rcky20220331b

rcky20220331b_10q.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-34382

ROCKY BRANDS, INC.

(Exact name of Registrant as specified in its charter)

Ohio		No. 31-1364046
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

39 East Canal Street, Nelsonville, Ohio 45764
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (740) 753‑9100

Title of class		Trading symbol		Name of exchange on which registered
Common Stock – No Par Value		RCKY		Nasdaq

Indicate by checkmark 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 the filing requirements for at least 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 (§ 232.405 of this chapter) 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 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 ☒

There were 7,313,075 shares of the Registrant's Common Stock outstanding on April 30, 2022.

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TABLE OF CONTENTS



		Page
PART I	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited), December 31, 2021, and March 31, 2021 (Unaudited)	2
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021 (Unaudited)	3
	Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (Unaudited)	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II	Other Information

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	24
SIGNATURES		25

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PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

(Unaudited)

	March 31,		December 31,		March 31,
	2022		2021		2021
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents	$	14,950	$	5,909	$	8,892
Trade receivables – net		123,387		126,807		84,050
Contract receivables		268		1,062		2,171
Other receivables		260		242		231
Inventories – net		289,230		232,464		125,133
Income tax receivable		2,338		4,294		-
Prepaid expenses		5,875		4,507		4,116
Total current assets		436,308		375,285		224,593
LEASED ASSETS		10,696		11,428		1,696
PROPERTY, PLANT & EQUIPMENT – net		60,958		59,989		51,150
GOODWILL		50,246		50,641		-
IDENTIFIED INTANGIBLES – net		125,528		126,315		170,930
OTHER ASSETS		938		917		715
TOTAL ASSETS	$	684,674	$	624,575	$	449,084

LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable	$	156,890	$	114,632	$	45,077
Contract liabilities		268		1,062		2,927
Current Portion of Long-Term Debt		3,250		3,250		3,250
Accrued expenses:
Salaries and wages		3,715		3,668		3,005
Taxes - other		2,054		849		618
Accrued freight		1,735		1,798		1,479
Commissions		1,689		2,447		1,185
Accrued duty		18,873		5,469		6,953
Accrued interest		-		2,133		-
Income tax payable		-		-		2,357
Other		8,014		4,828		5,343
Total current liabilities		196,488		140,136		72,194
LONG-TERM DEBT		264,486		266,794		183,019
LONG-TERM TAXES PAYABLE		169		169		169
LONG-TERM LEASE		8,200		8,809		1,178
DEFERRED INCOME TAXES		10,293		10,293		8,271
DEFERRED LIABILITIES		584		519		386
TOTAL LIABILITIES		480,220		426,720		265,217
SHAREHOLDERS' EQUITY:
Common stock, no par value;
25,000,000 shares authorized; issued and outstanding March 31, 2022 - 7,311,059; December 31, 2021 - 7,302,199; March 31, 2021 7,280,711		68,454		68,061		66,856
Retained earnings		136,000		129,794		117,011
Total shareholders' equity		204,454		197,855		183,867
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	684,674	$	624,575	$	449,084

See Notes to Unaudited Condensed Consolidated Financial Statements

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Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended
	March 31,
	2022			2021
NET SALES	$	167,025		$	87,667
COST OF GOODS SOLD		104,198			52,528
GROSS MARGIN		62,827			35,139

OPERATING EXPENSES		49,630			28,558

INCOME FROM OPERATIONS		13,197			6,581

INTEREST EXPENSE AND OTHER EXPENSES		(3,907	)		(747	)

INCOME BEFORE INCOME TAX EXPENSE		9,290			5,834

INCOME TAX EXPENSE		1,951			1,342

NET INCOME	$	7,339		$	4,492

INCOME PER SHARE
Basic	$	1.00		$	0.62
Diluted	$	0.99		$	0.61

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

Basic		7,306			7,258
Diluted		7,410			7,348

See Notes to Unaudited Condensed Consolidated Financial Statements

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Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(In thousands, except per share amounts)

(Unaudited)

	Common Stock and				Accumulated
	Additional Paid-in Capital				Other					Total
	Shares				Comprehensive		Retained			Shareholders'
	Outstanding		Amount		Income		Earnings			Equity

BALANCE - December 31, 2020		7,248	$	65,971		-	$	113,534		$	179,505

Net income							$	4,492		$	4,492
Dividends paid on common stock ($0.14 per share)								(1,015	)		(1,015	)
Repurchase of common stock											-
Stock issued for options exercised, including tax benefits		31	$	607				-			607
Stock compensation expense		2		278				-			278
BALANCE - March 31, 2021		7,281	$	66,856	$	-	$	117,011		$	183,867

BALANCE - December 31, 2021		7,302	$	68,061		-	$	129,794		$	197,855

Net income							$	7,339		$	7,339
Dividends paid on common stock ($0.155 per share)								(1,133	)		(1,133	)
Repurchase of common stock		-		-							-
Stock issued for options exercised, including tax benefits		7	$	145				-			145
Stock compensation expense		2		248				-			248
BALANCE - March 31, 2022		7,311	$	68,454	$	-	$	136,000		$	204,454

See Notes to Unaudited Condensed Consolidated Financial Statements

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Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,339		$	4,492
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		3,024			1,095
Amortization of debt issuance costs		213			-
Stock compensation expense		248			278
Change in assets and liabilities:
Receivables		3,403			1,202
Contract receivables		794			2,999
Inventories		(56,371	)		(5,912	)
Other current assets		(635	)		331
Other assets		(21	)		(267	)
Accounts payable		40,296			5,922
Accrued and other liabilities		14,342			(3,570	)
Income taxes		1,955			(1,019	)
Contract liabilities		(794	)		(2,655	)
Net cash provided by operating activities		13,793			2,896

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(1,243	)		(1,209	)
Acquisition of business, net of cash acquired		-			(206,970	)
Net cash used in investing activities		(1,243	)		(208,179	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility		3,342			80,000
Repayments on revolving credit facility		(5,025	)		(19,500	)
Proceeds from term loan		-			130,000
Repayments on term loan		(838	)		-
Debt issuance costs		-			(4,270	)
Proceeds from stock options		145			607
Dividends paid on common stock		(1,133	)		(1,015	)
Net cash (used in) provided by financing activities		(3,509	)		185,822

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		9,041			(19,461	)

CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD		5,909			28,353
END OF PERIOD	$	14,950		$	8,892

See Notes to Unaudited Condensed Consolidated Financial Statements

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Rocky Brands, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of well recognized brand names including Rocky, Georgia Boot, Durango, Lehigh, The Original Muck Boot Company ("Muck"), XTRATUF, Servus, NEOS and Ranger. Our brands have a long history of representing high quality, comfortable, functional and durable footwear and our products are organized around six target markets: outdoor, work, duty, commercial military, military and western. In addition, as part of our strategy of outfitting consumers from head-to-toe, we market complementary branded apparel and accessories that we believe leverage the strength and positioning of each of our brands.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments that are necessary for a fair presentation of the financial results. All such adjustments reflected in the unaudited condensed consolidated financial statements are considered to be of a normal and recurring nature. The results of operations for the three months ended March 31, 2022 and 2021 are not necessarily indicative of the results to be expected for the whole year. The December 31, 2021 condensed consolidated balance sheet data was derived from the audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). This Quarterly Report on Form 10-Q should be read in connection with our Annual Report on Form 10-K for the year ended December 31, 2021, which includes all disclosures required by GAAP.

We report our segment information in accordance with provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 280, Segment Reporting. We evaluate business performance based upon several metrics, using segment profit as the primary financial measure. During the three months ended June 30, 2021, we changed our reporting segments when compared to our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, to change our Military reporting segment to "Contract Manufacturing" and to change the composition thereof to continue to include sales to the U.S. Military ("Military Contracts") and to include sales under manufacturing contracts for private label or other specific footwear products sold through our Wholesale and Retail channels ("Private Contracts"). Previously, only Military Contracts were included in this segment. The Private Contract sales have characteristics more like Military Contracts, with similar sales, delivery processes and gross margins. This segment reporting change reflects a corresponding change in how our Chief Executive Officer and our Chief Financial Officer, our chief operating decision makers ("CODMs"), review financial information in order to allocate resources and assess performance. Previously, Private Contracts were included in the Wholesale segment, but with our acquisition of the lifestyle and performance footwear business of Honeywell International Inc., our Wholesale segment has substantially increased in size and our CODMs determined that the change in segment reporting was appropriate at this time to mirror how they evaluate and manage our business.

There has been no change in our total consolidated financial condition, results of operations, or segment information previously reported, as the result of the change in our reportable segments, as we had no Private Contract sales during the fiscal year ended December 31, 2020 or quarterly period ended March 31, 2021. Each of our reporting segments continue to employ consistent accounting policies. As a result of this assessment, we now report our activities in the following three reporting segments: Wholesale, Retail and Contract Manufacturing. Our Wholesale segment includes sales of footwear and accessories to several classifications of retailers, including sporting goods stores, outdoor specialty stores, online retailers, marine stores, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail segment includes direct sales of our products to consumers through our e-commerce websites, marketplaces, our Rocky outlet store, and Lehigh businesses. Our Contract Manufacturing segment includes sales to the U.S. Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer. See Note 14 – Segment Information for further information.

2. ACCOUNTING STANDARDS UPDATES

Recently Issued Accounting Pronouncements

We are currently evaluating the impact of the following Accounting Standards Update (“ASU”) on our Unaudited Condensed Consolidated Financial Statements or Notes to the Unaudited Condensed Consolidated Financial Statements:

Standard		Description		Anticipated Adoption Period		Effect on the financial statements or other significant matters
ASU 2016-13, Measurement of Credit Losses on Financial Instruments		The pronouncement seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.		Q1 2023		We are evaluating the impacts of the new standard on our existing financial instruments, including trade receivables.

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Accounting Standards Adopted in the Current Year

Standard		Description		Effect on the financial statements or other significant matters
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes		This pronouncement is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.		We adopted the new standard in Q1 2021 and the standard did not have a significant impact on our Consolidated Financial Statements.

3. FAIR VALUE

Generally accepted accounting standards establish a framework for measuring fair value. The fair value accounting standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard clarifies how to measure fair value as permitted under other accounting pronouncements.

The fair value accounting standard defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This standard also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

●

Level 1 – Quoted prices in active markets for identical assets or liabilities.

●

Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

●

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The fair values of cash and cash equivalents, receivables, and payables approximated their carrying values because of the short-term nature of these instruments. Receivables consist primarily of amounts due from our customers, net of allowances, amounts due from employees (sales persons’ advances in excess of commissions earned and employee travel advances), other customer receivables, net of allowances, and expected insurance recoveries. The carrying amounts of our long-term credit facility and other short-term financing obligations also approximate fair value, as they are comparable to the available financing in the marketplace during the year. The fair value of our credit facilities are categorized as Level 2.

We hold assets and liabilities in a separate trust in connection with deferred compensation plans. The fair value of these assets are based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).

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4. ACQUISITION

The Performance and Lifestyle Footwear Business of Honeywell International Inc.

On January 24, 2021, we entered into a Purchase Agreement (the "Purchase Agreement") with certain subsidiaries of Honeywell International Inc. (collectively, "Honeywell"), to purchase Honeywell's performance and lifestyle footwear business, including brand names, trademarks, assets and liabilities associated with Honeywell's performance and lifestyle footwear business (the "Acquisition") for an aggregate purchase price of $212 million.

On March 15, 2021 (the "Acquisition Date"), pursuant to the terms and conditions set forth in the Purchase Agreement, we completed the Acquisition for an aggregate preliminary closing price of approximately $207 million, net of cash acquired, based on preliminary working capital and other adjustments. Upon a final agreement of net working capital as of the Acquisition Date, we owed Honeywell an additional $5.4 million. The Acquisition was funded through cash on hand and borrowings under two new credit facilities. See Note 10 for information regarding the two new credit facilities.

The Acquisition expanded our brand portfolio to include Muck, XTRATUF, Servus, NEOS and Ranger brands (the "Acquired Brands"). We acquired 100% of the voting interests of certain subsidiaries and additional assets comprising the performance and lifestyle footwear business of Honeywell with the Acquisition.

Through the Acquisition, we have greatly enhanced our powerful portfolio of footwear brands and significantly increased our sales and profitability. We acquired a well-run business with a corporate culture and a customer base similar to ours, which provides meaningful growth opportunities within our existing product categories as well as an entry into new market segments. Its innovative and authentic product collections complement our existing offering with minimal overlap, which will allow us to strengthen our wholesale relationships and serve a wider consumer audience. At the same time, we plan to leverage our existing advanced fulfillment capabilities to improve distribution of the Acquired Brands to wholesale customers and accelerate direct-to-consumer penetration.

In connection with the Acquisition, we also entered into employment agreements with seven key employees from the performance and lifestyle footwear business of Honeywell, pursuant to which, among other things, we agreed to grant 25,000 non-qualified stock options in the aggregate to the seven employees as an inducement for continuing their employment with us.

We acquired multiple leases through the Acquisition including the lease of our Rock Island, Illinois and China manufacturing facilities and an office building in Westwood, Massachusetts.

The Acquisition contributed net sales of $64.4 million and $6.5 million, respectively, to the unaudited condensed consolidated operating results for the three months ended March 31, 2022 and 2021. The Acquisition contributed net income of $2.0 million and $0.5 million, respectively, to the unaudited condensed consolidated operating results for the three months ended March 31, 2022 and 2021.

Acquisition-related costs

Costs incurred to complete and integrate the Acquisition are expensed as incurred and included in "operating expenses" in the accompanying condensed consolidated statements of operations. During the three months ended March 31, 2022 and 2021, there were approximately $1.0 million and $5.2 million, respectively, of acquisition-related costs recognized. These costs represent investment banking fees, legal and professional fees, transaction fees, integration costs, amortization and consulting fees associated with the Acquisition.

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Preliminary Purchase Price Allocation

The Acquisition has been accounted for under the business combinations accounting guidance. As a result, we have applied acquisition accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the Acquisition Date. The aggregate closing price noted above was allocated to the major categories of assets acquired and liabilities assumed based on their fair values at the Acquisition Date using primarily Level 2 and Level 3 inputs. These Level 2 and Level 3 valuation inputs include an estimate of future cash flows and discount rates. Additionally, estimated fair values are based, in part, upon outside valuation for certain assets, including specifically identified intangible assets.

The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill is finalized and is no longer subject to adjustment as the final valuation related to assets acquired and liabilities assumed has been obtained.

The following table summarizes the consideration paid and estimated fair value of the assets acquired and liabilities assumed as of the Acquisition Date.

($ in thousands)	Fair Value
Cash	$	2,655
Accounts receivable ⁽¹⁾		36,734
Inventories ⁽²⁾		41,057
Property, plant and equipment		16,243
Goodwill ⁽³⁾		50,246
Intangible assets		98,620
Other assets		1,250
Accounts payable		(18,108	)
Accrued expenses		(13,634	)
Total identifiable net assets		215,063
Cash acquired		(2,655	)
Total cash paid, net of cash acquired	$	212,408

⁽¹⁾ The recorded amount for accounts receivable considers expected uncollectible amounts of approximately $0.6 million in its determination of fair value.

⁽²⁾ Fair value of finished goods inventories included a preliminary step up value of approximately $3.5 million, of which approximately $0.3 million was expensed during the three months ended March 31, 2021, and are included in "Cost of Goods Sold" in the accompanying unaudited condensed consolidated statements of operations. The remaining $3.2 million was expensed during the year ended December 31, 2021 and as such there was no expense for the three months ended March 31, 2022.

⁽³⁾ Goodwill consists largely consists of the acquired workforce, expected cost synergies and economies of scale resulting from the Acquisition.

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Unaudited Pro Forma Financial Information

The following unaudited pro forma results of operations assume that the Acquisition occurred at the beginning of the periods presented. These unaudited pro forma results are presented for information purposes only and are not necessarily indicative of what the results of operations would have been if the Acquisition had occurred at the beginning of the periods presented, nor are they indicative of the future results of operations. The pro forma results presented below are adjusted for the removal of acquisition-related costs of approximately $1.0 million and $5.2 million for the three months ended March 31, 2022 and 2021, respectively.

	Three Months Ended March 31,
($ in thousands, except per share amount)	2022		2021
Net sales	$	167,025	$	126,345
Net income	$	8,150	$	13,949
Diluted earnings per share	$	1.10	$	1.90

5. REVENUE

Nature of Performance Obligations

Our products are distributed through three distinct channels, which represent our business segments: Wholesale, Retail, and Contract Manufacturing. In our Wholesale business, we distribute our products through a wide range of distribution channels representing over ten thousand retail store locations in the U.S., Canada, and internationally. Our Wholesale channels vary by product line and include sporting goods stores, outdoor specialty stores, online retailers, marine stores, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail business includes direct sales of our products to consumers through our e-commerce websites, marketplaces, our Rocky outlet store, and Lehigh businesses. Under our Contract Manufacturing segment, we sell footwear under the Rocky label to the U.S. Military, and manufacture private label footwear and other footwear as contracted by a customer.

Significant Accounting Policies and Judgements

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; this generally occurs upon shipment of our product to our customer, which is when the transfer of control of our products passes to the customer. The duration of our arrangements with our customers are typically one year or less. Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of our products at a point in time and consists of either fixed or variable consideration or a combination of both.

Revenues from sales are recorded at the net sales price, which includes estimates of variable consideration for which reserves are established. Components of variable consideration include prompt payment discounts, volume rebates, and product returns. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer).

The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Our analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of March 31, 2022. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net revenue and earnings in the period such variances become known.

When a customer has a right to a prompt payment discount, we estimate the likelihood that the customer will earn the discount using historical data and adjust our estimate when the estimate of the likelihood that a customer will earn the discount changes or the consideration becomes fixed, whichever occurs earlier. The estimated amount of variable consideration is recognized as a credit to trade receivables and a reduction in revenue until the uncertainty of the variable consideration is alleviated. Because most of our customers have payment terms of less than six months, there is not a significant financing component in our contracts with customers.

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When a customer is offered a rebate on purchases retroactively this is accounted for as variable consideration because the consideration for the current and past purchases is not fixed until it is known if the discount is earned. We estimate the expected discount the customer will earn at contract inception using historical data and projections and update our estimates when projections materially change or consideration becomes fixed. The estimated rebate is recognized as a credit to trade receivables and offset against revenue until the rebate is earned or the earning period has lapsed.

When a right of return is part of the arrangement with the customer, we estimate the expected returns based on an analysis using historical data. We adjust our estimate either when the most likely amount of consideration we expect to receive changes or when the consideration becomes fixed, whichever occurs earlier. See Note 6 and Note 7 for additional information.

Trade receivables represent our right to unconditional payment that only relies on the passage of time.

Contract receivables represent contractual minimum payments required under non-cancellable contracts with the U.S. Military and other customers with a duration of one year or less.

Contract liabilities are performance obligations that we expect to satisfy or relieve within the next twelve months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancellable contracts before the transfer of goods or services to the customer has occurred. Our contract liability represents unconditional obligations to provide goods under non-cancellable contracts with the U.S. Military and other customers.

Items considered immaterial within the context of the contract are recognized as an expense.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue producing transaction, that are collected from customers, are excluded from revenue.

Costs associated with our manufacturer’s warranty continue to be recognized as expense when the products are sold in accordance with guidance surrounding product warranties.

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in operating expenses.

Costs associated with obtaining a contract are expensed as incurred in accordance with the practical expedient in ASC 340-40 in instances where the amortization period is one year or less. We anticipate substantially all of our costs incurred to obtain a contract would be subject to this practical expedient.

Contract Balances

The following table provides information about contract liabilities from contracts with our customers.

	March 31,		December 31,		March 31,
($ in thousands)	2022		2021		2021
Contract liabilities	$	268	$	1,062	$	2,927

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Significant changes in the contract liabilities balance during the period are as follows:

($ in thousands)	Contract liabilities
Balance, December 31, 2021	$	1,062
Non-cancelable contracts with customers entered into during the period		-
Revenue recognized related to non-cancelable contracts with customers during the period		(794	)
Balance, March 31, 2022	$	268

Disaggregation of Revenue

All revenues are recognized at a point in time when control of our products pass to the customer at point of shipment. Because all revenues are recognized at a point in time and are disaggregated by channel, our segment disclosures are consistent with ASC 606 disaggregation requirements. See Note 14 for segment disclosures.

6. TRADE RECEIVABLES

Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $1,730,000, $613,000 and $394,000 at March 31, 2022, December 31, 2021 and March 31, 2021, respectively. We record the allowance based on historical experience, the age of the receivables, and identification of customer accounts that are likely to prove difficult to collect due to various criteria including pending bankruptcy. However, estimates of the allowance in any future period are inherently uncertain and actual allowances may differ from these estimates. If actual or expected future allowances were significantly greater or less than established reserves, a reduction or increase to bad debt expense would be recorded in the period this determination was made. Our credit policy generally provides that trade receivables will be deemed uncollectible and written-off once we have pursued all reasonable efforts to collect on the account.

In accordance with ASC 606, the return reserve liability netted against trade receivables was approximately $2,079,000, $1,670,000 and $1,619,000 at March 31, 2022, December 31, 2021 and March 31, 2021, respectively.

7. INVENTORY

Inventories are comprised of the following:

	March 31,		December 31,		March 31,
($ in thousands)	2022		2021		2021
Raw materials	$	23,229	$	20,933	$	19,372
Work-in-process		1,872		1,316		1,505
Finished goods		264,129		210,215		104,256
Total	$	289,230	$	232,464	$	125,133

In accordance with ASC 606, the return reserve asset included within inventories was approximately $1,134,000, $902,000 and $641,000 at March 31, 2022, December 31, 2021 and March 31, 2021, respectively.

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8. GOODWILL

Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill arose from the Acquisition and largely consists of the workforce acquired, expected cost synergies and economies of scale resulting from the business combination. The amount of Goodwill that is expected to be deductible for tax purposes is $49.0 million.

GAAP has established guidance for reporting information about a company's operating segments, including disclosures related to a company's products and services, geographic areas and major customers. We monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments, as well as our reporting units. As previously stated, our operations represent three reporting segments: Wholesale, Retail and Contract Manufacturing. Goodwill impairment analysis will be performed for our Wholesale and Retail reporting segments. There is no goodwill allocated to our Contract Manufacturing segment. Of total Goodwill, $25.4 million was allocated to our Wholesale segment and $24.8 million was allocated to our Retail segment.

Goodwill is subject to impairment tests at least annually. We review the carrying amounts of goodwill by reporting unit at least annually, or when indicators of impairment are present, to determine if goodwill may be impaired. We include assumptions about the expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying value of these assets is not recoverable, based on the discounted cash flow analysis, management compares the fair value of the assets to the carrying value. Goodwill is considered impaired if the recorded value exceeds the fair value.

We may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. We would not be required to quantitatively determine the fair value of goodwill unless we determine, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projection and operating plans. We perform our annual testing for goodwill at the beginning of the fourth quarter of each fiscal year, starting with our fiscal year ended December 31, 2021.

9. IDENTIFIED INTANGIBLE ASSETS

A schedule of identified intangible assets is as follows:

	Gross		Accumulated		Carrying
($ in thousands)	Amount		Amortization		Amount
March 31, 2022
Trademarks
Wholesale ⁽¹⁾	$	72,579		-	$	72,579
Retail ⁽²⁾		9,220		-		9,220
Patents		895	$	810		85
Customer relationships ⁽³⁾		46,900		3,256		43,644
Total Intangibles	$	129,594	$	4,066	$	125,528

⁽¹⁾ $45.4 million of the total resulted from our Acquisition that occurred on March 15, 2021.

⁽²⁾ $6.3 million of the total resulted from our Acquisition that occurred on March 15, 2021.

⁽³⁾ Resulted from our Acquisition that occurred on March 15, 2021.

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	Gross		Accumulated		Carrying
($ in thousands)	Amount		Amortization		Amount
December 31, 2021
Trademarks
Wholesale (1)	$	72,579		-	$	72,579
Retail (2)		9,220		-		9,220
Patents		895	$	804		91
Customer relationships (3)		46,900		2,475		44,425
Total Intangibles	$	129,594	$	3,279	$	126,315

⁽¹⁾ $45.4 million of the total resulted from our Acquisition that occurred on March 15, 2021.

⁽²⁾ $6.3 million of the total resulted from our Acquisition that occurred on March 15, 2021.

⁽³⁾ Resulted from our Acquisition that occurred on March 15, 2021.

	Gross		Accumulated		Carrying
($ in thousands)	Amount		Amortization		Amount
March 31, 2021
Trademarks
Wholesale	$	27,192		-	$	27,192
Retail		2,900		-		2,900
Patents		895	$	785		110
Acquired Intangibles ⁽¹⁾		140,728		-		140,728
Total Intangibles	$	171,715	$	785	$	170,930

⁽¹⁾ Represents total intangibles assets, allocated on a preliminary basis, as of March 31, 2021.

The weighted average life for our patents is 7.5 years.

A schedule of approximate amortization expense related to finite-lived intangible assets for the three months ended March 31, 2022 and 2021 is as follows:

	Three Months Ended
	March 31,
($ in thousands)	2022		2021
Amortization expense	$	787	$	7

Updated to include the amortization of our acquired intangible assets, a schedule of approximate expected remaining amortization expense related to finite-lived intangible assets for the years ending December 31, is as follows:

	Amortization
($ in thousands)	Expense
2022	$	2,362
2023		3,147
2024		3,143
2025		3,139
2026		3,136
2027		3,134
2028+		25,668

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10. LONG-TERM DEBT

On March 15, 2021, we entered into a senior secured term loan facility ("Term Facility") with TCW Asset Management Company, LLC, as agent, for the lenders party thereto in the amount of $130 million. The Term Facility provided for quarterly payments of principal and bears interest of LIBOR plus 7.00% through June 30, 2021. After this date, interest will be assessed quarterly based on our total leverage ratio. The total leverage ratio is calculated as (a) Total Debt to (b) EBITDA. If our total leverage ratio is greater than or equal to 3.25, the effective interest rate will be LIBOR plus 7.00% (or at our option, Prime Rate plus 6.00%). If our total leverage ratio is less than 3.25, the effective interest rate will be LIBOR plus 6.50% (or at our option, Prime Rate plus 5.50%). The Term Facility also has a LIBOR floor rate of 1.00%. In December 2021, the Term Facility was amended to increase the effective interest rate to LIBOR plus 7.00% until June 2022.

Our Term Facility is collateralized by a second-lien on accounts receivable, inventory, cash and related assets and a first-lien on substantially all other assets. The Term Facility matures on March 15, 2026.

On March 15, 2021, we also entered into a senior secured asset-based credit facility ("ABL Facility") with Bank of America, N.A. ("Bank of America") as agent, for the lenders party thereto. The ABL Facility provides a new senior secured asset-based revolving credit facility up to a principal amount of $150 million, which includes a sub-limit for the issuance of letters of credit up to $5 million. The ABL Facility may be increased up to an additional $50 million at the Borrowers’ request and the Lenders’ option, subject to customary conditions. In December 2021, we amended our ABL Facility to temporarily increase our borrowing capacity from $150 million to $175 million until June 2022, at which time our borrowing capacity will go down to $165 million. The ABL Facility includes a separate first in, last out (FILO) tranche, which allows the Company to borrow at higher advance rates on eligible accounts receivables and inventory balances. As of March 31, 2022, we had borrowing capacity of $30.6 million.

The ABL Facility is collateralized by a first-lien on accounts receivable, inventory, cash and related assets and a second-lien on substantially all other assets. The ABL Facility matures on March 15, 2026. Interest on the ABL Facility is based on the amount available to be borrowed as set forth on the following chart:

	Average Availability as a
Revolver Pricing Level ⁽¹⁾	Percentage of Commitments	Base Rate			LIBOR Rate			Base Rate for FILO			LIBOR Rate for FILO
I	> 66.7%		0.00	%		1.25	%		0.50	%		1.75	%
II	>33.3% and < or equal to 66.7%		0.00	%		1.50	%		0.50	%		2.00	%
III	< or equal to 33.3%		0.25	%		1.75	%		0.75	%		2.25	%

⁽¹⁾ Until June 30, 2021, Tier II applied.

In connection with the Term Facility and ABL Facility, we had to pay certain fees that were capitalized and will be amortized over the life of each respective loan. In addition, the ABL Facility requires us to pay an annual collateral management fee in the amount of $75,000 due on each anniversary of the ABL Facility issuance date, until it matures.

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Current and long-term debt consisted of the following:

	March 31,			December 31,			March 31,
($ in thousands)	2022			2021			2021
Term Facility that matures in 2026 with an effective interest rate of 8.00%	$	126,750		$	127,563		$	130,000
ABL Facility that matures in 2026:
LIBOR borrowings with an effective interest rate of 1.88%		140,257			140,000
Prime borrowings with an effective interest rate of 3.75%, 3.50% and 3.25% as of March 31, 2022, December 31, 2021 and March 31, 2021, respectively		4,106			6,072			60,500
Total debt		271,113			273,635			190,500
Less: Unamortized debt issuance costs		(3,377	)		(3,591	)		(4,231	)
Total debt, net of debt issuance costs		267,736			270,044			186,269
Less: Debt maturing within one year		(3,250	)		(3,250	)		(3,250	)
Long-term debt	$	264,486		$	266,794		$	183,019

Credit Facility Covenants

The Term Facility contains restrictive covenants which requires us to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio, as defined in the agreement. We are in compliance with all credit facility covenants as of March 31, 2022, December 31, 2021 and March 31, 2021.

Our ABL Facility contains a restrictive covenant which requires us to maintain a fixed charge coverage ratio upon a triggering event taking place (as defined in the ABL Facility agreement). During the three months ended March 31, 2022 and 2021, there were no triggering events and the covenant was not in effect.

Both the Term Facility and the ABL Facility contain restrictions on the amount of dividend payments.

Huntington Credit Facility

On February 13, 2019, we entered into a Revolving Credit, Guaranty, and Security Agreement (“Credit Agreement”) with the Huntington National Bank (“Huntington”) as administrative agent. The Credit Agreement provided for a new senior secured asset-based revolving credit facility up to a principal amount of $75 million, which included a sublimit for the issuance of letters of credit up to $7.5 million (the “Huntington Credit Facility”). The Huntington Credit Facility permitted increases up to an additional $25 million at our request and the lenders’ option, subject to customary conditions.

					Applicable
					Spread Rates for
		Applicable Spread Rates			Domestic Rate
	Average Excess Revolver Availability	for Eurodollar Rate			Revolving
Revolver Pricing Level	for Previous Quarter	Revolving Advances			Advances
I	$25,000,000+		1.00	%		0.50	%
II	$17,500,000 to < 25,000,000		1.25	%		0.50	%
III	$10,000,000 to < 17,500,000		1.50	%		2.50	%
IV	$< 10,000,000		1.75	%		0.00	%

The total amount available under the Huntington Credit Facility was subject to a borrowing base calculation based on various percentages of accounts receivable and inventory.

As of March 31, 2021, we had no outstanding borrowings against the Huntington Credit Facility. The Huntington Credit Facility was paid off and closed as part of the Acquisition and new ABL Facility with Bank of America.

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Credit Facility Covenants

The Huntington Credit Facility contained restrictive covenants which required us to maintain a fixed charge coverage ratio. These restrictive covenants were only in effect upon a triggering event taking place. The Huntington Credit Facility contained restrictions on the amount of dividends that may be paid.

11. TAXES

We are subject to tax examinations in various taxing jurisdictions. The earliest years open for examination are as follows:

		Earliest Exam Year
Taxing Authority Jurisdiction:
U.S. Federal		2018
Various U.S. States		2017
Puerto Rico (U.S. Territory)		2016
Canada		2016
China		2018
Mexico		2021
United Kingdom		2021
Australia		2021

Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. No such expenses were recognized during the three months ended March 31, 2022 and 2021. We do not believe there will be any material changes in our uncertain tax positions over the next 12 months.

Accounting for uncertainty in income taxes requires financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. Under this guidance, income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of the standard. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations.

Our estimated tax rates for the three months ended March 31, 2022 and 2021 were 21.0% and 23.0%, respectively.

12. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income applicable to common shareholders by the weighted average number of common shares outstanding during each period. The diluted earnings per share computation includes common share equivalents, when dilutive.

A reconciliation of the shares used in the basic and diluted income per common share computation for the three months ended March 31, 2022 and 2021 is as follows:

	Three Months Ended
	March 31,
(shares in thousands)	2022		2021

Basic - weighted average shares outstanding		7,306		7,258
Dilutive stock options		104		90
Diluted - weighted average shares outstanding		7,410		7,348
Anti-dilutive securities		107		34

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13. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the three months ended March 31, 2022 and 2021 was as follows:

		Three Months Ended
		March 31,
($ in thousands)	2022			2021

Interest paid	$	3,479		$	20

Federal, state, and local income taxes paid, net	$	-		$	4

Change in contract receivables, net	$	794		$	2,999

Change in contract liabilities, net	$	(794	)	$	(2,655	)

Property, plant, and equipment purchases in accounts payable	$	1,962		$	1,668

14. SEGMENT INFORMATION

During the three months ended June 30, 2021, we changed our reporting segments when compared to our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, to change our Military reporting segment to "Contract Manufacturing" and to change the composition thereof to continue to include Military Contracts and to include sales under manufacturing contracts for private label or other Private Contracts. Previously, only Military Contracts were included in this segment. The Private Contract sales have characteristics more like Military Contracts, with similar sales, delivery processes and gross margins. This segment reporting change reflects a corresponding change in how our CODMs review financial information in order to allocate resources and assess performance. Previously, Private Contracts were included in the Wholesale segment, but with our Acquisition, our Wholesale segment has substantially increased in size and our CODMs determined that the change in segment reporting was appropriate at this time to mirror how they evaluate and manage our business.

We have identified three reportable segments: Wholesale, Retail and Contract Manufacturing. Our Wholesale segment includes sales of footwear and accessories to several classifications of retailers, including sporting goods stores, outdoor specialty stores, online retailers, marine stores, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail segment includes direct sales of our products to consumers through our e-commerce websites, marketplaces, our Rocky outlet store, and Lehigh businesses. Our Contract Manufacturing segment includes sales to the U.S. Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer. The following is a summary of segment results for the Wholesale, Retail, and Contract Manufacturing segments for the three months ended March 31, 2022 and 2021.

	Three Months Ended
	March 31,
($ in thousands)	2022		2021
NET SALES:
Wholesale	$	133,961	$	59,235
Retail		28,626		23,986
Contract Manufacturing		4,438		4,446
Total Net Sales	$	167,025	$	87,667

GROSS MARGIN:
Wholesale	$	48,259	$	22,261
Retail		13,848		11,549
Contract Manufacturing		720		1,329
Total Gross Margin	$	62,827	$	35,139

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

During the first quarter of 2022, we experienced strong demand for our brands which led to growth across our Wholesale and Retail segments and throughout our diverse mix of distribution channels including western, work, farm & ranch, outdoor, and family retail. The combination of a healthy inventory position and additional fulfillment capacity allowed us to better capitalize on the market opportunities we are creating through our product and marketing strategies and focus on operational excellence.

During the first quarter of 2021, we closed on the acquisition of the performance and lifestyle footwear business of Honeywell International Inc., which we refer to herein as the "Acquisition". We have incurred significant expenses associated with the Acquisition.

COVID-19- We are monitoring and responding to the evolving nature of the global novel coronavirus pandemic (“COVID-19” or “pandemic”) and its impact to our global business. The health and safety of our team members is our top priority and to protect our employees, we are implementing all measures recommended by the Centers for Disease Control and Prevention (“CDC”). We will continue to proactively manage the Company and its operations through the pandemic, however we cannot predict the ultimate impact that COVID-19 will have on our short-term and long-term demand at this time, as it will depend on, among other things, the severity and duration of the COVID-19 pandemic. The further spread of COVID-19, and the requirements to take action to help limit the spread of the illness, may impact our ability to carry out our business as usual and may materially adversely impact global economic conditions, our business, results of operations and financial condition.

RESULTS OF OPERATIONS

The following tables set forth, for the periods indicated, information derived from our Unaudited Condensed Consolidated Financial Statements, expressed as a percentage of net sales. The discussion that follows each table should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements as well as our annual report on Form 10-K for the year ended December 31, 2021.

	Three Months Ended
	March 31,
	2022			2021
Net sales		100.0	%		100.0	%
Cost of goods sold		62.4			59.9
Gross margin		37.6			40.1
Operating expenses		29.7			32.6
Income from operations		7.9	%		7.5	%

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

	Three Months Ended
	March 31,
($ in thousands)	2022		2021		Inc./ (Dec.)			Inc./ (Dec.)
NET SALES:
Wholesale	$	133,961	$	59,235	$	74,726			126.2	%
Retail		28,626		23,986		4,640			19.3
Contract Manufacturing		4,438		4,446		(8	)		(0.2	)
Total Net Sales	$	167,025	$	87,667	$	79,358			90.5	%

Included in Wholesale net sales for the three months ended March 31, 2022 and 2021 were approximately $60.1 million and $5.5 million, respectively, of net sales attributed to the Acquired Brands. The increase in both our legacy and acquired brands is due to having a healthy inventory position and additional fulfillment capacity which allowed us to better capitalize on the market opportunities we are creating through our product and marketing strategies.

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Included in Retail net sales for the three months ended March 31, 2022 and 2021 were approximately $4.3 and $1.0 million, respectively, of net sales attributed to the Acquired Brands. The increase in retail sales can be attributed to a strong growth in our Lehigh business in the first quarter of 2022 as businesses continued to re-open and get back to full capacity in the wake of the COVID-19 pandemic.

Contract Manufacturing sales remained flat in the first quarter of 2022 as we continued to fulfill our military contracts.

	Three Months Ended
	March 31,
($ in thousands)	2022			2021			Inc./ (Dec.)
GROSS MARGIN:
Wholesale Margin $'s	$	48,259		$	22,261		$	25,998
Margin %		36.0	%		37.6	%		-1.6	%
Retail Margin $'s	$	13,848		$	11,549		$	2,299
Margin %		48.4	%		48.1	%		0.3	%
Contract Manufacturing Margin $'s	$	720		$	1,329		$	(609	)
Margin %		16.2	%		29.9	%		-13.7	%
Total Margin $'s	$	62,827		$	35,139		$	27,688
Margin %		37.6	%		40.1	%		-2.5	%

Wholesale gross margin decreased in the first quarter of 2022 compared to the prior year period due to increased capitalized manufacturing and sourcing costs, such as in-bound freight coupled with the delayed impact of our price increases.

Retail gross margin increased for the three months ended March 31, 2022 compared to the same period a year ago as our direct to consumer business accounted for a higher percentage of total retail sales, which carry higher margins.

Contract Manufacturing gross margin decreased in the first quarter of 2022 compared to the prior year period due to increased capitalized manufacturing costs as well as certain inefficiencies in our Puerto Rico manufacturing facility.

	Three Months Ended
	March 31,
($ in thousands)	2022			2021			Inc./ (Dec.)			Inc./ (Dec.)
OPERATING EXPENSES:
Operating Expenses	$	49,630		$	28,558		$	21,072			73.8	%
% of Net Sales		29.7	%		32.6	%		-2.9	%

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On an adjusted basis to exclude acquisition related expenses of $1.0 million and $5.2 million, respectively, for the three months ended March 31, 2022 and 2021, operating expenses were $48.6 million and $23.4 million. The increase in operating expenses for the first quarter of 2022 compared to the first quarter 2021 was due to an increase in variable expenses tied to the sales increase. We also experienced higher logistics and fulfillment costs including temporary spending associated with the getting the new distribution center in Reno, Nevada fully operational.

	Three Months Ended
	March 31,
($ in thousands)	2022			2021			Inc./ (Dec.)			Inc./ (Dec.)
INCOME TAXES:
Income Tax Expense	$	1,951		$	1,342		$	609			45.4	%
Effective Tax Rate		21.0	%		23.0	%		-2.0	%

Due to our Acquisition, we estimate that our tax rate will decrease to 21.0% for the year ended December 31, 2022 based on our actual results and additional foreign tax credits as a result of the Acquisition.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal sources of liquidity have been our income from operations and borrowings under our credit facilities and other indebtedness.

During the three months ended March 31, 2022, our primary source of cash was from operations. During the three months ended March 31, 2021, our primary use of cash was to partly fund the Acquisition. Our working capital consists primarily of trade receivables and inventory, offset by debt and accounts payable. Our working capital fluctuates throughout the year as a result of our seasonal business cycle and business expansion and is generally lowest in the months of January through March of each year and highest during the months of May through October of each year. We typically utilize our revolving credit facility to fund our seasonal working capital requirements. As a result, balances on our revolving credit facility can fluctuate significantly throughout the year.

Our capital expenditures relate primarily to projects relating to our corporate offices, property, merchandising fixtures, molds and equipment associated with our manufacturing and distribution operations and for information technology. Capital expenditures were $3.3 million and $2.9 million for the three months ended March 31, 2022 and 2021, respectively.

We lease certain machinery, two shoe centers, distribution centers in Lancaster, Ohio, Reno, Nevada, Canada and Australia and manufacturing facilities under operating leases that generally provide for renewal options.

We believe that our ABL Facility, with the option to expand our borrowing capacity, coupled with cash generated from operations will provide sufficient liquidity to fund our operations and debt obligations for at least the next twelve months. Our continued liquidity, however, is contingent upon future operating performance, cash flows and our ability to meet financial covenants under our credit facility. For more information regarding our credit facility see Note 10.

Cash Flows

	Three Months Ended
	March 31,
($ in millions)	2022			2021
Operating activities	$	13.8		$	2.9
Investing activities		(1.2	)		(208.2	)
Financing activities		(3.5	)		185.8
Net change in cash and cash equivalents	$	9.1		$	(19.5	)

Operating Activities. Cash provided by operating activities for the three months ended March 31, 2022 was primarily impacted by an increase in accounts payable and accrued liabilities, partially offset by an increase in inventory. Cash provided by operating activities for the three months ended March 31, 2021 was primarily impacted by an increase in accounts payable and decrease in accounts receivable, partially offset by an increase in inventory.

Investing Activities. Cash used in investing activities for the three months ended March 31, 2022 was primarily related the purchase of investments in molds and equipment associated with our manufacturing operations, for information technology and for improvements to our distribution facility. Cash used in investing activities for the three months ended March 31, 2021 was primarily to fund our Acquisition. See Note 4 for additional information regarding the Acquisition.

Financing Activities. Cash used in financing activities for three months ended March 31, 2022 was primarily related to payments on our revolving credit facility and dividends paid on common stock. Cash provided by financing activities for the three months ended March 31, 2021 was primarily related to proceeds from our term loan and revolving credit facility, partially offset by repayments on our revolving credit facility and debt issuance costs paid in connection with our recent Acquisition.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Company’s Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed 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. Historically, actual results have not been materially different from the Company’s estimates. However, actual results may differ materially from these estimates under different assumptions or conditions.

We have identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in our Management Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our and management’s intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely,” “would,” “could” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that forward-looking statements involve risk and uncertainties including, without limitations, dependence on sales forecasts, changes in consumer demand, seasonality, impact of weather, competition, reliance on suppliers, risks inherent to international trade, changing retail trends, the loss or disruption of our manufacturing and distribution operations, cybersecurity breaches or disruption of our digital systems, fluctuations in foreign currency exchange rates, economic changes, as well as other factors set forth under the caption “Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (filed March 15, 2022), and other factors detailed from time to time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We assume no obligation to update any forward-looking statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no material changes to our market risk as disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. 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 as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 promulgated under the Exchange Act. Based upon this evaluation, our chief executive officer and our chief financial officer concluded that, as of March 31, 2022, our disclosure controls and procedures were (1) designed to ensure that material information relating to our Company is accumulated and made known to our management, including our chief executive officer and chief financial officer, in a timely manner, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information we are required to disclose 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 rules and forms.

Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Controls There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have made the necessary and appropriate updates to our internal controls as it relates to financial reporting over our Acquired Brands, none of which were material. We are currently evaluating the business processes, information technology systems, and other components over internal controls of financial reporting related to the Acquired Brands as a part of our integration activities which may result in periodic control changes. Such changes will be disclosed as required by applicable SEC guidance.

PART II -- OTHER INFORMATION

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

Use of Proceeds

Not applicable.

Our shareholder repurchase program expired on March 4, 2022.

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ITEM 6. EXHIBITS

Exhibit Number	Description
31.1*	Certification Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Principal Executive Officer.

31.2*	Certification Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Principal Financial Officer.

32**	Section 1350 Certification of Principal Executive Officer/Principal Financial Officer.

101*	Attached as Exhibits 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 formatted in Inline XBRL (“eXtensible Business Reporting Language”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Shareholders' Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related notes to these financial statements.
104*	Cover Page Interactive Data File, formatted in Inline XBRL and contained in Exhibit 101

* Filed with this Report.

** Furnished with this Report.

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SIGNATURE

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.

	ROCKY BRANDS, INC.

Date: May 9, 2022	By:	/s/THOMAS D. ROBERTSON
		Thomas D. Robertson
		Executive Vice President, Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer and Duly Authorized Officer)

SEC Form 10-Q filed by Rocky Brands Inc.