Delta Apparel (DLAPQ) Risk Analysis

When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price that is allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets acquired. At March 2024 and September 2023, our goodwill and other intangible assets were approximately $40.5 million and $50.4 million, respectively. We conduct an annual review, and more frequent reviews if events or circumstances dictate, to determine whether goodwill is impaired. We also determine whether impairment indicators are present related to our identifiable intangible assets. If we determine that goodwill or intangible assets are impaired, we would be required to write down the value of these assets. We completed our annual impairment test of goodwill on the first day of our third fiscal quarter of fiscal year 2023 and concluded that there was no indication of impairment.  However, based upon the subsequent operating results and projections for our DTG2Go business, we concluded that the goodwill associated with that business was impaired. Due to this impairment, we recorded an impairment charge of $9.2 million in fiscal year 2023. At March 2024, we concluded based on the assessment performed that there was additional indication of impairment on the goodwill in our DTG2Go business and recorded an impairment of $8.8 million in March 2024. There can, however, be no assurance that we will not be required to take an impairment charge on other goodwill or intangible assets in the future, which could have a material adverse effect on our results of operations.

We incurred operating losses in fiscal year 2023 as well as in the first six months of our fiscal year 2024 and have financed our operations principally through borrowings under our U.S. asset-based revolving credit facility. Future profitability is difficult to predict with certainty given the current market environment and our liquidity position. Failure to achieve profitability could materially and adversely affect the value of our Company and our ability to effect additional financing. The success of our business depends on our ability to increase revenues to offset expenses and operate profitably. If we are unable to meet or achieve our revenue targets and/or unable to reduce operating expenses, our business, financial condition and operating results will be materially adversely affected and we may incur additional operating losses. Significant operating losses or significant uses of cash in our operations have caused, and could continue to cause, us to default on our U.S. asset-based revolving credit facility. We rely on our credit facility, as well as on cash generated by our operations, to fund our working capital, capital expenditure and other operational needs, to make acquisitions, to fund repurchases under our share repurchase program and to pay dividends should we choose to do so in the future. Our working capital needs are generally greater in advance of the spring and summer selling seasons. Availability under our credit facility is primarily a function of the levels of our accounts receivable and inventory, as well as the uses of cash in our operations. A significant deterioration in our accounts receivable or inventory levels could restrict our ability to borrow additional funds or service our indebtedness. Cash on hand and availability under our U.S. revolving credit facility totaled $11.8 million at March 30, 2024. The covenants in our credit facility include, among other things, limitations on asset sales, consolidations, mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases, and transactions with affiliates as well as requirements to complete transactions related to certain assets. During the second quarter of our fiscal year 2024 we became non-compliant with certain EBITDA and other thresholds in our U.S. asset-based revolving credit facility and it is probable that we will not satisfy other thresholds in our U.S. asset-based revolving credit facility. A failure to satisfy our minimum availability threshold requires us to maintain the minimum fixed charge coverage ratio (FCCR) specified in our credit agreement, which we may not be able to maintain. Our non-compliance with one or more of the financial covenants in our U.S. revolving credit facility constitutes a breach of that agreement and an event of default. If an additional event of default under our credit facility occurs or becomes imminent, we may request our credit agreement lenders to provide a waiver. If we were unsuccessful in that endeavor, we could explore alternative sources of capital, whether debt or equity, which would likely be more expensive than the costs we incur under our credit facility and may not be available. If we were unable to cure an un-waived event of default under our credit facility, we would be unable to borrow additional amounts under the facility, we could be unable to fund our working capital and capital expenditure needs, make acquisitions, fund share repurchases or pay dividends, and our lenders thereunder could accelerate our obligations under the agreement and foreclose on our assets subject to the liens in their favor. This circumstance would have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition.