PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(In thousands, except per share amounts)

(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

Rocky Brands, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements

Rocky Brands, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments that are necessary for a fair presentation of the financial results. All such adjustments reflected in the unaudited condensed consolidated financial statements are considered to be of a normal and recurring nature. The results of operations for the three months ended March 31, 20212022 and 20202021 are not necessarily indicative of the results to be expected for the whole year. The December 31, 20202021 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, 20202021, which includes all disclosures required by GAAP.

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

There has been no change in our total consolidated financial condition, results of operations, or segment information previously reported, as the result of the change in our reportable segments, as we had no Private Contract sales during the fiscal year ended December 31, 2020 or quarterly period ended March 31, 2021. Each of our reporting segments continue to employ consistent accounting policies. As a result of this assessment, we now report our activities in the following 3 reporting segments: Wholesale, Retail and Contract Manufacturing. Our Wholesale segment includes sales of footwear and accessories to several classifications of retailers, including sporting goods stores, outdoor specialty stores, online retailers, marine stores, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail segment includes direct sales of our products to consumers through our e-commerce websites, marketplaces, our Rocky outlet store, and Lehigh businesses. Our Contract Manufacturing segment includes sales to the U.S. Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer. See Note 14 – Segment Information for further information.

2. ACCOUNTING STANDARDS UPDATES

Recently Issued Accounting Pronouncements

Rocky Brands, Inc. isWe are currently evaluating the impact of certainthe following Accounting Standards UpdatesUpdate (“ASU”) on itsour Unaudited Condensed Consolidated Financial Statements or Notes to the Unaudited Condensed Consolidated Financial Statements:

Accounting Standards Adopted in the Current Year

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:

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;allowances, and expected insurance recoveries. The carrying amounts of our long-term credit facility and other short-term financing obligations also approximate fair value, as they are comparable to the available financing in the marketplace during the year. The fair value of our credit facilities are categorized as Level 2.

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

4. ACQUISITION

The Performance and Lifestyle Footwear Business of Honeywell International Inc.

On January 24, 2021, we entered into a Purchase Agreement (the "Purchase Agreement") with certain subsidiaries of Honeywell International Inc. (collectively, "Honeywell"), to purchase Honeywell's performance and lifestyle footwear business, including brand names, trademarks, assets and liabilities associated with Honeywell's performance and lifestyle footwear business (the "Acquisition") for a preliminaryan aggregate purchase price of $230$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 based on preliminary working capital and other adjustments. This is subject to further adjustments based on the Upon a final assessmentagreement of net working capital and other items as of the closing date.Acquisition Date, we owed Honeywell an additional $5.4 million. The acquisitionAcquisition was funded through cash on hand and borrowings under two new credit facilities. See Note 910for information regarding the two new credit facilities.

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

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

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

In connection withWe acquired multiple leases through the Acquisition Honeywell will provide certain services to us underincluding the Transition Service Agreement (TSA). The costs associated with the TSA are both fixedlease of our Rock Island, Illinois and variable. We expect these costs to decline over time as we integrate the businesses.China manufacturing facilities and an office building in Westwood, Massachusetts.

The Acquisition contributed net sales of $64.4 million and $6.5 million, respectively, to the unaudited condensed consolidated operating results for the three months ended March 31, 2022 and 2021. The Acquisition contributed net income of approximately $6.5$2.0 million and $0.5 million, respectively, to the unaudited condensed consolidated operating results for the period March 15, 2021 threethrough months ended March 31, 2021.2022 and 2021.

Acquisition-related costs

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

Preliminary Purchase Price Allocation

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

The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill is based upon preliminary informationfinalized and is no longer subject to change withinadjustment as the measurement period (up to 90 days from the acquisition date) as additional information concerning final working capital true-up adjustments and valuationsvaluation related to assets acquired and liabilities assumed ishas been obtained.

The following table summarizes the consideration paid for the Acquisition and the amountsestimated fair value of the assets acquired and liabilities assumed as of the Acquisition Date, which have been allocated on a preliminary basis and are subject to change based on the final working capital true-up.Date.

⁽¹⁾ The recorded amount for accounts receivable considers expected uncollectible amounts of approximately $0.2 $0.6 million in its determination of fair value.

⁽²⁾ Fair value of finished goods inventories included a preliminary step up value of approximately $3$3.5 million, of which approximately $0.3 million was expensed induring the three months ended March 31, 2021, and are included in "Cost of Goods Sold" in the accompanying theunaudited condensed consolidated statements of operations. The remaining $3.2 million was expensed during the year ended December 31, 2021 and as such there was no expense for the three months ended March 31, 2022.

⁽³⁾ Intangible assets consist Goodwill consists largely consists of trademarks and goodwill, allocated on a preliminary basis. The goodwill consists largely ofthe acquired workforce, expected cost synergies and economies of scale expectedresulting from the combining of the operations of Rocky and the Acquired Brands. Upon completion of the working capital true-up and fair value determinations noted above, goodwill will be assigned to the Company's wholesale and retail segments.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 of acquisition-related costs of approximately $1.0 million and $5.2 million for thethe three months ended March 31, 2021. There were 0 such transaction expenses for the three2022 months endedand March 31, 2020.2021, respectively.

5. REVENUE

Nature of Performance Obligations

Our products are distributed through three3 distinct channels, which represent our business segments: Wholesale, Retail, and Military.Contract Manufacturing. In our Wholesale business, we distribute our products through a wide range of distribution channels representing over ten thousand retail store locations in the U.S., Canada, and internationally. Our Wholesale channels vary by product line and include sporting goods stores, outdoor specialty stores, online retailers, marine stores, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail business includes direct sales of our products to consumers through our e-commerce websites, marketplaces, our Rocky outlet store, and Lehigh businesses. We alsoUnder our Contract Manufacturing segment, we sell footwear under the Rocky label to the U.S. Military.Military, and manufacture private label footwear and other footwear as contracted by a customer.

Significant Accounting Policies and Judgements

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

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

The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Our analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of March 31, 20212022. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net revenue and earnings in the period such variances become known.

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

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

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

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

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

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

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

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

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

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

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

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 1314 for segment disclosures.

6. TRADE RECEIVABLES

Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $394,000, $242,000$1,730,000, $613,000 and $262,000$394,000 at March 31, 20212022, December 31, 20202021 and March 31, 20202021, respectively. We record the allowance based on historical experience, the age of the receivables, and identification of customer accounts that are likely to prove difficult to collect due to various criteria including pending bankruptcy. However, estimates of the allowance in any future period are inherently uncertain and actual allowances may differ from these estimates. If actual or expected future allowances were significantly greater or less than established reserves, a reduction or increase to bad debt expense would be recorded in the period this determination was made. Our credit policy generally provides that trade receivables will be deemed uncollectible and written-off once we have pursued all reasonable efforts to collect on the account.

In accordance with ASC 606, the return reserve liability netted against trade receivables was approximately $1,619,000, $1,348,000$2,079,000, $1,670,000 and $838,000$1,619,000 at March 31, 20212022, December 31, 20202021 and March 31, 20202021, respectively.

7. INVENTORY

Inventories are comprised of the following:

In accordance with ASC 606, the return reserve asset included within inventories was approximately $1,134,000, $902,000 and $641,000 $744,000at March 31, 2022, December 31, 2021 and $492,000 at March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

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

OVERVIEW

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

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

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

Net sales to foreign countries represented approximately 2.5% and 1.1% of net sales for three months ended March 31, 2021 and 2020, respectively.

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, 2020.2021.

Three Months Ended March 31, 20212022 Compared to Three Months Ended March 31, 20202021

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

Wholesale sales increased as we continue to see a high demand with our Rocky, Georgia and Durango products as we have benefited from strong new collections and healthier stock positions. This has allowed us to obtain incremental shelf space with many of our key wholesale partners and experience better sell-through to the end consumer. Included in wholesaleRetail net sales for the first quarterthree months ended March 31, 2022 and 2021 were approximately $4.3 and $1.0 million, respectively, of 2021 was approximately $5.5 million in net sales attributed to the newly acquired brands ofAcquired Brands. The Original Muck Boot Company, XTRATUF, Servus, NEOS and Ranger that were tiedincrease in retail sales can be attributed to the acquisition of the performance and lifestyle footweara strong growth in our Lehigh business of Honeywell International, Inc. which was completed on March 15, 2021. Inin the first quarter of 2020, we did see some softness from the pull forward on certain deliveries ahead of price increases that went into effect on January 1, 2020 as well as decreases due to the COVID-19 crisis as several states announced closures of all non-essential businesses and implemented stay-at-home directives, which cut back planned deliveries and replenishment orders. 

Retail sales increased as we have continued to see strong growth in our direct to consumer e-commerce and marketplace businesses which we believe was attributable to both recent investments aimed at increasing traffic and conversion rates as well as an increase in online shopping due to the COVID-19 pandemic. Included in retail sales for the first quarter of 2021 was approximately $1.0 million in net sales attributed to the newly acquired brands of The Original Muck Boot Company, XTRATUF, Servus, NEOS and Ranger that were associated with the acquisition of the performance and lifestyle footwear business of Honeywell International, Inc. which was completed on March 15, 2021. We have also seen an increase in our Lehigh business2022 as businesses continuecontinued to re-open and get back to full capacity in the wake of the COVID-19 pandemic. 

MilitaryContract Manufacturing sales increasedremained flat in the first quarter of 2021 due2022 as we continued to a temporary closure offulfill our manufacturing facility in Puerto Rico in 2020 due to the COVID-19 crisis.military contracts.