ROCKY BRANDS, INC. (Form: 10-Q, Received: 08/03/2010 16:21:21)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2010

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

For the transition period from _____________ to

Commission file number: 1-34382

ROCKY BRANDS, INC.

(Exact name of registrant as specified in its charter)

Ohio		31-1364046
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

39 E. Canal Street, Nelsonville, Ohio 45764

(Address of Principal Executive Offices, Including Zip Code)

(740) 753-1951

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark 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 such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of July 29, 2010, 7,406,787 shares of Rocky Brands, Inc. common stock, no par value, were outstanding.

FORM 10-Q

ROCKY BRANDS, INC.

TABLE OF CONTENTS

		PAGE
		NUMBER

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets June 30, 2010 and 2009 (Unaudited), and December 31, 2009	3

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (Unaudited)	5

	Notes to the Interim Unaudited Condensed Consolidated Financial Statements for the Three-Month and Six-Month Periods Ended June 30, 2010 and 2009	6 – 15

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16 – 22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults Upon Senior Securities	24

Item 4.	Reserved	24

Item 5.	Other Information	24

Item 6.	Exhibits	24

SIGNATURE		25

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

ROCKY BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2010			December 31, 2009			June 30, 2009
	(Unaudited)						(Unaudited)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents	$	3,166,143		$	1,797,093		$	2,865,461
Trade receivables – net		40,782,470			45,831,558			44,454,476
Other receivables		1,182,335			1,476,643			1,924,195
Inventories		61,811,667			55,420,467			79,286,477
Deferred income taxes		1,475,695			1,475,695			2,167,966
Prepaid and refundable income taxes		325,493			-			2,413,523
Prepaid expenses		1,876,888			1,309,138			1,983,480
Total current assets		110,620,691			107,310,594			135,095,578
FIXED ASSETS – net		22,436,535			22,669,876			23,777,945
IDENTIFIED INTANGIBLES		30,512,822			30,516,910			30,769,248
OTHER ASSETS		2,112,475			2,892,683			3,609,296
TOTAL ASSETS	$	165,682,523		$	163,390,063		$	193,252,067

LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable	$	13,415,750		$	6,781,534		$	8,504,099
Current maturities – long term debt		528,434			511,870			495,976
Accrued expenses:
Salaries and wages		1,080,435			343,345			830,733
Co-op advertising		259,779			460,190			522,670
Interest		181,502			471,091			459,483
Income taxes payable		-			26,242			-
Taxes – other		535,101			440,223			502,032
Commissions		493,086			487,340			339,379
Current portion of pension funding		700,000			700,000			-
Other		2,216,962			2,764,783			2,351,937
Total current liabilities		19,411,049			12,986,618			14,006,309
LONG TERM DEBT – less current maturities		36,370,863			55,079,776			87,023,125
DEFERRED INCOME TAXES		9,071,639			9,071,639			9,438,921
DEFERRED PENSION LIABILITY		3,687,075			3,589,875			3,860,920
DEFERRED LIABILITIES		187,973			184,481			195,264
TOTAL LIABILITIES		68,728,599			80,912,389			114,524,539
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
25,000,000 shares authorized; issued and outstanding June 30, 2010 - 7,406,787; December 31, 2009 - 5,576,465 and June 30, 2009 - 5,547,215		68,931,586			54,598,104			54,384,172
Accumulated other comprehensive loss		(3,037,242	)		(3,217,144	)		(3,062,448	)
Retained earnings		31,059,580			31,096,714			27,405,804
Total shareholders' equity		96,953,924			82,477,674			78,727,528
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	165,682,523		$	163,390,063		$	193,252,067

See notes to the interim unaudited condensed consolidated financial statements.

ROCKY BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
NET SALES	$	55,223,054		$	51,188,615		$	111,302,040		$	101,253,176

COST OF GOODS SOLD		36,123,970			33,470,943			73,446,107			63,443,016

GROSS MARGIN		19,099,084			17,717,672			37,855,933			37,810,160

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		16,163,354			18,119,173			34,188,041			38,065,301

INCOME (LOSS) FROM OPERATIONS		2,935,730			(401,501	)		3,667,892			(255,141	)

OTHER INCOME AND (EXPENSES):
Interest expense, net		(2,121,552	)		(1,936,490	)		(3,766,143	)		(3,710,420	)
Other – net		3,432			158,023			40,117			33,457
Total other - net		(2,118,120	)		(1,778,467	)		(3,726,026	)		(3,676,963	)

INCOME (LOSS) BEFORE INCOME TAXES		817,610			(2,179,968	)		(58,134	)		(3,932,104	)

INCOME TAX EXPENSE (BENEFIT)		294,000			(785,000	)		(21,000	)		(1,416,000	)

NET INCOME (LOSS)	$	523,610		$	(1,394,968	)	$	(37,134	)	$	(2,516,104	)

NET INCOME (LOSS) PER SHARE
Basic	$	0.08		$	(0.25	)	$	(0.01	)	$	(0.45	)
Diluted	$	0.08		$	(0.25	)	$	(0.01	)	$	(0.45	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic		6,535,812			5,547,215			6,072,045			5,546,880
Diluted		6,557,289			5,547,215			6,072,045			5,546,880

See notes to the interim unaudited condensed consolidated financial statements.

ROCKY BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(37,134	)	$	(2,516,104	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,808,696			3,175,594
Deferred pension and other		280,594			255,479
Loss on disposal of fixed assets		15,100			8,468
Stock compensation expense		129,900			134,108
Change in assets and liabilities
Receivables		5,343,396			15,149,057
Inventories		(6,391,200	)		(8,984,303	)
Other current assets		(893,243	)		(2,866,364	)
Other assets		930,208			355,705
Accounts payable		6,635,696			(1,392,390	)
Accrued and other liabilities		(226,349	)		102,875
Net cash provided by operating activities		8,595,664			3,422,125

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(2,589,880	)		(3,114,629	)
Investment in trademarks and patents		(19,327	)		(39,610	)
Proceeds from sale of fixed assets		21,360			19,323
Net cash used in investing activities		(2,587,847	)		(3,134,916	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility		126,138,795			117,213,842
Repayments of revolving credit facility		(115,579,265	)		(117,197,776	)
Debt financing costs		(150,000	)		(1,512,500	)
Repayments of long-term debt		(29,251,879	)		(236,627	)
Issuance of common stock, net of issuance costs		14,123,612			-
Proceeds from exercise of stock options		79,970			-
Net cash used in financing activities		(4,638,767	)		(1,733,061	)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,369,050			(1,445,852	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		1,797,093			4,311,313

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,166,143		$	2,865,461

See notes to the interim unaudited condensed consolidated financial statements.

ROCKY BRANDS, INC.

AND SUBSIDIARIES

NOTES TO THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2010 AND 2009

1.	INTERIM FINANCIAL REPORTING

In the opinion of management, the accompanying interim 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 interim condensed consolidated financial statements are considered to be of a normal and recurring nature. The results of the operations for the three-month and six-month periods ended June 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the whole year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

The components of total comprehensive income (loss) are shown below:

	(Unaudited)					(Unaudited)
	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010		2009			2010			2009

Net income (loss)	$	523,610	$	(1,394,968	)	$	(37,134	)	$	(2,516,104	)
Other comprehensive income:
Amortization of unrecognized transition obligation, service cost and net loss		89,951		79,883			179,902			159,767
Total comprehensive income (loss)	$	613,561	$	(1,315,085	)	$	142,768		$	(2,356,337	)

2.	TRADE RECEIVABLES

Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $951,000, $1,178,000 and $1,793,000 at June 30, 2010, December 31, 2009 and June 30, 2009, respectively. The allowance for uncollectible accounts is calculated based on the relative age and size of trade receivable balances.

3.	INVENTORIES

Inventories are comprised of the following:

	June 30,			December 31,			June 30,
	2010			2009			2009
	(Unaudited)						(Unaudited)
Raw materials	$	10,987,932		$	5,438,055		$	9,560,424
Work-in-process		581,874			497,914			673,914
Finished goods		50,288,419			49,522,542			69,104,239
Reserve for obsolescence or lower of cost or market		(46,558	)		(38,044	)		(52,100	)
Total	$	61,811,667		$	55,420,467		$	79,286,477

4.	SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is as follows:

	(Unaudited)
	Six Months Ended
	June 30,
	2010		2009

Interest	$	3,282,283	$	3,345,363

Federal, state and local income taxes, net of refunds	$	331,181	$	928,666

Fixed asset purchases in accounts payable	$	150,054	$	139,283

5.	PER SHARE INFORMATION

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. There are no adjustments to net income necessary in the calculation of basic and diluted earnings per share.

A reconciliation of the shares used in the basic and diluted income per common share computation for the three-month and six-month periods ended June 30, 2010 and 2009 is as follows:

	(Unaudited)				(Unaudited)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Weighted average shares outstanding		6,535,812		5,547,215		6,072,045		5,546,880

Dilutive stock options		21,477		-		-		-

Dilutive weighted average shares outstanding		6,557,289		5,547,215		6,072,045		5,546,880

Anti-dilutive stock options/weighted average shares outstanding		201,896		403,534		217,251		403,534

6.	RECENT FINANCIAL ACCOUNTING STANDARDS

Recently adopted accounting standards

In June 2009, the FASB modified the accounting standard related to transfers and servicing. This standard, as modified, intends to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This standard, as modified, must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This standard, as modified, must be applied to transfers occurring on or after the effective date. The adoption of the transfers and servicing standard, as modified, did not have a material effect on our consolidated financial statements.

In June 2009, the FASB modified the accounting standard related to consolidation. This standard, as modified, intends to improve financial reporting by enterprises involved with variable interest entities. This standard, as modified, addresses the effects on certain provisions relating to the Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in the accounting standard related to transfers and servicing, and constituent concerns about the application of certain key provisions of this standard, including those in which the accounting and disclosures under the standard do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This standard, as modified, is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of the consolidation standard, as modified, did not have a material effect on our consolidated financial statements.

In January 2010, the FASB issued “Fair Value Measurements and Disclosures - Improving Disclosures about Fair Value Measurements.” This statement requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in FASB Statement “Fair Value Measurement”. The amendments are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this pronouncement did not have a material effect on our consolidated financial statements.

Accounting standards not yet adopted

In September 2009, the Emerging Issues Task Force (“EITF”) issued “ Revenue Arrangements with Multiple Deliverables .” This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate the consideration to each unit of accounting. This issue eliminates the use of the residual value method for determining allocation of arrangement consideration and allows the use of an entity's best estimate to determine the selling price if vendor specific objective evidence and third-party evidence cannot be determined. This issue also requires additional disclosure to provide both qualitative and quantitative information regarding the significant judgments made in applying this issue. In addition, for each reporting period in the initial year of adoption, this issue requires disclosure of the amount of revenue recognized subject to the measurement requirements of this issue and the amount of revenue that would have been recognized if the related transactions were subject to the measurement requirements of Issue 00-21. This issue is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. Early adoption is permitted. We are currently assessing the potential impact of the adoption of these rules on our consolidated financial statement disclosures.

7.	INCOME TAXES

We file income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. We are no longer subject to U.S. Federal tax examinations for years before 2005. State jurisdictions that remain subject to examination range from 2004 to 2008. Foreign jurisdiction tax returns that remain subject to examination range from 2002 to 2008 for Canada and from 2004 to 2008 for Puerto Rico. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of June 30, 2010, accrued interest or penalties were not material, and no such expenses were recognized during the quarter. We provided for income taxes at an estimated effective tax rate of 36% for the three-month and six-month periods ended June 30, 2010 and 2009.

8.	INTANGIBLE ASSETS

A schedule of intangible assets is as follows:

	Gross		Accumulated		Carrying
June 30, 2010 (unaudited)	Amount		Amortization		Amount
Trademarks:
Wholesale	$	27,243,578	$	-	$	27,243,578
Retail		2,900,000		-		2,900,000
Patents		2,408,326		2,039,083		369,243
Customer relationships		1,000,000		1,000,000		-
Total Identified Intangibles	$	33,551,904	$	3,039,083	$	30,512,821

	Gross		Accumulated		Carrying
December 31, 2009	Amount		Amortization		Amount
Trademarks:
Wholesale	$	27,243,578	$	-	$	27,243,578
Retail		2,900,000		-		2,900,000
Patents		2,388,999		2,015,667		373,332
Customer relationships		1,000,000		1,000,000		-
Total Identified Intangibles	$	33,532,577	$	3,015,667	$	30,516,910

	Gross		Accumulated		Carrying
June 30, 2009 (unaudited)	Amount		Amortization		Amount
Trademarks:
Wholesale	$	27,243,578	$	-	$	27,243,578
Retail		2,900,000		-		2,900,000
Patents		2,349,152		1,823,482		525,670
Customer relationships		1,000,000		900,000		100,000
Total Identified Intangibles	$	33,492,730	$	2,723,482	$	30,769,248

Amortization expense for intangible assets was $11,764 and $145,570 for the three months ended June 30, 2010 and 2009, respectively and $23,416 and $290,841 for the six months ended June 30, 2010 and 2009, respectively. The weighted average amortization period for patents is 15 years.

Estimate of Aggregate Amortization Expense for the years ending December 31, :

2011	$	45,755
2012		45,755
2013		45,755
2014		45,755
2015		45,755

9.	CAPITAL STOCK

On May 11, 2004, our shareholders approved the 2004 Stock Incentive Plan. The Plan includes 750,000 of our common shares that may be granted for stock options and restricted stock awards. As of June 30, 2010, we were authorized to issue approximately 360,031 shares under our existing plans.

The Plan generally provides for grants with the exercise price equal to fair value on the date of grant, graduated vesting periods of up to five years, and lives not exceeding ten years. The following summarizes stock option transactions from January 1, 2010 through June 30, 2010:

	Shares			Weighted Average Exercise Price

Options outstanding at January 1, 2010		335,250		$	18.25
Issued		-			-
Exercised		(14,250	)	$	5.61
Forfeited		(69,000	)	$	18.81
Options outstanding at June 30, 2010		252,000		$	18.81

Options exercisable at:
January 1, 2010		335,250		$	18.25
June 30, 2010		252,000		$	18.81

Unvested options at January 1, 2010		-
Granted		-
Vested		-
Forfeited		-
Unvested options at June 30, 2010		-

During the six-month period ended June 30, 2010, we issued 16,072 shares of common stock to members of our Board of Directors. We recorded compensation expense of $122,500, which was the fair market value of the shares on the grant date. The shares are fully vested but cannot be sold for one year.

In June 2009, our Board of Directors adopted a Rights Agreement, which provides for one preferred share purchase right to be associated with each share of our outstanding common stock. Shareholders exercising these rights would become entitled to purchase shares of Series B Junior Participating Cumulative Preferred Stock. The rights are exercisable after the time when a person or group of persons without the approval of the Board of Directors acquire beneficial ownership of 20 percent or more of our common stock or announce the initiation of a tender or exchange offer which if successful would cause such person or group to beneficially own 20 percent or more of our common stock. Such exercise would ultimately entitle the holders of the rights to purchase at the exercise price, shares of common stock of the surviving corporation or purchaser, respectively, with an aggregate market value equal to two times the exercise price. The person or groups effecting such 20 percent acquisition or undertaking such tender offer would not be entitled to exercise any rights. These rights expire during July 2012.

In May 2010, the Company completed a public offering of 1.8 million shares of common stock at a price of $8.40 per share. We received net proceeds from the offering of $14.1 million after deducting $0.9 million in underwriting discounts and $0.1 million in expenses. The proceeds were used to prepay amounts due under term loans with Laminar Direct Capital L.P. and Whitebox Hedged High Yield Partners, L.P. After the prepayment, principal under the term loans total $26 million in the aggregate. The term loans have an interest rate of 11.5% payable semi-annually over the five year term of the notes. Principal repayment is due at maturity in May 2012. The transaction is expected to generate approximately $1.6 million in interest savings annually. In connection with this transaction, $0.2 million of prepayment fees and $0.2 million of non-cash charges related to deferred interest expense were incurred and have been reflected as a component of interest expense.

10.	RETIREMENT PLANS

We sponsor a noncontributory defined benefit pension plan covering non-union workers in our Ohio and Puerto Rico operations. Benefits under the non-union plan are based upon years of service and highest compensation levels as defined. On December 31, 2005, we froze the noncontributory defined benefit pension plan for all non-U.S. territorial employees.

Net pension cost of the Company’s plan is as follows:

	(Unaudited)						(Unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Service cost	$	19,977		$	28,843		$	39,954		$	57,686
Interest		161,677			151,454			323,354			302,908
Expected return on assets		(133,054	)		(121,613	)		(266,108	)		(243,227	)
Amortization of unrecognized net gain or loss		71,853			61,786			143,706			123,572
Amortization of unrecognized transition obligation		-			-			-			-
Amortization of unrecognized prior service cost		18,098			18,098			36,196			36,196
Net pension cost	$	138,551		$	138,568		$	277,102		$	277,135

Our unrecognized benefit obligations existing at the date of transition for the non-union plan are being amortized over 21 years. Actuarial assumptions used in the accounting for the plan were as follows: