most significant
 
estimates and
 
assumptions relate
 
to
 
revenue recognition,
 
accounts
receivable and related reserves, inventory and related reserves,
 
the carrying value of goodwill, and the accounting for
 
income taxes.
 
A
 
detailed discussion
 
of
 
critical
 
accounting policies
 
is
 
contained in
 
the
 
Significant
 
Accounting Policies
 
included
 
in
 
Note 2
 
to
 
the
 
Audited Consolidated
 
Financial
Statements included in our Annual Report
 
on Form 10-K for fiscal 2022, and
 
there have been no changes in those
 
policies since the filing of that Annual
 
Report on Form
10-K with the SEC.
 
Environmental and Other Regulatory Matters
 
We
 
are subject
 
to various
 
federal, state
 
and local
 
environmental laws
 
and regulations
 
concerning, among
 
other things,
 
wastewater discharges,
 
storm water
 
flows, air
emissions and
 
solid waste
 
disposal. The
 
labeling, distribution, importation,
 
marketing, and
 
sale of
 
our products
 
are subject
 
to extensive
 
regulation by various
 
federal
agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys general in the United States. Our international operations
are also subject to compliance
 
with the U.S. Foreign Corrupt Practices Act (the
 
“FCPA”) and other anti-bribery laws applicable to our operations.
 
The environmental and other regulations applicable to our business are becoming increasingly
 
stringent, and we incur capital and other expenditures annually to achieve
compliance with these environmental
 
standards and regulations. We currently do not
 
expect that the amount of
 
expenditures required to comply with
 
these environmental
standards or other regulatory
 
matters will have
 
a material adverse
 
effect on our operations,
 
financial condition or
 
liquidity. There can be no
 
assurance, however, that future
changes in
 
federal, state,
 
or
 
local regulations,
 
interpretations of
 
existing regulations
 
or
 
the discovery
 
of
 
currently unknown
 
problems or
 
conditions will
 
not
 
require
substantial additional expenditures. Similarly, while we believe that we are currently in
 
compliance with all applicable environmental and other regulatory requirements,
the extent of
 
our liability, if any, for past
 
failures to comply
 
with laws, regulations
 
and permits applicable
 
to our operations
 
cannot be determined
 
and could have
 
a material
adverse effect on our operations, financial condition and liquidity.
Item 4.
 
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures are controls and other procedures
 
that are designed to reasonably assure that information
 
required to be disclosed in the reports that
we file
 
or submit
 
under the
 
Exchange Act
 
is recorded,
 
processed, summarized
 
and reported
 
within the
 
time periods
 
specified in
 
the SEC’s
 
requirements. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or
submit under
 
the
 
Exchange Act
 
is
 
accumulated and
 
communicated to
 
our management,
 
including our
 
Chief Executive
 
Officer
 
and
 
principal accounting
 
officer,
 
as
appropriate to allow timely decisions regarding required disclosure.
 
Our management, with the
 
participation of our Chief
 
Executive Officer and principal
 
accounting officer, has
 
evaluated the effectiveness of our
 
disclosure controls and
procedures as
 
of the
 
end of
 
period covered by
 
this quarterly
 
report ("the
 
Evaluation Date") and,
 
based on
 
their evaluation,
 
our Chief
 
Executive Officer
 
and principal
accounting officer have concluded that these controls and procedures
 
were effective as of the Evaluation Date.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes during the December
 
2022 quarter that have materially affected, or
 
are reasonably likely to materially affect,
 
our internal control over
 
financial
reporting.
PART II.
 
OTHER INFORMATION
 
Item 1.
 
Legal Proceedings
 
See Note M—Legal Proceedings, in Part I, Item 1, which
 
is incorporated herein by reference.
Item 1A.
 
Risk Factors
 
None
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
(c) Repurchases of Common Stock
 
See Note N—Repurchase of Common Stock, Part I, in Item
 
1, which is incorporated herein by reference.
Item 5.
 
Other Information
 
Ninth Amendment to the Fifth Amended and Restated
 
Credit Agreement
On February 3, 2023, Delta Apparel, Inc. and its subsidiaries, M.J. Soffe, LLC,
 
Culver City Clothing Company (f/k/a Junkfood Clothing Company), Salt Life,
 
LLC, and
DTG2Go, LLC (f/k/a Art Gun, LLC) (collectively, the “Borrowers”) entered into a Ninth Amendment to the Fifth Amended and Restated Credit Agreement with Wells
Fargo Bank (the “Agent”) and the other lenders set forth therein
 
(“Ninth Amendment”). The Fifth Amended and Restated Credit Agreement, dated as of May 10, 2016,
was filed as
 
Exhibit 10.1 to
 
Delta Apparel’s Quarterly
 
Report on Form
 
10-Q filed with
 
the SEC on
 
May 12, 2016.
 
The First Amendment
 
to the Amended
 
Credit Agreement
was filed as
 
Exhibit 10.2.5 to
 
Delta Apparel’s
 
Annual Report on
 
Form 10-K filed
 
with the SEC
 
on November 28,
 
2017. The Consent
 
and Second Amendment
 
to the
Amended Credit Agreement was filed
 
as Exhibit 10.1 to
 
Delta Apparel’s Form 8-K
 
filed with the SEC
 
on March 13, 2018.
 
The Consent and Third Amendment
 
to the
Amended Credit Agreement was filed as Exhibit 10.1 to Delta
 
Apparel’s Form 8-K filed with the SEC on
 
October 9, 2018. The Consent and Fourth Amendment to the
Amended Credit Agreement
 
was filed as
 
Exhibit 10.2.8 to
 
Delta Apparel's Annual
 
Report on Form
 
10-K filed with
 
the SEC on November
 
21, 2019. The
 
Fifth Amendment
to the
 
Amended Credit
 
Agreement was
 
filed
 
as Exhibit
 
10.1 to
 
Delta Apparel’s
 
Quarterly Report
 
on
 
Form 10-Q
 
filed
 
with the
 
SEC on
 
April 30,
 
2020.
 
The Sixth
Amendment to the Amended Credit Agreement was
 
filed as Exhibit 10.1 to Delta Apparel’s Form 8-K filed with the
 
SEC on August 31, 2020. The Seventh Amendment
to the Amended Credit Agreement was filed as Exhibit
 
10.1 to Delta Apparel’s Form 8-K filed with the SEC on June 3, 2022.
 
The Ninth Amendment adds an
 
Accommodation Period beginning on the amendment date and
 
continuing through the date following September 30,
 
2023, upon which
Borrowers satisfy minimum availability thresholds
 
and during which: (i)
 
the minimum borrowing availability thresholds
 
applicable to the Amended
 
Credit Agreement
are (a) through (and including) April 1, 2023, $7,500,000,
 
(b) on and after April 2, 2023 through (and including)
 
June 4, 2023, $9,000,000, (c) on and after June 5, 2023,
through the date following September 30, 2023, upon which Borrowers satisfy minimum availability thresholds, $10,000,000; and (d) at all
 
times thereafter, $0; (ii) the
Fixed Charge Coverage
 
Ratio (“FCCR”)
 
covenant is
 
suspended; (iii)
 
Borrowers must
 
maintain specified
 
minimum EBITDA
 
levels for trailing
 
three-month periods
 
starting
March 4, 2023; (iv) the Applicable Margin with respect to loans
 
under the Amended Credit Agreement is increased by
 
50 basis points; and (v) a Cash Dominion Trigger
19
Event occurs if availability
 
is less than $2,000,000.
 
The Ninth Amendment also,
 
among other things, (i)
 
amends the FILO maximum
 
amount calculation by reloading
 
5%
of eligible
 
accounts receivable
 
(capped at
 
$3,000,000) and
 
deferring the
 
applicable amortization
 
schedules to
 
August 1,
 
2023; (ii)
 
defers the
 
monthly amortization
 
payments
for real
 
estate, machinery and
 
equipment, and
 
intellectual property assets
 
to August 1,
 
2023; (iii)
 
requires weekly reporting
 
of availability through
 
the date
 
following
September 30, 2023, upon which Borrowers
 
satisfy minimum availability thresholds;
 
and (iv) prohibits certain restricted payments
 
through the date following September
30, 2023, upon which Borrowers satisfy minimum availability
 
thresholds.
 
We expect the Ninth Amendment will enhance
 
our borrowing base and allow
 
us to access more of
 
our availability under the Amended
 
Credit Agreement while easing
 
the
financial covenant restrictions for the remainder of fiscal 2023.
The foregoing summary of the Ninth Amendment and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference
to the text of the Ninth Amendment, which is filed herewith
 
as Exhibit 10.2 to this Quarterly Report on Form 10-Q
 
and which is incorporated herein by reference.
Separate from
 
the relationship
 
related to
 
the
 
Amended Credit
 
Agreement, as
 
amended, certain
 
lenders thereunder
 
have engaged
 
in, or
 
may in
 
the future
 
engage in,
transactions with, and perform services for, Delta Apparel, Inc. and/or its
 
subsidiaries in the ordinary course of business
20
Item 6.
 
Exhibits
 
Exhibits
 
10.1
 
10.2
 
10.3
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
 
Inline XBRL Instance
 
Document - the
 
instance document does not
 
appear in the
 
Interactive Data File because
 
its XBRL tags
 
are embedded within
 
the
Inline XBRL document.
 
 
 
101.SCH
 
Inline XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase
 
 
 
104
 
Cover Page Interactive Data File - (formatted as Inline XBRL
 
and contained in Exhibit 101)
 
 
21
SIGNATURES
 
Pursuant to the requirements
 
of the Securities Exchange
 
Act of 1934, the
 
registrant has duly caused
 
this report to be
 
signed on its behalf
 
by the undersigned thereunto
duly authorized.
 
 
 
 
DELTA
 
APPAREL, INC.
(Registrant)
 
 
 
 
Date
February 7, 2023
By:
/s/Nancy P. Bubanich
 
 
 
Nancy P. Bubanich
Chief Accounting Officer