What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-10 compared with 2022-03-15 · 324 added, 177 removed, 911 unchanged (35% of the section changed)

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Consolidated Balance Sheets as of December 31, 2022 and 2021

Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020

Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021, and 2020

Consolidated Statements of Shareholders’

Equity for the Years Ended December 31, 2021 and 2020

Equity for the Years Ended December 31, 2022, 2021, and 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020

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BUSINESS ACQUISITION 36

ASSET SALE 37

PROPERTY, PLANT, AND EQUIPMENT

IDENTIFIED INTANGIBLE ASSET

IDENTIFIED INTANGIBLE ASSETS

LONG-TERM DEBT

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SEGMENT INFORMATION

RESTRUCTURING CHARGES 47

COMMITMENTS AND CONTINGENCIES

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and Subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, shareholders’

equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes and the financial statement schedule listed in the index at Item 15(a)(2), (collectively referred to as the “financial statements”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2022 expressed an unqualified opinion.

equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and the financial statement schedule listed in the index at Item 15(a)(2), (collectively referred to as the “financial statements”). 

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2023 expressed an unqualified opinion.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgment.

The communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involve our especially challenging, subjective, or complex judgment.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Indefinite-Lived Identified Intangibles in Conjunction with Annual Impairment Testing

Description of the Matter

At December 31, 2021, the Company’s indefinite-lived intangible assets were approximately $132.4 million, which included $30.1 million of existing trade names and trademarks and $51.7 million of trademarks and $50.6 million of goodwill that were acquired through the acquisition of the performance and lifestyle footwear brands of Honeywell International Inc.

(Boston Group) on March 15, 2021.

At December 31, 2022, the Company’s indefinite-lived intangible assets were approximately $178.3 million, which included $128.1 million of trade names and trademarks and $50.2 million of goodwill.

As discussed in Note 1 to the financial statements, indefinite-lived intangible assets are tested for potential impairment annually or when conditions indicate impairment may have occurred.

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discount rates, royalty rates, cost of capital, and market multiples.

These estimates and assumptions require management’s judgment, and changes to these estimates and assumptions could materially affect the determination of fair value and/or impairment for each of the Company’s indefinite-lived intangible assets.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s intangible asset impairment review process.

To test the estimated fair value of the Indefinite-Lived Intangible Assets, we performed audit procedures that included, among others, involving our valuation specialists in evaluating the methodologies used and significant assumptions described above, and testing the underlying data used by the Company, with the assistance of an independent valuation specialist, in its analysis for completeness and accuracy.

We compared the significant assumptions used by management to current industry and economic trends, recent historical performance, changes to the reporting unit’s business model and other relevant factors.

We evaluated the reasonableness of the Company’s financial projections used in the analysis. 

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We evaluated the incorporation of the applicable assumptions into the model and tested the model’s computational accuracy and performed a sensitivity analysis on certain key assumptions.

Valuation of Customer Relationships, Trade Names and Goodwill Acquired through the Boston Group Acquisition

Description of the Matter

On March 15, 2021, the Company completed the acquisition of the Boston Group for an aggregate purchase price of approximately $212 million, net of cash acquired, based on working capital and other adjustments.

The acquisition was accounted for under the acquisition method of accounting for business combinations.

Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of approximately $149.2 million, which consisted of customer relationships, trade names and goodwill of approximately $46.9 million, $51.7 million and $50.6 million, respectively.

The Company, with the assistance of an independent valuation specialist, estimated the fair values of the customer relationships and trade names using the multi-period excess earnings method and the relief from royalty method, respectively.

The multi-period excess earnings method determines the fair value as the estimation of revenues and cash flows derived from the intangible assets reduced by portions of the cash flow attributed to supporting assets.

The determination of fair value of the customer relationships involves significant estimates and assumptions related to annual attrition and the selected discount rate.

The relief from royalty method determines the fair value based on the measurement of license payments that has been saved as a consequence of having the ownership of the asset.

The determination of fair value of the trade names involves significant estimates and assumptions related to the selection of the royalty and discount rates.

The Company, with the assistance of an independent valuation specialist, estimated the allocation of goodwill to reporting units using the discounted cash flow method, which determines fair value based on significant estimates and assumptions of future cash flows.

Auditing the valuation of the acquired intangible assets was challenging because there is significant judgment required in determining the methodologies and assumptions used to estimate the fair values of the Company’s acquired customer relationships, trademarks and goodwill.

In particular, the fair value estimates were sensitive to significant judgment assumptions including annual attrition, financial projections, and royalty and discount rates.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the valuation methodology.

To test the estimated fair value of the acquired intangible assets, we performed audit procedures that included, among others, involving our valuation specialists in evaluating the methodologies used and significant assumptions described above, and testing the underlying data used by the Company in its analysis for completeness and accuracy.

We evaluated the reasonableness of the Company’s financial projections used in the analysis. 

We evaluated the incorporation of the applicable assumptions into the model and tested the model’s computational accuracy.

We have served as the Company's auditor since 2007.

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11,014  

11,428  

PROPERTY, PLANT & EQUIPMENT –

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50,246  

50,641  

IDENTIFIED INTANGIBLES –

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Salaries and wages

Taxes - other

Taxes –

Accrued freight

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253,646  

266,794  

LONG-TERM TAXES PAYABLE

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$ 514,227  

$ 277,309  

COST OF GOODS SOLD

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225,219  

194,536  

104,735  

OPERATING EXPENSES

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158,564  

77,565  

INCOME FROM OPERATIONS

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35,972  

OTHER EXPENSES

27,170  

INTEREST AND OTHER EXPENSES

( 18,270 )  

( 10,603 )  

INCOME BEFORE INCOME TAX EXPENSE

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25,369  

26,965  

INCOME TAX EXPENSE

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$ 20,559  

$ 20,964  

INCOME PER SHARE

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$ 2.78  

$ 2.77  

$ 2.86  

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

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$ 197,855  

$ 20,465  

Dividends paid on common stock ($ 0.62 per share)

( 4,538 )  

Repurchase of common stock

Stock issued for options exercised, including tax benefits

Stock compensation expense

BALANCE - December 31, 2022

$ 69,752  

$ 145,721  

$ 215,473  

Quarterly dividend was increased from $0.14 per share to $0.155 per share in the third quarter of 2021.

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$ 20,559  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

$ 20,964  

Adjustments to reconcile net income to net cash used in operating activities:

Depreciation and amortization

12,320  

11,342  

Amortization of debt issuance costs

Provision for bad debts

Deferred income taxes

Loss on disposal of fixed assets

( 2,209 )  

(Gain) Loss on disposal of assets

( 789 )  

Stock compensation expense

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28,222  

( 42,245 )  

Contract receivables

( 4,986 )  

( 114,226 )  

Other current assets

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( 45,921 )  

78,626  

Accrued and other liabilities

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( 1,062 )  

Net cash (used in) provided by operating activities

( 4,520 )  

Net cash provided by (used in) operating activities

19,123  

( 54,875 )  

31,441  

CASH FLOWS FROM INVESTING ACTIVITIES:

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( 6,702 )  

( 21,055 )  

Acquisition of business, net of cash acquired

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Proceeds from sales of fixed assets

Proceeds from the sale of assets

Net cash used in investing activities

( 1,234 )  

( 233,463 )  

CASH FLOWS FROM FINANCING ACTIVITIES:

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180,072  

20,000  

Repayments on revolving credit facility

( 40,263 )  

( 34,000 )  

Proceeds from term loan

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( 11,231 )  

( 2,438 )  

Debt issuance costs

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( 4,538 )  

Net cash provided by (used in) financing activities

( 4,299 )  

Net cash (used in) provided by financing activities

( 18,079 )  

265,894  

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

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( 22,444 )  

12,835  

CASH AND CASH EQUIVALENTS:

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$ 5,909  

$ 28,353  

See notes to Consolidated Financial Statements

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AND SUBSIDIARIES

Notes to the Consolidated Financial Statements For the Years Ended December 31, 2021 and 2020

Notes to the Consolidated Financial Statements

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Principles of Consolidation - The accompanying Consolidated Financial Statements include the accounts of Rocky Brands, Inc.

("Rocky") and its wholly-owned subsidiaries, Lifestyle Footwear, Inc.

("Rocky Brands") and its wholly-owned subsidiaries, Lifestyle Footwear, Inc.

("Lifestyle"), Five Star Enterprises Ltd.

("Five Star"), Rocky Brands Canada, Inc.

("Rocky Canada"), Rocky Brands US, LLC, Rocky Brands International, LLC, Lehigh Outfitters, LLC, US Footwear Holdings, LLC, Rocky Brands (Australia) Pty Ltd., Mexico FW Holdings, S.

("Rocky Brands Canada"), Rocky Brands US, LLC, Rocky Brands International, LLC, Lehigh Outfitters, LLC, US Footwear Holdings, LLC, Rocky Brands (Australia) Pty Ltd., Mexico FW Holdings, S.

de C.V., Rocky Footwear (Chuzhou) Co.

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All inter-company transactions have been eliminated.

Business Activity - We are a leading designer, manufacturer and marketer of premium quality footwear marketed under a portfolio of well recognized brand names including Rocky, Georgia Boot, Durango, Lehigh, Muck, XTRATUF, Servus, NEOS, Ranger and the licensed brand Michelin.

Our brands have a long history of representing high quality, comfortable, functional and durable footwear and our products are organized around six target markets:

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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 the Acquisition, our Wholesale segment has substantially increased in size and our CODMs determined that the change in segment reporting was appropriate at that 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 quarterly period ended March 31, 2021 or the fiscal year ended December 31, 2020. 

We evaluate business performance based upon several metrics, using segment profit as the primary financial measure.

Each of our reporting segments continue to employ consistent accounting policies.

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Wholesale 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 business includes direct sales of our products to consumers through our e-commerce websites, marketplaces, our Rocky outlet store, and Lehigh businesses.

Our Retail business includes direct sales of our products to consumers through our e-commerce websites, marketplaces, our Rocky Outdoor Gear Store, and Lehigh businesses.

Contract Manufacturing 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.

Note 17  –

Segment Information for further information.

Note 18  for further information.

Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

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that is not federally insured. 

Trade Receivables - Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $ 613,000 and $ 242,000 at December 31, 2021 and 2020 , respectively.

Trade Receivables - Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $ 3.5  million and $ 0.6  million at December 31, 2022 and 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.

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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 $ 1,670,000 and $ 1,348,000 at December 31, 2021 and 2020 , respectively.

In accordance with ASC 606, the return reserve liability netted against trade receivables was $ 2.1  million and $ 1.7 million at December 31, 2022 and 2021 , respectively.

Concentration of Credit Risk - We have significant transactions with a large number of customers.

No customer represented 10% of trade receivables - net as of December 31, 2021 and 2020 .

No customer represented 10% of net trade receivables as of December 31, 2022 and 2021 .

Our exposure to credit risk is impacted by the economic climate affecting the retail shoe industry.

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We are not aware of any governmental or economic restrictions that would alter these current operations.

We source a significant portion of our footwear, apparel and gloves from manufacturers in Asia, and primarily in China, Vietnam and Indonesia.

We source a significant portion of our footwear, apparel and gloves from manufacturers in Asia, and primarily in China and Vietnam.

We are not aware of any governmental or economic restrictions that would alter our current sourcing operations.

Inventories - Inventories are valued at the lower of cost, determined on a first -in, first -out (FIFO) basis, or net realizable value.

Reserves are established for inventories when the net realizable value (NRV) is deemed to be less than its cost based on our periodic estimates of NRV.

Inventories - Inventories are valued at the lower of cost, determined on a first -in, first -out (FIFO) basis, or net realizable value (NRV).

Reserves are established for inventories when the NRV is deemed to be less than its cost based on our periodic estimates of NRV.

Property, Plant and Equipment - We record fixed assets at historical cost and generally utilizes the straight-line method of computing depreciation for financial reporting purposes over the estimated useful lives of the assets as follows:

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See Note 7  for more information.

Leases - Our leases primarily consist of  office buildings, distribution centers, manufacturing facilities, and equipment.

We lease assets in the normal course of business to meet our current and future needs while providing flexibility to our operations.

We enter into contracts with

third parties to lease specifically identified assets.

Most of our leases have contractually specified renewal periods. Our operating leases expire at various dates through

2027, and contain various provisions for rental adjustments renewal provisions for varying periods.

We determine the lease term for each lease based on the terms of each contract and factor in renewal and early termination options if such options are reasonably certain to be exercised.

Under FASB ASC Topic

842,  Leases, we have elected the practical expedient to account for lease components and nonlease components associated with individual leases as a single lease component for all leases.

In addition, we have elected to account for multiple lease components as a single lease component. Our leases

may include variable lease costs such as payments based on changes to an index, payments based on a percentage of retail store sales, and maintenance, utilities, shared marketing or other service costs that are paid directly to the lessor under terms of the lease.

We recognize variable lease payments when the amounts are incurred and determinable.

We have elected to account for leases of

twelve  months or less as short-term leases and accordingly do 

not recognize a right-of-use asset or lease liability for these leases.

We recognize lease expense for these leases on a straight-line basis over the lease term.

Comprehensive Income - Comprehensive income includes changes in equity that result from transactions and economic events from non-core operations.

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Advertising - We expense advertising costs as incurred.

Advertising expense was approximately $ 17,911,000 and 

$ 8,406,000 for 2021 and 2020 , respectively.

The increase in advertising expense was attributed to the Acquisition.

Advertising expense was approximately $ 15.4  million, 

$ 17.9  million and $ 8.4  million for 2022 , 

2021  and 

2020 , respectively.

The decrease from 2021 to 2022 is due to a decrease in discretionary spending.

The increase from 2020 to 2021 in advertising expense was attributed to the Acquired Brands.

Shipping Costs - All shipping costs billed to customers have been included in net sales.

All outbound shipping costs to customers have been included in operating expenses and totaled approximately 

$ 25,139,000 and 

$ 10,523,000 in 2021 and 2020 , respectively.

The increase in shipping costs was due to the Acquisition.

$ 38.5  million, 

$ 25.1  million and $ 10.5  million in 2022 , 

2021  and 

2020 , respectively.

The increase in shipping costs from 2021 to 2022  is due to increased freight rates, increased sales and product mix. The increase in shipping costs from 2020 to 2021 was due to the Acquired Brands.

Stock Compensation Expense - 

We recognize compensation expense for awards of stock options, restricted stock units ("RSUs"), and director stock units based on the fair value on the grant date and on a straight-line basis over the requisite service period for the awards that are expected to vest, with forfeitures estimated based on our historical experience and future expectations.

Stock-based compensation is included in operating expenses in the consolidated statements of operations.

Fair Value Measurements –

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

Effective August 18, 2020, we entered into a second deferred compensation plan (the "Dominican Plan").

Effective August 18, 2020, our Board of Directors adopted a second deferred compensation plan (the "Dominican Plan").

The Dominican Plan is an unfunded nonqualified deferred compensation plan for key employees at our Dominican Republic manufacturing facility.

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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 are evaluating the impacts of the new standard on our existing financial instruments, including trade receivables.

Accounting Standards Adopted in the Current Year

We do not anticipate that adopting this standard will have a material impact on our consolidated financial statements.

Accounting Standards Adopted in 2021

Effect on the financial statements or other significant matters

ASU 2018 - 13 Fair Value Measurement (Topic 820 ):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

This pronouncement changes the fair value measurement disclosure requirements of ASC 820.

The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting —

Notes to Financial Statements.

We adopted the new standard in Q1 2020 and the standard did not have a significant impact on our Consolidated Financial Statements.

ASU 2019 - 12, Income Taxes (Topic 740 ):

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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.

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Note 9  for information regarding the two credit facilities.

The Acquisition expanded our brand portfolio to include Muck, XTRATUF, Servus, NEOS and Ranger brands (the "Acquired Brands").

The Acquisition expanded our brand portfolio to include Muck, XTRATUF, Servus, Ranger, and NEOS 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.

On September 30, 2022, we completed the sale of the NEOS brand and the related assets.

See Note 4  for additional information. 

Through the Acquisition, we have greatly enhanced our powerful portfolio of footwear brands and significantly increased our sales and profitability.

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

We closed the office in Westwood, Massachusetts on December 

The Acquisition contributed net sales of $ 242.8  million to our consolidated operating results for the year ended December 31, 2022.

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Costs incurred to complete and integrate the Acquisition are expensed as incurred and included in "operating expenses" in the accompanying consolidated statements of operations.

During the year ended December 31, 2021 and 2020, there were approximately $ 11.9  million and $ 0.7  million, respectively, of acquisition-related costs recognized.

During the years e nded December 31, 2022, 

2021, and 2020 there were approximately $ 3.5  million, $ 11.9  million and $ 0.7 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.

Preliminary Purchase Price Allocation

Purchase Price Allocation

The Acquisition has been accounted for under the business combinations accounting guidance.

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

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 the step of value of finished goods inventory associated with the Acquisition of approximately $ 3.5 million. The pro forma results presented below are also adjusted for the removal of acquisition-related costs of approximately $ 11.9  million and $ 0.7 million for the 

twelve months ended December 31, 2021 and 2020, respectively. 

Twelve Months Ended December 31,

The pro forma results presented below are adjusted for the removal of the step up value of finished goods inventory associated with the Acquisition of approximately $ 3.5 million for the year ended December 31, 2021. 

The pro forma results presented below are also adjusted for the removal of acquisition-related costs of approxi mately $ 3.5 million, $ 11.9  million  and $ 0.7 million for the 

twelve months ended December 31, 2022, 

2021, and 2020, respectively. 

Year Ended December 31,

($ in thousands, except per share amount)

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$ 23,250  

$ 40,248  

$ 41,726  

Diluted earnings per share

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$ 5.43  

$ 5.69  

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 shall be managed and paid out in accordance with the terms of the asset purchase agreement and the escrow agreement.

The sale of the NEOS brand included the sale of inventory, fixed assets, customer relationships, tradenames, all of which related to our Wholesale segment.

This transaction resulted in the sale of inventory of approximately $ 3.6 million recorded in net sales and approximately $ 2.4 million recorded in costs of goods sold in the accompanying condensed consolidated Statement of Operations for the twelve months ended December 31, 2022.

Fixed assets, customer relationships and tradenames sold in connection with the sale of the NEOS brand resulted in reduction of operating expenses of approximately $ 0.7 million recorded in the accompanying unaudited condensed consolidated statement of operations for the twelve months ended December 31, 2022.

Inventories are comprised of the following:

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127,308  

124,092  

Less - accumulated depreciation

( 69,949 )  

Net Fixed Assets

Net Property, Plant and Equipment

$ 57,359  

$ 59,989  

We incurred approximately $ 8.8 million and $ 5.2 million in depreciation expense for 2021 and 2020 , respectively.

We incurred approximately $ 9.2 million, $ 8.8 million, and $ 5.2 million in depreciation expense for 2022 , 2021, and 2020, respectively.

IDENTIFIED INTANGIBLE ASSETS

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$ 121,782  

$ 45.4 million of the total resulted from our Acquisition that occurred on

March 15, 2021.

NEOS trademarks were reduced from approximately

$ 0.6 million to

December 31, 2022 as a result of the sale of the NEOS bran

$ 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.

Customer relationships relating to the NEOS brand of approximately

$ 0.9 million and related amortization of approximately

$ 0.1 million was reduced to

December 31, 2022 as a result of the sale of the NEOS br

($ in thousands)

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December 31, 2021

Wholesale (1)

$ 72,579  

Customer relationships (3)

46,900  

44,425  

Total Intangibles

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$ 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.

The weighted average remaining life for our patents is 

24 unchanged sentences

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.

If our total leverage ratio is greater than or equal to 4.00, 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 4.00, 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 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 whereas SOFR will be used 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 LIBOR plus 7.00 % until June 2023 and to 

provide certain EBITDA adjustments with response to financial covenants, 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.

5 unchanged sentences

request and the Lenders’

option, subject to customary conditions. In December of 

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.

option, subject to customary conditions.

In December of 

In June 2022, we further amended our ABL Facility to temporarily increase our borrowing capacity by $ 25 million 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 December 31, 2022, we had borrowing capacity of $ 56.2  million.

Interest expense was approximately $ 18.3 million, $ 10.6  million and $ 0.2 million, respectively for the years ended December 31, 2022, 2021 and 2020.

The ABL Facility is collateralized by first -lien on accounts receivable, inventory, cash and related assets and a second -lien on substantially all other assets.

4 unchanged sentences

Percentage of Commitments

Term SOFR Loan

Base Rate for FILO

LIBOR Rate for FILO

Term SOFR FILO Loans

0.00 %  

9 unchanged sentences

0.75 %  

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

Tier II applied until June 30, 2021.

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:

($ in thousands)

Term Facility that matures in 2026 with an effective interest rate of 8.00%

Term Facility that matures in 2026 with an effective interest rate of 12.14% and 8.00% as of December 31, 2022 and December 31, 2021, respectively

$ 116,332  

$ 127,563  

ABL Facility that matures in 2026:

LIBOR borrowings with an effective interest rate of 1.88%

LIBOR borrowings with an effective interest rate of 5.47% and 1.88% as of December 31, 2022 and December 31, 2021, respectively

140,000  

Prime borrowings with an effective interest rate of 3.50%

140,000  

Prime borrowings with an effective interest rate of 7.27% and 3.50% as of December 31, 2022 and December 31, 2021, respectively

259,633  

273,635  

Unamortized debt issuance costs

( 2,737 )  

Total debt, net of debt issuance costs

256,896  

270,044  

Debt maturing within one year

( 3,250 )  

Long-term debt

$ 253,646  

$ 266,794  

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 agreement. We believe we are in compliance with all Term Facility covenants as of 

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 agreement. We are in compliance with all Term Facility covenants as of 

December 31, 2022 .

4 unchanged sentences

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.

The Huntington credit facility was terminated in March 2021 and was replaced by the ABL Facility.

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

As of December 31, 2020, we had total capacity of $ 70.8 million.

We had no outstanding borrowings against Huntington Credit Facility for fiscal year ending 

December 31, 2020 .

Huntington Credit Facility Covenants

Our Huntington Credit Facility contained restrictive covenants which required us to maintain a fixed charge coverage ratio.

These restrictive covenants are only in effect upon a triggering event taking place (as defined in the agreement).

Our Huntington Credit Facility contains restrictions on the amount of dividends that may be paid.

During the twelve months ended December 31, 2020, there were no triggering events and the covenant was not in effect for our Huntington Credit Facility.

On March 15, 2021, the Term Facility and ABL Facility collectively replaced our Huntington Credit Agreement.

The operating ROU asset and operating lease liabilities as of December 31, 2021 and December 31, 2020 are as follows:

The Huntington credit facility was terminated in March 2021 and was replaced by the ABL Facility. We had no outstanding borrowings against Huntington Credit Facility at fiscal year ending December 31, 

The operating ROU asset and operating lease liabilities as of December 31, 2022 and December 31, 2021  were as follows:

($ in thousands)

5 unchanged sentences

$ 3,071  

$ 2,985  

Other accrued expenses

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Operating leases

For the twelve months ended December 31, 2021 and December 31, 2020 the supplemental cash flow information is as follows:

For the twelve months ended December 31, 2022 ,  

December 31, 2021  and 

December 31, 2020 the supplemental cash flow information was as follows:

($ in thousands)

2 unchanged sentences

$ 1,492  

$ 1,230  

Right-of-use assets obtained in exchange for lease obligations

1 unchanged sentence

$ 2,786  

The breakdown of rent expense for our operating leases for the twelve months ended December 31, 2021 and December 31, 2020 are as follows:

$ 13,186  

The breakdown of rent expense for our operating leases for the twelve months ended December 31, 2022 and December 31, 2021  were as follows:

Twelve Months Ended

8 unchanged sentences

$ 2,230  

( 1 ) Includes short-term lease expenses of approximately $ 1,310,000  and $ 103,000  for the twelve months ended December 31, 2021  and 

December 31, 2020 , respectively.

   BENEFIT PLAN

$ 1,111  

( 1 ) Includes short-term lease expenses of approximately $2,166,000,  $ 1,310,000  and $ 103,000 for the twelve months ended December 31, 2022 , 

December 31, 2021  and December 31, 2020, respectively.

   BENEFIT PLAN  

We sponsor a 401 (k) savings plan for eligible employees.

6 unchanged sentences

$ 1,798  

$ 1,311  

Deferred Compensation Plans

9 unchanged sentences

Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a "Rabbi Trust").

The assets held by the trust were approximately $ 311,000  and $ 150,000 as of 

December 31, 2021 and December 31, 2020 , respectively, and are classified as trading securities within other assets in the accompanying consolidated balance sheets.

The assets held by the trust were approximately $ 335,000  and $ 311,000  as of 

December 31, 2022  and 

December 31, 2021 , respectively, and are classified as trading securities within other assets in the accompanying consolidated balance sheets.

The liabilities by the trust were approximately $ 120,000 and $ 119,000 , as of 

5 unchanged sentences

The funds are accrued based on service and are not held in an investment or trust account.

The total liabilities held under the Dominican Plan were approximately $ 107,000  and $ 44,000 as of 

The total liabilities held under the Dominican Plan were approximately $ 187,000  and 

$ 107,000  

December 31, 2022  and 

7 unchanged sentences

$ 1,554  

$ 4,942  

( 1,417 )  

Total Federal

1 unchanged sentence

( 247 )  

( 176 )  

Total State & local

( 623 )  

( 37 )  

Total Foreign

1 unchanged sentence

$ 5,303  

A reconciliation of recorded Federal income tax expense to the expected expense computed by applying the applicable Federal statutory rate for all periods to income before income taxes follows:

$ 4,810  

$ 6,001  

A reconciliation of recorded Federal income tax expense to the expected expense computed by applying the applicable Federal statutory rate for all periods to income before income taxes follows: 

Year Ended December 31,

3 unchanged sentences

$ 5,327  

$ 5,662  

Increase (decrease) in income taxes resulting from:

1 unchanged sentence

( 632 )  

( 1,238 )  

Tax Rate Differential effect of Foreign Operations

3 unchanged sentences

( 348 )  

( 547 )  

Meals and entertainment

3 unchanged sentences

$ 5,303  

Deferred income taxes recorded in the Consolidated Balance Sheets at December 31, 2021 and 2020 consist of the following:

$ 4,810  

$ 6,001  

Deferred income taxes recorded in the Consolidated Balance Sheets at December 31, 2022 and 2021 consisted of the following:

($ in thousands)

1 unchanged sentence

Asset valuation allowances and accrued expenses

$ 2,257  

State and local income taxes

1 unchanged sentence

Net operating losses

Total deferred tax assets

Valuation allowances

163(J) Interest limitation

Total deferred tax assets

10,371  

Deferred tax liabilities:

Intangible assets

10,262  

Tollgate tax on Lifestyle earnings

3 unchanged sentences

18,377  

15,478  

Net deferred tax liability

1 unchanged sentence

$ 10,293  

The valuation allowance as of December 31, 2020 

is related to certain state and local income tax net operating loss carry forwards.

We have provided Puerto Rico tollgate taxes on approximately $ 3,684,000 of accumulated undistributed earnings of Lifestyle prior to the fiscal year ended June 

We have provided Puerto Rico tollgate taxes on approximately $ 3.7  million of accumulated undistributed earnings of Lifestyle prior to the fiscal year ended June 

30, 1994, that would be payable if such earnings were repatriated to the United States.

In 2001, we received abatement for Puerto Rico tollgate taxes on all earnings subsequent to June 

30, 1994, thus no other provision for tollgate tax has been made on earnings after that date.

If we repatriate the earnings from Lifestyle, $ 227,563 of tollgate tax would be due as of December 31, 2021.

 thus no other provision for tollgate tax has been made on earnings after that date.

If we repatriate the earnings from Lifestyle, $ 227,563 of tollgate tax would be due as of December 31, 2022. 

We are subject to tax examinations in various taxing jurisdictions.

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SHAREHOLDERS' EQUITY

Repurchase of Common Stock

A summary of our authorized share repurchase plans is as follows:

Repurchase of Common Stock 

A summary of our previously authorized share repurchase plans, both of which are expired by their terms, is as follows:

($ in thousands, except share and per share amounts)

3 unchanged sentences

Date of plan's authorization by the Board

February 2020

March 2021  

February 2020  

Funding source

Working capital

Number of shares repurchased under the plan (shares)

7 unchanged sentences

$ 4,562  

Common shares can be purchased in the open market or privately negotiated transactions over the next twelve months from the date of plan authorization.

Our shareholder repurchase program terminated on March 4, 2022.

Common shares can be purchased in the open market or privately negotiated transactions over the next twelve months following the date of plan authorization.

Our previous shareholder repurchase program terminated expired on March 4, 2022. 

T here has not been an announcement for a new repurchase program since the expiration prior program expired in March 2022.

Preferred Shares

6 unchanged sentences

125,000 shares have been designated Series A non-voting convertible preferred stock with a stated value of $0.06 per share, of which no shares are issued or outstanding at December 31, 2022 and 2021 , respectively.

SHARE-BASED COMPENSATION

7, 2014, our shareholders approved the 2014 Omnibus Incentive Plan and in May 2021 this plan was amended as our shareholders authorized an additional 600,000 shares (as amended, the "2014 Plan").

10 unchanged sentences

2.15 %  

Expected volatility of Rocky's common stock

Expected volatility of Rocky Brand's common stock

54.70 %  

7 unchanged sentences

$ 1,230  

Table of Contents  

$ 1,265  

The following summarizes stock option activity for the year ended December 31, 2022 :

24 unchanged sentences

The plans generally provided for grants with the exercise price equal to fair value on the date of grant, graduated vesting periods of up to 5 years, and lives not exceeding 10 years.

For the years ended 2021 and 2020 , cash received for the exercise of stock options was approximately $ 825,000 and $ 136,000 , respectively.

For the years ended December 31, 

2021 , and 2020,  cash received for the exercise of stock options was approximately $ 461,000 , $ 825,000 , and $ 136,000 respectively.

In the first quarter of 2022 , Board of Director members were granted 

31,500 stock options that vest over a year and will expire in 5 years.

Restricted Stock Units

The following table summarizes the status of the Company's restricted stock units and activity as of 

December 31, 2022 :

Restricted Stock Units

Weighted-Average Grant Date

($ amounts are per share)

Fair Value Per Share

Nonvested at January 1, 2022

Nonvested at December 31, 2022

$ 25.58  

As of December 31, 2022 , the total unrecognized compensation cost related to non-vested stock options and restricted stock units was approximately $ 148,000 with a weighted-average expense recognition period of 3.8 years.

During the years ended December 31, 2021 and 2020 , we issued 

6,868  and 

During the years ended December 31, 2022 and 2021 , and 2020 we issued 

10,762  shares, 6,868 shares and 

10,456  shares of common stock to members of our Board of Directors, respectively.

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.

12 unchanged sentences

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.

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, 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 outlet store, and Lehigh business.

We also sell footwear under the Rocky label to the U.S.

Our Retail business includes direct sales of our products to consumers through our e-commerce websites, our Rocky Outdoor Gear Store, and Lehigh business.

We also sell footwear under the Rocky Brands label to the U.S.

Significant Accounting Policies and Judgements

5 unchanged sentences

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).

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.

29 unchanged sentences

$ 1,062  

$ 5,582  

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

6 unchanged sentences

Balance, December 31, 2022

$ 1,062  

Disaggregation of Revenue

5 unchanged sentences

31, as follows:

Twelve Months Ended

($ in thousands)

1 unchanged sentence

$ 17,501  

$ 7,930  

Federal, state, and local income taxes paid, net

1 unchanged sentence

$ 8,638  

$ 4,669  

Change in contract receivables, net

$ 1,062  

$ 4,108  

Change in contract liabilities, net

$ ( 1,062 )  

$ ( 4,520 )  

Property, plant, and equipment purchases in accounts payable

2 unchanged sentences

SEGMENT INFORMATION

During the three months ended June 30, 2021, 

we changed our reporting segments 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.

Reportable Segments - We have identified three reportable segments:

Wholesale, Retail and Contract Manufacturing.

In our Wholesale segment, our products are offered in over 

10,000 retail locations representing a wide range of distribution channels in the U.S., Canada, U.K.

In our Wholesale segment, our products are offered in over 10,000 retail locations representing a wide range of distribution channels in the U.S., Canada, U.K.

and other international markets, mainly Europe.

These distribution channels vary by product line and target market and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores, specialty retailers and online retailers.

In our Retail segment, we market directly to consumers through our Lehigh business-to-business including direct sales and through our CustomFit websites, consumer e-commerce websites, third -party marketplaces, and our Rocky outlet store.

Through our outlet store, we generally sell first quality or discontinued products in addition to a limited amount of factory damaged goods, which typically carry lower gross margins.

Through our outdoor gear store, we generally sell first quality or discontinued products in addition to a limited amount of factory damaged goods, which typically carry lower gross margins.

Contract Manufacturing.

8 unchanged sentences

115,354  

94,658  

72,877  

Contract Manufacturing

1 unchanged sentence

28,499  

18,878  

Total Net Sales

1 unchanged sentence

$ 514,227  

$ 277,309  

GROSS MARGIN:

3 unchanged sentences

57,817  

47,792  

34,283  

Contract Manufacturing

2 unchanged sentences

$ 194,536  

$ 104,735  

Segment asset information is not prepared or used to assess segment performance.

Product Group Information - The following is supplemental information on net sales by product group for the years ended December 

Product Group Information - The following is supplemental information on net sales by product group for the years ended

December 

($ in thousands)

3 unchanged sentences

$ 280,235  

Western footwear

54.5 %  

3 unchanged sentences

76,031  

21,074  

108,697  

87,425  

61,127  

Duty and commercial military footwear

1 unchanged sentence

39,715  

41,005  

Military footwear

4 unchanged sentences

100.0 %  

Net sales to foreign countries represented approximately 

6.9 % of net sales in 2021 and 

0.8 % of net sales in 2020 .

$ 514,227  

100.0 %  

$ 277,309  

Net sales to foreign countries represented approximately 6.2 % of net sales in 2022 , 6.9 % of net sales in 2021  and 0.8 % of net sales in 

The net book value of fixed assets located outside of the U.S.

totaled $ 13.0  million at December 31, 2021, of which approximately $ 4.6  million resides in the Dominican Republic and approximately $ 8.4 million resides in China. The net book value of fixed assets located outside of the U.S.

totaled $ 4.5 million at December 31, 2020, all of which resides in the Dominican Republic.

COMMITMENTS AND CONTINGENCIES

$ 12.6  million at

December 31, 2022, of which approx

imately $ 4.6  mill ion resides in the Dominican Republic and approximatel

y $ 8.0 mil lion resides in China. 

RESTRUCTURING CHARGES

2022, we completed a cost savings review aimed at operating efficiencies to better position us for profitable growth.

Following the integration of the Acquired Brands, we identified a number of operational synergies and cost savings opportunities, including a reduction in workforce.

In addition to the accrued expenses below, we incurred  approximately 

$1.0 million in restructuring costs that are included in operating expenses in the accompanying consolidated statements of operations for the year ended December 31, 2022.

For the year ended

December 31, 2022, the following activity was recorded:

Employee Severance, Benefits and

($ in thousands)

Related Costs

Accrued expenses, January 1, 2022

Restructuring charges

$ 1,201  

Cash payments

Accrued expenses, December 31, 2022

COMMITMENTS AND CONTINGENCIES 

We are, from time to time, a party to litigation which arises in the normal course of business.

Although the ultimate resolution of pending proceedings cannot be determined, in the opinion of management, the resolution of such proceedings in the aggregate will not have a material adverse effect on our financial position, results of operations, or liquidity.

We are currently party to litigation with a manufacturing supplier of the Acquired Brands.

While it is not possible to predict the outcome of this litigation with certainty, we do not anticipate the resolution will have a material, adverse impact on our financial position.

We believe that the likelihood of the resolution being materially adverse to our financial statements is remote and as such have not recorded any contingent liabilities within the accompanying Consolidated Financial Statements.

In addition, we have not recorded any potential favorable resolution to the litigation due in accordance with ASC 450 - 30, Gain Contingencies.

Gain Contingency

In June 2022, we became aware of a misclassification of Harmonized Tariff Schedule (HTS) codes filed with the U.S.

Customs and Border Protection (U.S.

Customs) on certain products imported in the U.S.

associated with the Acquired Brands during 2021 and 2022.

As a result of the misclassification of HTS codes we have paid duties in excess of the required amount.

We are in the process of filing multiple post summary corrections with U.S.

customs to see refunds of duties paid in excess of the correct HTS codes.

As of December 31, 2022, we have the potential to recover approximately $ 7.7 million from overpaid duties of which we have received $ 3.2 million in refunds.

All refunds received were and will be recognized as a reduction to the cost of goods sold as received. We are accounting for these post summary corrections as a gain contingency, and as such have not recorded these potential refunds within the accompanying unaudited condensed consolidated balance sheet due to uncertainty of collection.

Any refunds received will be recognized as a reduction to the cost of goods sold when and if the refunds are received. 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data