SUPERIOR GROUP OF COMPANIES INC

Superior Group of Companies****, Inc. and Subsidiaries**

Notes to theCondensedConsolidated Financial Statements (Unaudited)

NOTE1 – Description of Business and Basis of Presentation**:**

Description of business

Superior Group of Companies, Inc. (together with its subsidiaries, “the Company,” “Superior,” “we,” “our,” or “us”) was organized in1920 and was incorporated in1922 as a New York company under the name Superior Surgical Mfg. Co., Inc. In1998, 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 throughthird parties or in Superior’s own facilities, and are sold to customers in a wide range of industries, including retail chain, food service, entertainment, technology, transportation and other industries. The segment currently has sales offices in the United States, Canada, and Brazil, with support services in China and India.

Superior’s Healthcare Apparel segment, primarily through its signature marketing brands Fashion Seal Healthcare®, Wink® and CID Resources, manufactures (throughthird parties or in its own facilities) and sells a wide range of healthcare apparel, such as scrubs, lab coats, protective apparel and patient apparel. This segment sells its products 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 unaudited condensed 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"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Intercompany items have been eliminated in consolidation. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended* December 31, 2023*, and filed with the SEC. Management believes that the information furnished includes all adjustments of a normal recurring nature that are necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The results of operations for any interim period arenot necessarily indicative of results to be expected for the full year.

The Company refers to the condensed 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.

Reclassifications

The accompanying financial statements for the previous year contain certain reclassifications. Reclassifications impact the reporting of accounts receivable-other within the condensed consolidated balance sheets and statements of cash flows and items as described within Note9. These reclassifications haveno effect on previously reported results of operations.

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Written Put Options

During thesecond quarter of2022, the Company entered into written put options with a former employee that, if exercised by the former employee, required 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 were liabilities under ASC480, “Distinguishing Liabilities from Equity” because the options embody obligations to repurchase the Company’s shares by paying cash. As of* December 31, 2023,the fair value of the written put options were $1.8 million. The fair value of the written put options was based directly on the Company’s stock price and included in other current liabilities in our balance sheets. The written put options expire after twenty-four months and contain certain quarterly maximums. During thesix* months ended* June 30, 2024*, the remaining unexpired options of 132,924 expired resulting in a $2.4 million reduction in other current liabilities with an offset to additional paid-in capital. We recognized unrealized losses of $0.3 million on written put options during each of thethree months ended* June 30, 2024* and2023. We recognized an unrealized loss of $0.7 million and an unrealized gain of $0.1 million on written put options during thesix months ended* June 30, 2024* and2023, respectively. Unrealized gains and losses from changes in the fair value of the written put options were included within selling and administrative expenses in our statements of comprehensive income.

Recent Accounting Pronouncements

We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUsnot listed below were assessed and determined tonot be applicable.

Recently Issued Accounting PronouncementsNot* Yet Adopted*

In* November 2023,the FASB issued ASU2023*-07, "Segment Reporting (Topic280*)—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. We will adopt the disclosure requirements of ASU2023*-07 in our* December 31, 2024annual financial statements. The adoption of the ASU will only impact our disclosures, which will be made on a retrospective basis, withno* impacts on our results of operations, cash flows or financial condition. The Company’s adoption of this standard isnot expected to have a material impact on its financial statements.

In* December 2023,the FASB issued ASU2023*-09, "Income Taxes (Topic740*)—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,which for the Company is the calendar year beginning January 1, 2025.Early adoption is permitted for annual financial statements that havenot* yet been issued. The amendments should be applied on a prospective basis although retrospective application is permitted. The adoption of this guidance willnot 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.

NOTE2 – Inventories:

Inventories consisted of the following amounts (in thousands):

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NOTE3 – Long-Term Debt:

Debt consisted of the following (in thousands):

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.

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 6.4% as of* June 30, 2024*. 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* June 30, 2024*, there wereno outstanding letters of credit under the revolving credit facility.

Contractual principal payments for the term loan are as follows: remainder of2024 - $2.8 million;2025 - $5.6 million;2026 - $6.6 million and2027 - $52.5 million. The term loan doesnot 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 butnot 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 to1.0 and a net leverage rationot to exceed 4.0 to1.0. 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 thefour most recently ended fiscal quarters. As of* June 30, 2024*, the Company was in compliance with these ratios.

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NOTE4 – Net Sales:

For our Branded Products and Healthcare Apparel segments, revenue is primarily generated from the sale of finished products to customers. Revenues for our Branded Products and Healthcare Apparel segments are recognized when the performance obligations under the contract terms are satisfied. For certain contracts with customers in which the Company has an enforceable right to payment for goods withno alternative use, revenue is recognized over time upon receipt of finished goods into inventory. Revenue for goods that do have an alternative use or that the customer isnot obligated to purchase under the terms of a contract is generally recognized when the goods are transferred to the customer. The Company includes shipping and handling fees billable to customers in net sales. Shipping and handling activities that occur after the transfer of promised goods are accrued as control is transferred to the customer rather than being treated as a separate performance obligation.

For our Contact Centers segment, revenue is generated from providing our customers with contact center services. Revenue for our Contact Centers segment is recognized as services are delivered.

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 terms* mayinvolve 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 willnot* occur when the uncertainty associated with the variable consideration is resolved. The promised amount of consideration in a contract isnot adjusted for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised good or service to a customer and when the customer pays for that product or service will beone year or less. Sales taxes are excluded from the measurement of a performance obligation’s transaction price. Sales commissions are expensed as incurred when we expect that the amortization period of such costs will beone year or less.

For further information regarding our net sales disaggregated by reportable segment see Note9.

Contract Assets and Contract Liabilities

The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers (in thousands):

Contract assets relate to goods produced without an alternative use for which the Company has an enforceable right to payment but which hasnot yet been invoiced to the customer. The majority of the amounts included in contract assets on* December 31, 2023* were transferred to accounts receivable during thesix months ended* June 30, 2024*. Contract liabilities relate to payments received in advance of the Company completing its performance under a contract. Contract liabilities are included in other current liabilities in our balance sheets. During thesix months ended* June 30, 2024*, $4.0 million of revenue was recognized from the contract liabilities balance as of* December 31, 2023*.

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NOTE*5*** – Contingencies:**

The purchase price to acquire substantially all of the assets of Sutter’s Mill Specialties, Inc. (“Sutter’s Mill”) in* December 2021included contingent consideration based on varying levels of Sutter’s Mill’s EBITDA in each measurement period from2022* to2024. In* July 2023,management agreed to settle the remaining contingent consideration obligation associated with this acquisition for $0.5 million, which was paid in thefirst* quarter of2024. The purchase price to acquire substantially all of the assets of Guardian Products, Inc. (“Guardian”) in* May 2022included 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 June 30, 2024* was $1.7 million, of which $1.0 million is expected to be paid in thethird quarter of2024. The total estimated undiscounted remaining payment related to this contingent consideration payable is between $1.9 million and $2.0 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. The carrying amount of the liability* mayfluctuate 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 isnot expected to have a material impact on the Company’s results of operations, cash flows, or financial position.

NOTE6 – Share-Based Compensation**:**

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

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.

All stock options and SARs vest betweenone andthree years after the grant date. Employee awards expire five years after the grant date, and those issued to directors expireten years after the grant date. The Company issues new shares upon the exercise of stock options and SARs. Stock options, as well as SARs granted in tandem with stock options, are subject to accelerated vesting under certain circumstances as outlined in the2013 Incentive Stock and Awards Plan (the*“2013* Plan”) or2022 Equity Incentive and Awards Plan (the*“2022* Plan”), as applicable.

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A summary of stock option transactions during thesix months ended* June 30, 2024* follows:

As of* June 30, 2024*, the Company had $1.1 million in unrecognized compensation cost related to nonvested stock options to be recognized over the remaining weighted average vesting period of 1.2 years.

A summary of stock-settled SARs transactions during thesix months ended* June 30, 2024* follows:

As of* June 30, 2024*, the Company had $0.3 million in unrecognized compensation cost related to nonvested SARs to be recognized over the remaining weighted average vesting period of 1.3 years.

Restricted Stock

The Company has granted shares of restricted stock to directors and certain employees, which vest at a specified future date, generally after three years, over five years or when certain conditions are met. The shares are subject to accelerated vesting under certain circumstances as outlined in the2013 Plan or2022 Plan, as applicable. Expense for each of these grants is based on the fair value at the date of the grant and is being recognized on a straight-line basis over the respective service period.

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A summary of restricted stock transactions during thesix months ended* June 30, 2024* follows:

As of* June 30, 2024*, the Company had $4.2 million of unrecognized compensation cost related to nonvested restricted stock grants expected to be recognized over the remaining weighted average vesting period of 1.8 years.

Performance Shares

The Company has granted performance shares, which either contain only service-based vesting conditions or service-based and performance-based vesting conditions. The service-based awards vest after the service period is met, which is generally three tofive years. Expense for these grants is based on the fair value on the date of the grant and is being recognized on a straight-line basis over the respective service period. The performance-based awards generally vest after five years if the performance and service targets are met. The Company evaluates the performance conditions associated with these grants each reporting period to determine the expected number of shares to be issued. Expense for grants of performance shares is recognized on a straight-line basis over the respective service period based on the grant date fair value and expected number of shares to be issued. The awards are subject to accelerated vesting on a pro rata basis under certain circumstances as outlined in the2013 Plan or2022 Plan, as applicable, except in those circumstances in which award agreements or change in control agreements specify full vesting.

On* May 1, 2024,the Compensation Committee approved the Company entering into a grant of 125,000 and 75,000 performance shares to Michael Benstock, Chief Executive Officer and Michael Koempel, Chief Financial Officer, respectively, under the2022* Equity Incentive and Awards Plan. The performance shares agreements were executed on* May 6, 2024.Each performance share represents a contingent right to receiveone* share of common stock. The performance shares will vest if, in each case and during afour-year performance period beginning on* January 1, 2024,subject to additional requirements, the average closing price of the Company’s common stock over a rollingthirty* (30) day period equals or exceeds 115%,130%, and 150% of the closing share price on* May 10, 2024and the executive is still employed by the Companytwelve* (12) months after the applicable stock price condition has been satisfied. The fair value and derived service periods of the shares were determined based on a Monte Carlo valuation model, which includes estimates of the Company’s stock price volatility. Expense for these grants is being recognized on a straight-line basis over each tranche’s derived service period.

A summary of performance share transactions during thesix months ended* June 30, 2024* follows:

As of* June 30, 2024*, the Company had $3.1 million of unrecognized compensation cost related to nonvested performance share grants expected to be recognized over the remaining weighted average service period of 1.8 years.

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NOTE*7*** –**Income Taxes:

The Company calculates its interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, the Company makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date income or loss. The tax expense or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.

The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, butnot limited to, the expected operating income for the year and permanent and temporary differences. The accounting estimates used to compute the provision for income taxes* may*change as new events occur, additional information is obtained or the tax environment changes.

For thethree months ended* June 30, 2024*, the Company recorded a provision for income taxes of $0.1 million, which represents an effective tax rate of 7.7%. For thesix months ended* June 30, 2024*, the Company recorded a provision for income taxes of $0.7 million, which represents an effective tax rate of 13.9%. The income tax provision and the effective tax rate for thethree andsix months ended* June 30, 2024* 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. The tax rate was further favorably impacted by the windfall benefits associated with stock option exercises during thesix months ended* June 30, 2024,*totaling $0.5 million.

For thethree months ended* June 30, 2023*, the Company recorded a provision for income taxes of $0.2 million, which represents an effective tax rate of 11.8%. For thesix months ended* June 30, 2023*, the Company recorded a provision for income taxes of $0.2 million, which represents an effective tax rate of 9.5%. The income tax provision and the effective tax rate for thethree andsix months ended* June 30, 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.