rcky20230630

rcky20230630_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 June 30, 2023

☐ 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 7,366,201 shares of the Registrant's Common Stock outstanding on July 31, 2023.

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		Page
PART I	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2023 (Unaudited), December 31, 2022, and June 30, 2022 (Unaudited)	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited)	3
	Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 (Unaudited)	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19

PART II	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 6.	Exhibits	20
SIGNATURES		21

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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)

	June 30,		December 31,		June 30,
	2023		2022		2022
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents	$	3,082	$	5,719	$	5,802
Trade receivables – net		72,566		94,953		115,794
Contract receivables		2,990		-		-
Other receivables		2,225		908		224
Inventories – net		218,327		235,400		287,817
Income tax receivable		3,494		-		6,360
Prepaid expenses		5,522		4,067		5,216
Total current assets		308,206		341,047		421,213
LEASED ASSETS		9,362		11,014		10,376
PROPERTY, PLANT & EQUIPMENT – net		54,032		57,359		61,352
GOODWILL		47,844		50,246		50,246
IDENTIFIED INTANGIBLES – net		114,019		121,782		124,740
OTHER ASSETS		1,049		942		911
TOTAL ASSETS	$	534,512	$	582,390	$	668,838

LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable	$	61,225	$	69,686	$	130,246
Contract liabilities		2,990		-		-
Current Portion of Long-Term Debt		4,625		3,250		3,250
Accrued expenses:
Salaries and wages		2,791		1,253		4,869
Taxes – other		922		1,325		1,674
Accrued freight		2,491		2,413		2,290
Commissions		844		1,934		1,428
Accrued duty		6,377		6,764		12,144
Accrued interest		2,345		2,822		2,705
Income tax payable		-		1,172		-
Other		5,756		5,675		5,693
Total current liabilities		90,366		96,294		164,299
LONG-TERM DEBT		217,114		253,646		281,365
LONG-TERM TAXES PAYABLE		169		169		169
LONG-TERM LEASE		6,804		8,216		7,636
DEFERRED INCOME TAXES		8,006		8,006		10,293
DEFERRED LIABILITIES		1,325		586		609
TOTAL LIABILITIES		323,784		366,917		464,371
SHAREHOLDERS' EQUITY:
Common stock, no par value;
25,000,000 shares authorized; issued and outstanding June 30, 2023 - 7,354,060; December 31, 2022 - 7,339,011; June 30, 2022 - 7,313,075		70,400		69,752		68,680
Retained earnings		140,328		145,721		135,787
Total shareholders' equity		210,728		215,473		204,467
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	534,512	$	582,390	$	668,838

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						Six Months Ended
	June 30,						June 30,
	2023			2022			2023			2022
NET SALES	$	99,822		$	162,039		$	210,267		$	329,063
COST OF GOODS SOLD		62,250			108,288			128,936			212,486
GROSS MARGIN		37,572			53,751			81,331			116,577

OPERATING EXPENSES		35,370			48,155			74,974			97,785

INCOME FROM OPERATIONS		2,202			5,596			6,357			18,792

INTEREST EXPENSE AND OTHER INCOME/(EXPENSE) – net		(5,630	)		(4,323	)		(10,294	)		(8,230	)

(LOSS) INCOME BEFORE INCOME TAX EXPENSE		(3,428	)		1,273			(3,937	)		10,562

INCOME TAX (BENEFIT) EXPENSE		(713	)		353			(823	)		2,304

NET (LOSS) INCOME	$	(2,715	)	$	920		$	(3,114	)	$	8,258

(LOSS) INCOME PER SHARE
Basic	$	(0.37	)	$	0.13		$	(0.42	)	$	1.13
Diluted	$	(0.37	)	$	0.12		$	(0.42	)	$	1.12

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

Basic		7,354			7,313			7,350			7,310
Diluted		7,354			7,389			7,350			7,400

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

SIX MONTHS ENDED JUNE 30, 2022
Net income							$	7,338		$	7,338
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	$	-	$	135,999		$	204,453

Net income							$	920		$	920
Dividends paid on common stock ($0.155 per share)								(1,132	)		(1,132	)
Repurchase of common stock		-		-				-			-
Stock issued for options exercised, including tax benefits		-		-				-			-
Stock compensation expense		2	$	226				-			226
BALANCE - June 30, 2022		7,313	$	68,680		-	$	135,787		$	204,467

BALANCE - December 31, 2022		7,339	$	69,752		-	$	145,721		$	215,473

SIX MONTHS ENDED JUNE 30, 2023
Net loss							$	(398	)	$	(398	)
Dividends paid on common stock ($0.155 per share)								(1,141	)		(1,141	)
Repurchase of common stock		-		-				-			-
Stock issued for options exercised, including tax benefits		1	$	8				-			8
Stock compensation expense		7		347				-			347
BALANCE - March 31, 2023		7,347	$	70,107	$	-	$	144,182		$	214,289

Net loss							$	(2,715	)	$	(2,715	)
Dividends paid on common stock ($0.155 per share)								(1,139	)		(1,139	)
Repurchase of common stock		-		-				-			-
Stock issued for options exercised, including tax benefits		-		-				-			-
Stock compensation expense		7	$	293				-			293
BALANCE - June 30, 2023		7,354	$	70,400	$	-	$	140,328		$	210,728

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)

	Six Months Ended
	June 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(3,114	)	$	8,258
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization		5,527			5,847
Amortization of debt issuance costs		427			427
Provision for bad debts		312			785
Loss on disposal of assets		240			1
Gain on sale of business		(1,341	)		-
Stock compensation expense		640			474
Change in assets and liabilities:
Receivables		22,458			10,247
Contract receivables		(2,990	)		1,062
Inventories		10,908			(54,958	)
Other current assets		(1,455	)		343
Other assets		1,546			6
Accounts payable		(10,076	)		13,541
Accrued and other liabilities		(1,828	)		8,528
Income taxes		(4,588	)		(2,066	)
Contract liabilities		2,990			(1,062	)
Net cash provided by (used in) operating activities		19,656			(8,567	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(1,738	)		(3,565	)
Proceeds from sale of business		17,300			-
Net cash provided by (used in) investing activities		15,562			(3,565	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility		26,399			20,820
Repayments on revolving credit facility		(36,750	)		(5,050	)
Repayments on term loan		(25,232	)		(1,625	)
Proceeds from stock options		8			145
Dividends paid on common stock		(2,280	)		(2,265	)
Net cash (used in) provided by financing activities		(37,855	)		12,025

DECREASE IN CASH AND CASH EQUIVALENTS		(2,637	)		(107	)

CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD		5,719			5,909
END OF PERIOD	$	3,082		$	5,802

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 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 normal and recurring nature. The results of operations for the three and six months ended June 30, 2023 and 2022 are not necessarily indicative of the results to be expected for the whole year. The December 31, 2022 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, 2022, which includes all disclosures required by GAAP.

2. ACCOUNTING STANDARDS UPDATES

Accounting Standards Adopted in the Current Year

Standard		Description		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.		We adopted the new standard in Q1 2023 and the standard has not had a significant impact on our Consolidated Financial Statements year to date.

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, 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 is 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 is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).

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4. SALE OF SERVUS BRAND AND RELATED ASSETS

On March 30, 2023, we completed the sale of the Servus brand and related assets to PQ Footwear, LLC and Petroquim S.R.L. (collectively "the Buyer"). Total consideration for this transaction was approximately $19.0 million, of which $17.3 million was received at closing. The remaining $1.7 million will be paid out in accordance with the purchase agreement. The sale of the Servus brand included the sale of inventory, fixed assets, customer relationships, tradenames, and goodwill, all of which related to our Wholesale segment. In connection with the sale of the Servus brand we also are licensing the rights to certain proprietary processes to the Buyer. We recorded a gain on the sale of Servus of approximately $1.3 million which is recorded within Interest Expense and Other Income/(Expense) - net on the accompanying unaudited condensed consolidated statement of operations for the six months ended June 30, 2023.

5. SALE OF NEOS BRAND AND RELATED ASSETS

On September 30, 2022, we completed the sale of the NEOS brand and related assets to certain entities controlled by SureWerx pursuant to terms of an asset purchase agreement dated September 30, 2022. Total consideration for this transaction was approximately $5.8 million, of which $5.5 million was received at closing. The remaining $0.3 million was deposited in escrow and will be managed and paid out in accordance with the terms of the asset purchase agreement and the escrow agreement. The sale of NEOS brand included the sale of inventory, fixed assets, customer relationships, tradenames, all of which related to our Wholesale segment.

6. 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 10,000 retail store locations in the U.S., Canada, and internationally, mainly Europe. 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, our Rocky Outdoor Gear Store, and Lehigh businesses. We also sell footwear under the Rocky Brands label to the U.S. Military.

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 June 30, 2023. 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.

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 7 and Note 8 for additional information.

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

Current 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.

Current 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.

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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.

	June 30,		December 31,		June 30,
($ in thousands)	2023		2022		2022
Contract liabilities	$	2,990	$	-	$	-

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

($ in thousands)	Contract liabilities
Balance, December 31, 2022		-
Non-cancelable contracts with customers entered into during the period	$	2,990
Revenue recognized related to non-cancelable contracts with customers during the period		-
Balance, June 30, 2023	$	2,990

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 15 for segment disclosures.

7. TRADE RECEIVABLES

Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $3.2 million, $3.5 million and $2.6 million at June 30, 2023, December 31, 2022 and June 30, 2022, respectively. We record the allowance based on a data-driven approach, including historical experience, the age of the receivables, receivable insurance status, 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 $1.7 million, $2.1 million and $1.3 million at June 30, 2023, December 31, 2022 and June 30, 2022, respectively.

8. INVENTORY

Inventories are comprised of the following:

	June 30,		December 31,		June 30,
($ in thousands)	2023		2022		2022
Raw materials	$	17,671	$	16,541	$	22,214
Work-in-process		1,427		933		1,793
Finished goods		199,229		217,926		263,810
Total	$	218,327	$	235,400	$	287,817

In accordance with ASC 606, the return reserve allowance included within inventories was approximately $1.0 million, $1.1 million and $0.7 million at June 30, 2023, December 31, 2022 and June 30, 2022, respectively.

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9. 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 our acquisition of the performance and lifestyle footwear business of Honeywell International Inc. on March 15, 2021 (the "Acquisition"). The Acquisition expanded our brand portfolio to include the Muck, XTRATUF, Servus (see Note 4), NEOS (See Note 5) and Ranger brands (the "Acquired Brands"). Goodwill 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 $47.0 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, $23.0 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.

10. IDENTIFIED INTANGIBLE ASSETS

A schedule of identified intangible assets is as follows:

	Gross		Accumulated		Carrying
($ in thousands)	Amount		Amortization		Amount
June 30, 2023
Trademarks
Wholesale ⁽¹⁾	$	69,439		-	$	69,439
Retail		9,220		-		9,220
Patents		895	$	836		59
Customer relationships⁽²⁾		41,659		6,358		35,301
Total Intangibles	$	121,213	$	7,194	$	114,019

⁽¹⁾ Servus trademarks were reduced from approximately $2.5 million to zero at March 30, 2023 as a result of the sale of the Servus brand (see Note 4).

⁽²⁾ Customer relationships relating to the Servus brand of approximately $4.3 million and related amortization of approximately $0.6 million was reduced to zero at March 30, 2023 as a result of the sale of the Servus brand (see Note 4).

	Gross		Accumulated		Carrying
($ in thousands)	Amount		Amortization		Amount
December 31, 2022
Trademarks
Wholesale ⁽¹⁾	$	71,979		-	$	71,979
Retail		9,220		-		9,220
Patents		895	$	826		69
Customer relationships⁽²⁾		46,006		5,492		40,514
Total Intangibles	$	128,100	$	6,318	$	121,782

⁽¹⁾ NEOS trademarks were reduced from approximately $0.6 million to zero at December 31, 2022 as a result of the sale of the NEOS brand (see Note 5).

⁽²⁾ Customer relationships relating to the NEOS brand of approximately $0.9 million and related amortization of approximately $0.1 million was reduced to zero at December 31, 2022 as a result of the sale of the NEOS brand (see Note 5).

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	Gross		Accumulated		Carrying
($ in thousands)	Amount		Amortization		Amount
June 30, 2022
Trademarks
Wholesale	$	72,579		-	$	72,579
Retail		9,220		-		9,220
Patents		895	$	815		80
Customer relationships		46,900		4,039		42,861
Total Intangibles	$	129,594	$	4,854	$	124,740

The weighted average life for our patents is 6.9 years.

A schedule of approximate amortization expense related to finite-lived intangible assets for the three and six months ended June 30, 2023 and 2022 is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
($ in thousands)	2023		2022		2023		2022
Amortization expense	$	697	$	788	$	1,478	$	1,575

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
2023	$	1,394
2024		2,785
2025		2,781
2026		2,778
2027		2,776
2028		2,772
2029+		20,074

11.LONG-TERM DEBT

On March 15, 2021, we entered into a senior secured term loan facility ("Term Facility") with TCW Asset Management Company, LLC (TCW), as agent, for the lenders party thereto in the amount of $130 million. The Term Facility provided for quarterly payments of principal and bore interest of LIBOR plus 7.00% through June 30, 2021. After this date, interest is 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 3.50, the effective interest rate will be SOFR plus 7.50% (or at our option, Prime Rate plus 6.50%). If our total leverage ratio is less than 3.50 but greater than 3.00, the effective interest rate will be SOFR plus 7.00% (or at our option, Prime Rate plus 6.00%). If our total leverage ratio is less than 3.00, the effective interest rate will be SOFR plus 6.50% (or at our option, Prime Rate plus 5.50%). The Term Facility also has a SOFR floor rate of 1.00%. In June 2022, we entered into a second amendment with TCW to further amend our Term Facility to consent to the modifications in our borrowing capacity under the ABL Facility as described below, and to adjust certain pricing and prepayment terms, among other things. The second amendment also modified the interest index to provide the use of SOFR to calculate interest rather than LIBOR. The effective interest rate was increased to SOFR plus 7.50% through November 2022. In November 2022, the Term Facility was amended to increase the effective interest rate to SOFR plus 7.00% until June 2023 and to provide certain EBITDA adjustments with respect to financial covenants, among other things. In May 2023, we entered into a fourth amendment with TCW to further amend our Term Facility to provide certain EBITDA adjustments in respect of the financial covenants, adjust the method to calculate total debt, continue certain pricing terms, extend certain prepayment terms, and pay such lenders certain amendment fees, among other things.

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 June 2022, we further amended our ABL Facility to temporarily increase our borrowing capacity to $200 million through December 31, 2022, which thereafter will be reduced to $175 million. In November 2022, we entered into a third amendment to our ABL Facility to provide certain EBITDA adjustments with respect to our financial covenants. 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 June 30, 2023, we had borrowing capacity of $26.9 million.

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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:


Revolver Pricing Level	Average Availability as a Percentage of Commitments	Base Rate			Term SOFR Loan			Base Rate for FILO			Term SOFR FILO Loans
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	%

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.

Current and long-term debt consisted of the following:

	June 30,			December 31,			June 30,
($ in thousands)	2023			2022			2022
Term Facility that matures in 2026 with an effective interest rate of 12.77%, 12.14% and 9.06% as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively	$	91,100		$	116,332		$	125,938
ABL Facility that matures in 2026:
SOFR borrowings with an effective interest rate of 5.06%, 5.47% and 3.88% as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively		130,213			140,000			155,726
Prime borrowings with an effective interest rate of 8.25%, 7.27% and 5.00% as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively		2,737			3,301			6,115
Total debt		224,050			259,633			287,779
Less: Unamortized debt issuance costs		(2,311	)		(2,737	)		(3,164	)
Total debt, net of debt issuance costs		221,739			256,896			284,615
Less: Debt maturing within one year		(4,625	)		(3,250	)		(3,250	)
Long-term debt	$	217,114		$	253,646		$	281,365

Credit Facility Covenants

The Term Facility contains restrictive covenants which require us to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio, as defined in the Term Facility agreement. We are in compliance with all credit facility covenants as of June 30, 2023, December 31, 2022 and June 30, 2022.

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 and six months ended June 30, 2023 and 2022, 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.

12. 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		2019
Various U.S. States		2018
Puerto Rico (U.S. Territory)		2018
Canada		2018
China		2019
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 and six months ended June 30, 2023 and 2022. We do not believe there will be any material changes in our uncertain tax positions over the next 12 months.

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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 effective tax rates for the three and six months ended June 30, 2023 and 2022 are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2023			2022			2023			2022
Effective Tax Rate		20.8	%		27.7	%		20.9	%		21.8	%

13. 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 and six months ended June 30, 2023 and 2022 is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(shares in thousands)	2023		2022		2023		2022

Basic - weighted average shares outstanding		7,354		7,313		7,350		7,310
Dilutive stock options^{(1) (2)}		-		76		-		90
Diluted - weighted average shares outstanding^{(1) (2)}		7,354		7,389		7,350		7,400
Anti-dilutive securities		283		104		283		299

⁽¹⁾ Due to a loss for the three months ended June 30, 2023, zero dilutive stock options are included for the period because the effect would be antidilutive.

⁽²⁾ Due to a loss for the six months ended June 30, 2023, zero dilutive stock options are included for the period because the effect would be antidilutive.

14. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the six months ended June 30, 2023 and 2022 was as follows:

	Six Months Ended
	June 30,
($ in thousands)	2023			2022

Interest paid	$	4,244		$	4,566

Federal, state, and local income taxes paid, net	$	3,889		$	4,047

Change in contract receivables, net	$	(2,990	)	$	1,062

Change in contract liabilities, net	$	2,990		$	(1,062	)

Property, plant, and equipment purchases in accounts payable	$	1,114		$	2,073

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15. SEGMENT INFORMATION

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, our Rocky Outdoor Gear 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 and six months ended June 30, 2023 and 2022.

Three Months Ended

Six Months Ended

June 30,

($ in thousands)

2023

2022

2023

2022

NET SALES:

SEC Form 10-Q filed by Rocky Brands Inc.