rcky20230331_10q.htm
 
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐    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 7,354,060 shares of the Registrant's Common Stock outstanding on April 30, 2023.
 
 
Table of Contents
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
Page
PART I
Financial Information
 
Item 1.
Financial Statements
 
 
Condensed Consolidated Balance Sheets as of March 31, 2023 (Unaudited), December 31, 2022, and March 31, 2022 (Unaudited)
2
 
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022 (Unaudited)
3
 
Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2023 and 2022 (Unaudited)
4
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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
15
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
 
1
Table of Contents
  
 
PART 1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
Rocky Brands, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
 
    March 31,
    December 31,
    March 31,
 
    2023
    2022
    2022
 
ASSETS:
                       
CURRENT ASSETS:
                       
Cash and cash equivalents
  $ 4,946     $ 5,719     $ 14,950  
Trade receivables – net
    73,650       94,953       123,387  
Contract receivables
    -       -       268  
Other receivables
    2,235       908       260  
Inventories – net
    224,124       235,400       289,230  
Income tax receivable
    -       -       2,338  
Prepaid expenses
    5,619       4,067       5,875  
Total current assets
    310,574       341,047       436,308  
LEASED ASSETS
    10,153       11,014       10,696  
PROPERTY, PLANT & EQUIPMENT – net
    54,666       57,359       60,958  
GOODWILL
    47,844       50,246       50,246  
IDENTIFIED INTANGIBLES – net
    114,716       121,782       125,528  
OTHER ASSETS
    1,028       942       938  
TOTAL ASSETS
  $ 538,981     $ 582,390     $ 684,674  
                         
LIABILITIES AND SHAREHOLDERS' EQUITY:
                       
CURRENT LIABILITIES:
                       
Accounts payable
  $ 66,783     $ 69,686     $ 156,890  
Contract liabilities
    -       -       268  
Current Portion of Long-Term Debt
    2,823       3,250       3,250  
Accrued expenses:
                       
Salaries and wages
    1,816       1,253       3,715  
Taxes – other
    857       1,325       2,054  
Accrued freight
    2,098       2,413       1,735  
Commissions
    706       1,934       1,689  
Accrued duty
    6,642       6,764       18,873  
Accrued interest
    2,311       2,822       -  
Income tax payable
    1,052       1,172       -  
Other
    5,902       5,675       8,014  
Total current liabilities
    90,990       96,294       196,488  
LONG-TERM DEBT
    216,973       253,646       264,486  
LONG-TERM TAXES PAYABLE
    169       169       169  
LONG-TERM LEASE
    7,501       8,216       8,200  
DEFERRED INCOME TAXES
    8,006       8,006       10,293  
DEFERRED LIABILITIES
    1,053       586       584  
TOTAL LIABILITIES
    324,692       366,917       480,220  
SHAREHOLDERS' EQUITY:
                       
Common stock, no par value;
                       
25,000,000 shares authorized; issued and outstanding March 31, 2023 - 7,346,650 ; December 31, 2022 - 7,339,011 ; March 31, 2022 - 7,311,059
    70,107       69,752       68,454  
Retained earnings
    144,182       145,721       136,000  
Total shareholders' equity
    214,289       215,473       204,454  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 538,981     $ 582,390     $ 684,674  
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
2
Table of Contents
 
 
 
Rocky Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2023
 
 
2022
 
NET SALES
 
$
110,445
 
 
$
167,025
 
COST OF GOODS SOLD
 
 
66,686
 
 
 
104,198
 
GROSS MARGIN
 
 
43,759
 
 
 
62,827
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
39,604
 
 
 
49,630
 
 
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
 
 
4,155
 
 
 
13,197
 
 
 
 
 
 
 
 
 
 
INTEREST EXPENSE AND OTHER INCOME – net
 
 
( 4,664
)
 
 
( 3,907
)
 
 
 
 
 
 
 
 
 
(LOSS) INCOME BEFORE INCOME TAX EXPENSE
 
 
( 509
)
 
 
9,290
 
 
 
 
 
 
 
 
 
 
INCOME TAX (BENEFIT) EXPENSE
 
 
( 111
)
 
 
1,951
 
 
 
 
 
 
 
 
 
 
NET (LOSS) INCOME
 
$
( 398
)
 
$
7,339
 
 
 
 
 
 
 
 
 
 
(LOSS) INCOME PER SHARE
 
 
 
 
 
 
 
 
Basic
 
$
( 0.05
)
 
$
1.00
 
Diluted
 
$
( 0.05
)
 
$
0.99
 
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
7,346
 
 
 
7,306
 
Diluted
 
 
7,346
 
 
 
7,410
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
3
Table of Contents
 
 
 
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  
                                         
THREE MONTHS ENDED MARCH 31, 2022
                                       
Net income
                          $ 7,339     $ 7,339  
Dividends paid on common stock ($ 0.155 per share)
                            ( 1,133 )     ( 1,133 )
Repurchase of common stock
                                    -  
Stock issued for options exercised, including tax benefits
    7     $ 145               -       145  
Stock compensation expense
    2       248               -       248  
BALANCE - March 31, 2022
    7,311     $ 68,454       -     $ 136,000     $ 204,454  
                                         
BALANCE - December 31, 2022
    7,339     $ 69,752       -     $ 145,721     $ 215,473  
                                         
THREE MONTHS ENDED MARCH 31, 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  
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
4
Table of Contents
 
 
 
Rocky Brands, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2023
 
 
2022
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
Net (loss) income
 
$
( 398
)
 
$
7,339
 
Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
2,812
 
 
 
3,024
 
Amortization of debt issuance costs
 
 
213
 
 
 
213
 
Provision for bad debts
 
 
( 194
)
 
 
1,165
 
Loss on disposal of assets
 
 
185
 
 
 
-
 
Gain on sale of business
 
 
( 1,341
)
 
 
-
 
Stock compensation expense
 
 
347
 
 
 
248
 
Change in assets and liabilities:
 
 
 
 
 
 
 
 
Receivables
 
 
21,871
 
 
 
2,238
 
Contract receivables
 
 
-
 
 
 
794
 
Inventories
 
 
5,111
 
 
 
( 56,371
)
Other current assets
 
 
( 1,552
)
 
 
( 635
)
Other assets
 
 
775
 
 
 
( 21
)
Accounts payable
 
 
( 4,390
)
 
 
40,296
 
Accrued and other liabilities
 
 
( 2,594
)
 
 
14,342
 
Income taxes
 
 
( 41
)
 
 
1,955
 
Contract liabilities
 
 
-
 
 
 
( 794
)
Net cash provided by operating activities
 
 
20,804
 
 
 
13,793
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
Purchase of fixed assets
 
 
( 431
)
 
 
( 1,243
)
Proceeds from sale of business
 
 
17,300
 
 
 
-
 
Net cash provided by (used in) investing activities
 
 
16,869
 
 
 
( 1,243
)
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
Proceeds from revolving credit facility
 
 
4,213
 
 
 
3,342
 
Repayments on revolving credit facility
 
 
( 21,000
)
 
 
( 5,025
)
Repayments on term loan
 
 
( 20,526
)
 
 
( 838
)
Proceeds from stock options
 
 
8
 
 
 
145
 
Dividends paid on common stock
 
 
( 1,141
)
 
 
( 1,133
)
Net cash used in financing activities
 
 
( 38,446
)
 
 
( 3,509
)
 
 
 
 
 
 
 
 
 
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
 
( 773
)
 
 
9,041
 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
 
 
 
 
 
BEGINNING OF PERIOD
 
 
5,719
 
 
 
5,909
 
END OF PERIOD
 
$
4,946
 
 
$
14,950
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
5
Table of Contents
 
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 months ended March 31, 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 did not have a significant impact on our Consolidated Financial Statements.
 
 
3. FAIR VALUE
 
Generally accepted accounting standards establish a framework for measuring fair value. The fair value accounting standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard clarifies how to measure fair value as permitted under other accounting pronouncements.
 
The fair value accounting standard defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This standard also establishes a three -level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
 
 
●
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
 
●
Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
 
●
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
 
The fair values of cash and cash equivalents, receivables, and payables approximated their carrying values because of the short-term nature of these instruments. Receivables consist primarily of amounts due from our customers, net of allowances, amounts due from employees (sales persons’ advances in excess of commissions earned and employee travel advances), other customer receivables, net of allowances, and expected insurance recoveries. The carrying amounts of our long-term credit facility and other short-term financing obligations also approximate fair value, as they are comparable to the available financing in the marketplace during the year. The fair value of our credit facilities 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 ).
 
6
Table of Contents
 
 
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 Pertoquim 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 - net on the accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 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  March 31, 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.
 
7
Table of Contents
 
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.
 
Contract receivables represent contractual minimum payments required under non-cancellable contracts with the U.S. Military and other customers with a duration of one year or less.
 
Contract liabilities are performance obligations that we expect to satisfy or relieve within the next twelve months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancellable contracts before the transfer of goods or services to the customer has occurred. Our contract liability represents unconditional obligations to provide goods under non-cancellable contracts with the U.S. Military and other customers.
 
Items considered immaterial within the context of the contract are recognized as an expense.
 
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue producing transaction, that are collected from customers are excluded from revenue.
 
Costs associated with our manufacturer’s warranty continue to be recognized as expense when the products are sold in accordance with guidance surrounding product warranties.
 
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in operating expenses.
 
Costs associated with obtaining a contract are expensed as incurred in accordance with the practical expedient in ASC 340 - 40 in instances where the amortization period is one year or less. We anticipate substantially all of our costs incurred to obtain a contract would be subject to this practical expedient.
 
Contract Balances
 
The following table provides information about contract liabilities from contracts with our customers. There have been no significant changes to the contract liabilities for the periods presented. 
 
    March 31,
    December 31,
    March 31,
 
($ in thousands)
  2023
    2022
    2022
 
Contract liabilities
  $ -     $ -     $ 268  
 
8
Table of Contents
 
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 $ 3.0  million, $ 3.5  million and $ 1.7  million at March 31, 2023 ,  December 31, 2022 and  March 31, 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 $ 1.2  million, $ 2.1  million and $ 2.1  million at  March 31, 2023 ,  December 31, 2022 and  March 31, 2022 , respectively.
 
 
8. INVENTORY
 
Inventories are comprised of the following:
 
    March 31,
    December 31,
    March 31,
 
($ in thousands)
  2023
    2022
    2022
 
Raw materials
  $ 16,949     $ 16,541     $ 23,229  
Work-in-process
    1,231       933       1,872  
Finished goods
    205,944       217,926       264,129  
Total
  $ 224,124     $ 235,400     $ 289,230  
 
In accordance with ASC 606, the return reserve allowance included within inventories was approximately $ 0.7  million, $ 1.1  million and $ 1.1  million at March 31, 2023 ,  December 31, 2022 and  March 31, 2022 , respectively.
 
9
Table of Contents
 
 
9. GOODWILL
 
Goodwill represents the excess of the purchase price over the f air 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  mil lion 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
 
March 31, 2023
                       
Trademarks
                       
Wholesale (1)
  $ 69,439       -     $ 69,439  
Retail
    9,220       -       9,220  
Patents
    895     $ 831       64  
Customer relationships (2)
    41,659       5,666       35,993  
Total Intangibles
  $ 121,213     $ 6,497     $ 114,716  
 
( 1 )  Servus tradenames 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 ).
 
10
Table of Contents
 
    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 ).
 
    Gross
    Accumulated
    Carrying
 
($ in thousands)
  Amount     Amortization     Amount  
March 31, 2022
                       
Trademarks
                       
Wholesale
  $ 72,579       -     $ 72,579  
Retail
    9,220       -       9,220  
Patents
    895     $ 810       85  
Customer relationships
    46,900       3,256       43,644  
Total Intangibles
  $ 129,594     $ 4,066     $ 125,528  
 
The weighted average life for our patents is 7.0  years.
 
A schedule of approximate amortization expense related to finite-lived intangible assets for the  three months ended March 31, 2023 and 2022 is as follows:
 
    Three Months Ended
 
    March 31,
 
($ in thousands)
  2023
    2022
 
Amortization expense
  $ 780     $ 787  
 
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
  $ 2,091  
2024
    2,785  
2025
    2,781  
2026
    2,778  
2027
    2,776  
2028
    2,772  
2029+
    20,074  
 
11
Table of Contents
 
 
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 leverag e 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 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 A BL Facility includes a separate first in, last out (FILO) tranche, which allows the Company to borrow at higher advance rates on eligible accounts receivables and inventory balances. As of  March 31, 2023 , we had borrowing capacity of  $ 37.4  million.
 
The ABL Facility is collateralized by a first -lien on accounts receivable, inventory, cash and related assets and a second -lien on substantially all other assets. The ABL Facility matures on March 15, 2026. Interest on the ABL Facility is based on the amount available to be borrowed as set forth on the following chart:
 
     
                               
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.
 
12
Table of Contents
 
Current and long-term debt consisted of the following:
 
    March 31,
    December 31,
    March 31,
 
($ in thousands)
  2023
    2022
    2022
 
Term Facility that matures in 2026 with an effective interest rate of 12.14 %, 12.14 % and 8.00 % as of March 31, 2023, December 31, 2022 and March 31, 2022, respectively
  $ 95,806     $ 116,332     $ 126,750  
ABL Facility that matures in 2026:
                       
SOFR borrowings with an effective interest rate of 4.80 %, 5.47 % and 1.88 % March 31, 2023, December 31, 2022 and March 31, 2022, respectively
    113,008       140,000       140,257  
Prime borrowings with an effective interest rate of 8.00 %, 7.27 % and 3.75 % as of March 31, 2023, December 31, 2022 and March 31, 2022, respectively
    13,506       3,301       4,106  
Total debt
    222,320       259,633       271,113  
Less: Unamortized debt issuance costs
    ( 2,524 )     ( 2,737 )     ( 3,377 )
Total debt, net of debt issuance costs
    219,796       256,896       267,736  
Less: Debt maturing within one year
    ( 2,823 )     ( 3,250 )     ( 3,250 )
Long-term debt
  $ 216,973     $ 253,646     $ 264,486  
 
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 March 31, 2023 , December 31, 2021 and  March 31, 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 months ended March 31, 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 months ended March 31, 2023 and 2022 . We do not believe there will be any material changes in our uncertain tax positions over the next 12 months.
 
Accounting for uncertainty in income taxes requires financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements.  Under this guidance, income tax positions must meet a more-likely-than- not recognition threshold at the effective date to be recognized upon the adoption of the standard.  We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations.
 
Our estim ated effective tax rates for t he  three months ended March 31, 2023 and 2022  are as follows:
 
    Three Months Ended
 
    March 31,
 
    2023
    2022
 
Effective Tax Rate
    21.8 %
    21.0 %
 
 
 
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 months ended March 31, 2023 and 2022 is as follows:
 
    Three Months Ended
 
    March 31,
 
(shares in thousands)
  2023
    2022
 
                 
Basic - weighted average shares outstanding
    7,346       7,306  
Dilutive stock options (1)
    -       104  
Diluted - weighted average shares outstanding (2)
    7,346       7,410  
Anti-dilutive securities
    265       107  
 
( 1 ) Due to a loss for the three months ended March 31, 2023, zero dilutive stock options are included for the period because the effect would be antidilutive.
 
( 2 )  Due to a loss for the three months ended March 31, 2023, zero dilutive stock options are included for the period because the effect would be antidilutive.
 
13
Table of Contents
   
 
14. SUPPLEMENTAL CASH FLOW INFORMATION
 
Supplemental cash flow information for the three months ended March 31, 2023 and 2022 was as follows:
 
    Three Months Ended  
    March 31,  
($ in thousands)
  2023
    2022
 
                 
Interest paid
  $ 4,100     $ 3,479  
                 
Change in contract receivables, net
  $ -     $ 794  
                 
Change in contract liabilities, net
  $ -     $ ( 794 )
                 
Property, plant, and equipment purchases in accounts payable
  $ 986     $ 1,962  
                 
 
 
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 months ended March 31, 2023 and 2022 .
 
    Three Months Ended
 
    March 31,
 
($ in thousands)
  2023
    2022
 
NET SALES:
               
Wholesale
  $ 80,050     $ 133,961  
Retail
    29,510       28,626  
Contract Manufacturing
    885       4,438  
Total Net Sales
  $ 110,445     $ 167,025  
                 
GROSS MARGIN:
               
Wholesale
  $ 29,308     $ 48,259  
Retail
    14,379       13,848  
Contract Manufacturing
    72       720  
Total Gross Margin
  $ 43,759     $ 62,827  
 
 
 
16. RESTRUCTURING CHARGES
 
In June 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.
 
During the three months ended March 31, 2023, the following activity was recorded:
 
    Employee Severance, Benefits and
 
($ in thousands)
  Related Costs
 
Accrued expenses, December 31, 2022
  $ 381  
Restructuring charges
    -  
Cash payments
    ( 14 )
Accrued expenses, March 31, 2023
  $ 367  
 
 
17. COMMITMENTS AND CONTINGENCIES 
 
Litigation
 
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 into 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 seek refunds of duties paid in excess of the correct HTS codes. We have the potential to recover th
e total amount of overp aid duties resulting in a potential refund of approximately
$ 7.7  million, of which we have received $ 3.2  million in refunds during year ended December 31, 2022 and $ 1.9 million in refunds during the  three months ended March 31, 2023.  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. Refunds received will be recognized as a reduction to the cost of goods sold when, and if, the refunds are received.
 
14
Table of Contents
    
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
OVERVIEW
 
During the first quarter of 2023, w e experienced a decline in sales for our brands and an increase in gross margin as a percentage of net sales. The increase in gross margin as a percentage of net sales was due to the realization of pricing actions taken in 2022, as well as decreases in in-bound logistics costs. We experienced an increased mix of Retail segment sales which carry higher gross margins than the Wholesale and Contract Manufacturing segments. We also experienced a decrease in operating expenses that was driven primarily by a decrease in variable expenses associated with lower sales and improved distribution center efficiencies compared with the year ago period.
 
We completed the sale of the Servus brand during the first quarter 2023. The gain of approximately $1.3 million on the sale of Servus is recorded in Interest Expense and Other Income - net within the unaudited condensed consolidated statement of operations for the three months ended March 31, 2023. The Servus brand was sold to allow us to focus on our more profitable core brands and allocate resources toward growth and development of additional opportunities with those brands moving forward.
 
RESULTS OF OPERATIONS
 
The following tables set forth, for the periods indicated, information derived from our Unaudited Condensed Consolidated Financial Statements, expressed as a percentage of net sales. The discussion that follows each table should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements as well as our annual report on Form 10-K for the year ended December 31, 2022.
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2023
 
 
2022
 
Net sales
 
 
100.0
%
 
 
100.0
%
Cost of goods sold
 
 
60.4
 
 
 
62.4
 
Gross margin
 
 
39.6
 
 
 
37.6
 
Operating expenses
 
 
35.9
 
 
 
29.7
 
Income from operations
 
 
3.7
%
 
 
7.9
%
 
Three Months Ended March 31, 2023 compared to Three Months Ended March 31, 2022
 
 
 
Three Months Ended
 
 
 
March 31,
 
($ in thousands)
 
2023
 
 
2022
 
 
Inc./ (Dec.)
 
 
Inc./ (Dec.)
 
NET SALES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
80,050
 
 
$
133,961
 
 
$
(53,911
)
 
 
(40.24
)%
Retail
 
 
29,510
 
 
 
28,626
 
 
 
884
 
 
 
3.1
 
Contract Manufacturing
 
 
885
 
 
 
4,438
 
 
 
(3,553
)
 
 
(80.1
)
Total Net Sales
 
$
110,445
 
 
$
167,025
 
 
$
(56,580
)
 
 
(33.9
)%
 
The decrease in Wholesale sales in the first quarter of 2023 was due to inventory levels at our retail partners within our Wholesale channel and a softer demand environment compared to the year ago period. 
 
 
15
Table of Contents
 
Retail net sales for the three months ended March 31, 2023 slightly increased compared to the three months ended March 31, 2022 due to growth in our Lehigh business as we continue to expand our customer base and product offerings.
 
The decrease in Contract Manufacturing sales for the first three months of 2023 compared to the first three months of 2022 was due to the expiration of certain contracts with the U.S. Military. 
 
 
Three Months Ended
 
 
March 31,
 
($ in thousands)
2023
 
2022
 
Inc./ (Dec.)
 
GROSS MARGIN:
 
 
 
 
 
 
 
 
 
Wholesale Margin $'s
$
29,308
 
$
48,259
 
$
(18,951
)
Margin %
 
36.6
%
 
36.0
%
 
0.6
%
Retail Margin $'s
$
14,379
 
$
13,848
 
$
531
 
Margin %
 
48.7
%
 
48.4
%
 
0.3
%
Contract Manufacturing Margin $'s
$
72
 
$
720
 
$
(648
)
Margin %
 
8.1
%
 
16.2
%
 
(8.1
)%
Total Margin $'s
$
43,759
 
$
62,827
 
$
(19,068
)
Margin %
 
39.6
%
 
37.6
%
 
2.0
%
 
The increase in Wholesale gross margin as a percentage of sales for the quarter ended March 31, 2023 compared to the year ago period was due to  realization of pricing actions taken in 2022, as well as decreases in in-bound logistics costs.
 
Retail gross margin increased for the three months ended March 31, 2023 compared to the same period a year ago due to pricing actions and a decrease in in-bound logistics costs.
 
Contract Manufacturing gross margin decreased in the first quarter of 2023 compared to the first quarter of 2022 due to volume related inefficiencies due to the expiring military contracts.
 
 
 
Three Months Ended
 
 
 
March 31,
 
($ in thousands)
 
2023
 
 
2022
 
 
Inc./ (Dec.)
 
 
Inc./ (Dec.)
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
$
39,604
 
 
$
49,630
 
 
$
(10,026
)
 
 
(20.2
)%
% of Net Sales
 
 
35.9
%
 
 
29.7
%
 
 
6.2
%
 
 
 
 
 
16
Table of Contents
 
On an adjusted basis to exclude $0.8 million of Acquisition-related amortization in the first quarter of 2023 and $1.0 million in Acquisition-related amortization and integration expenses in the first quarter of 2022, operating expenses were $38.8 million in the current year period and $48.6 million in the year ago period. The decrease in operating expenses was driven by a decrease in variable expenses associated with lower sales and improved distribution center efficiencies compared with the year ago period.
 
 
 
 
Three Months Ended
 
 
 
March 31,
 
($ in thousands)
 
2023
 
 
2022
 
 
Inc./ (Dec.)
 
 
Inc./ (Dec.)
 
INCOME TAXES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Tax Expense
 
$
(111
)
 
$
1,951
 
 
$
(2,062
)
 
 
(105.7
)%
Effective Tax Rate
 
21.8
%
 
 
21.0
%
 
0.8
%
 
 
 
 
 
The increase in our effective tax rate in the first quarter of 2023 compared to the same year ago period was due to changes in our projected income generated from our international business for fiscal year 2023 compared to fiscal year 2022.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Overview
 
Our principal sources of liquidity have been our income from operations and borrowings under our credit facilities.
 
During the three months ended March 31, 2023 , our primary use of cash was repayments on our credit facilities. Our working capital consists primarily of trade receivables and inventory, offset by debt and accounts payable. Our working capital fluctuates throughout the year as a result of our seasonal business cycle and business expansion and is generally lowest in the months of January through March of each year and highest during the months of May through October of each year. We typically utilize our revolving credit facility to fund our seasonal working capital requirements. As a result, balances on our revolving credit facility can fluctuate significantly throughout the year.
 
Our capital expenditures relate primarily to projects relating to our corporate offices, property, merchandising fixtures, molds and equipment associated with our manufacturing and distribution operations and for information technology. Capital expenditures were $1.3 million and $3.3 mill ion for the three months ended March 31, 2023 and 2022, respectively.
 
We lease certain machinery, one shoe center, distribution centers in Lancaster, Ohio and Reno, Nevada and manufacturing facilities under operating leases that generally provide for renewal options.
 
We believe that our ABL Facility, coupled with cash generated from operations will provide sufficient liquidity to fund our operations and debt obligations for at least the next twelve months. Our continued liquidity, however, is contingent upon future operating performance, cash flows and our ability to meet financial covenants under our credit facility. For more information regarding our credit facility see  Note 11 .
 
Cash Flows
 
 
 
Three Months Ended
 
 
 
March 31,
 
($ in millions)
 
2023
 
 
2022
 
Operating activities
 
$
20.8
 
 
$
13.8
 
Investing activities
 
 
16.9
 
 
 
(1.2
)
Financing activities
 
 
(38.4
)
 
 
(3.5
)
Net change in cash and cash equivalents
 
$
(0.7
)
 
$
9.1
 
 
Operating Activities. Cash provided by operating activities for the three months ended March 31, 2023  was primarily related to decreases in trade receivables and inventory. Cash provided by  operating activities for the three months ended March 31, 2022 was primarily impacted by an increase in accounts payable and accrued liabilities, partially offset by an increase in inventory.
 
Investing Activities. Cash provided by investing activities for the three months ended March 31, 2023 was primarily related to the sale of Servus b rand. See  Note 4 . C ash used in investing activities for the three months ended March 31, 2022 was primarily related the purchase of investments in molds and equipment associated with our manufacturing operations, for information technology and for improvements to our distribution facility.
 
Financing Activities.   Cash used in financing activities for the three months ended March 31, 2023 was primarily related to payments on our revolving credit facility and term loan. Cash used in financing activities for the three months ended March 31, 2022 was primarily related to payments on our revolving credit facility and dividends paid on common stock.
 
17
Table of Contents
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The preparation of the Company’s Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company’s estimates. However, actual results may differ materially from these estimates under different assumptions or conditions.
 
We have identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in our Management Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022.
 
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
 
This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our and management’s intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely,” “would,” “could” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that forward-looking statements involve risk and uncertainties including, without limitations, dependence on sales forecasts, changes in consumer demand, seasonality, impact of weather, competition, reliance on suppliers, risks inherent to international trade, changing retail trends, the loss or disruption of our manufacturing and distribution operations, cybersecurity breaches or disruption of our digital systems, fluctuations in foreign currency exchange rates, economic changes, as well as other factors set forth under the caption “Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (filed March 10, 2023), and other factors detailed from time to time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We assume no obligation to update any forward-looking statements.
 
18
Table of Contents
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
There have been no material changes to our market risk as disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2022.
 
ITEM 4. CONTROLS AND PROCEDURES.
 
Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
 
As of the end of the period covered by this report, our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 promulgated under the Exchange Act. Based upon this evaluation, our chief executive officer and our chief financial officer concluded that, as of March 31, 2023, our disclosure controls and procedures were (1) designed to ensure that material information relating to our Company is accumulated and made known to our management, including our chief executive officer and chief financial officer, in a timely manner, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
 
Changes in Internal Controls There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II -- OTHER INFORMATION
 
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Unregistered Sales of Equity Securities
 
None.
 
Use of Proceeds
 
Not applicable.
 
Our shareholder repurchase program expired on March 4, 2022.
 
19
Table of Contents
 
ITEM 6. EXHIBITS
 
Exhibit
Number
Description
10.1***
Employment Agreement, dated March 13, 2023, by and between the Company and Sarah O'Connor (incorporated by reference to Exhibit 101 to the Company's Current Report on Form 8-K dated February 13, 2023 and filed on February 13, 2023.
 
 
31.1*
Certification Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Principal Executive Officer.
 
 
31.2*
Certification Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Principal Financial Officer.
 
 
32**
Section 1350 Certification of Principal Executive Officer/Principal Financial Officer.
 
 
101*
Attached as Exhibits 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 formatted in Inline XBRL (“eXtensible Business Reporting Language”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Shareholders' Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related notes to these financial statements.
104*
Cover Page Interactive Data File, formatted in Inline XBRL and contained in Exhibit 101
 
 
* Filed with this Report.
** Furnished with this Report.
*** Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because such information (i) is not material and (ii) would likely be competitively harmful if publicly disclosed. The registrant hereby undertakes to furnish copies of any of the omitted schedules or exhibits upon request of the U.S. Securities and Exchange Commission.
 
20
Table of Contents
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ROCKY BRANDS, INC.
 
 
 
Date: May 10, 2023
By:
/s/SARAH O'CONNOR
 
 
Sarah E. O'Connor
 
 
Chief Financial Officer and Treasurer
 
 
(Principal Financial and Accounting Officer and Duly Authorized Officer)
 
21
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.