Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
Rocky Brands, Inc. and Subsidiaries
 
Index to consolidated financial statements
 
Description
Page
Report of Independent Registered Public Accounting Firm
28
Consolidated Balance Sheets as of December 31, 2020 and 2019
30
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
31
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2020 and 2019
32
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
33
 
 
Note 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
34
Note 2. ACCOUNTING STANDARDS UPDATES
36
Note 3. INVENTORIES
37
Note 4. PROPERTY, PLANT, AND EQUIPMENT
37
Note 5. IDENTIFIED INTANGIBLE ASSETS
38
Note 6. OTHER ASSETS
39
Note 7. LONG-TERM DEBT
39
Note 8. LEASES
40
Note 9. BENEFIT PLAN
42
Note 10. TAXES
42
Note 11. SHAREHOLDERS' EQUITY 
45
Note 12. SHARE-BASED COMPENSATION
45
Note 13. EARNINGS PER SHARE
46
Note 14. REVENUE
47
Note 15. SUPPLEMENTAL CASH FLOW INFORMATION
49
Note 16. SEGMENT INFORMATION
49
Note 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
50
Note 18. COMMITMENTS AND CONTINGENCIES
50
Note 19. SUBSEQUENT EVENTS
49
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Shareholders and Board of Directors of
Rocky Brands, Inc. and Subsidiaries
Nelsonville, Ohio
 
Opinion on the Financial Statements
 
We have audited the accompanying consolidated balance sheets of Rocky Brands, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes and the financial statement schedule listed in the index at Item 15(a)(2), (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2021 expressed an unqualified opinion.
 
Basis for Opinion
 
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matter
 
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involve our especially challenging, subjective, or complex judgment.
 
The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
 
 
 
Indefinite-Lived Identified Intangibles
 
 
 
Description of the Matter
 
At December 31, 2020, the Company’s indefinite-lived intangible assets were approximately $30.2 million. As discussed in Note 1 to the financial statements, indefinite-lived intangible assets are tested for potential impairment annually or when conditions indicate impairment may have occurred. This test was performed in the fourth quarter of 2020.
 
Auditing management’s indefinite-lived intangible assets was challenging because there is significant judgment required in determining the methodologies and assumptions used to estimate the fair values of the Company’s trade names and trademarks. In particular, the fair value estimates were sensitive to significant judgment assumptions including future cash flows, long-term growth rates of the business, operating margins, weighted average cost of capital and other factors such as; discount rates, royalty rates, cost of capital, and market multiples. These estimates and assumptions require management’s judgment, and changes to these estimates and assumptions could materially affect the determination of fair value and/or impairment for each of the Company’s indefinite-lived intangible assets.
 
 
 
How We Addressed the Matter in Our Audit
 
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s intangible asset impairment review process. To test the estimated fair value of the Indefinite-Lived Intangible Assets, we performed audit procedures that included, among others, involving our valuation specialists in evaluating the methodologies used and significant assumptions described above, and testing the underlying data used by the Company in its analysis for completeness and accuracy. We compared the significant assumptions used by management to current industry and economic trends, recent historical performance, changes to the reporting unit’s business model and other relevant factors. We performed a sensitivity analysis over the Company’s financial projections used in the analysis.  We assessed the historical accuracy of management’s estimates and significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions. We evaluated the incorporation of the applicable assumptions into the model and tested the model’s computational accuracy.
 
 
 
We have served as the Company's auditor since 2007
 
 
/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
March 16, 2021
 
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Rocky Brands, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
  
    December 31,
    December 31,
 
    2020
    2019
 
ASSETS:
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 28,353     $ 15,518  
Trade receivables – net
    48,010       45,585  
Contract receivables
    5,170       4,746  
Other receivables
    364       366  
Inventories – net
    77,576       76,731  
Income tax receivable     -       150  
Prepaid expenses
    3,713       3,030  
Total current assets
    163,186       146,126  
LEASED ASSETS
    1,572       1,743  
PROPERTY, PLANT & EQUIPMENT – net
    33,750       27,423  
IDENTIFIED INTANGIBLES – net
    30,209       30,240  
OTHER ASSETS
    374       294  
TOTAL ASSETS
  $ 229,091     $ 205,826  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
CURRENT LIABILITIES:
               
Accounts payable
    20,090       15,776  
Contract liabilities
    5,582       4,746  
Accrued expenses:
               
Salaries and wages
    4,463       3,044  
Taxes - other
    893       967  
Accrued freight
    911       867  
Commissions
    712       608  
Accrued duty
    4,270       3,824  
Income tax payable
    1,019       -  
Other
    2,043       1,702  
Total current liabilities
    39,983       31,534  
LONG-TERM TAXES PAYABLE
    169       169  
LONG-TERM LEASE
    944       1,158  
DEFERRED INCOME TAXES
    8,271       8,108  
DEFERRED LIABILITIES
    219       201  
TOTAL LIABILITIES
    49,586       41,170  
SHAREHOLDERS' EQUITY:
               
Common stock, no par value;
               
25,000,000 shares authorized; issued and outstanding December 31, 2020 - 7,247,631 ; December 31, 2019 - 7,354,970
    65,971       67,993  
Retained earnings
    113,534       96,663  
Total shareholders' equity
    179,505       164,656  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 229,091     $ 205,826  
 
See notes to consolidated financial statements
 
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Rocky Brands, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
 
 
 
Twelve Months Ended 
 
 
 
December 31,
 
 
 
2020
 
 
2019
 
NET SALES
 
$
277,309
 
 
$
270,408
 
COST OF GOODS SOLD
 
 
172,574
 
 
 
172,723
 
GROSS MARGIN
 
 
104,735
 
 
 
97,685
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
77,565
 
 
 
75,600
 
 
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
 
 
27,170
 
 
 
22,085
 
 
 
 
 
 
 
 
 
 
OTHER (EXPENSES) INCOME
 
 
( 205
)
 
 
146
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
26,965
 
 
 
22,231
 
 
 
 
 
 
 
 
 
 
INCOME TAX EXPENSE
 
 
6,001
 
 
 
4,769
 
 
 
 
 
 
 
 
 
 
NET INCOME
 
$
20,964
 
 
$
17,462
 
 
 
 
 
 
 
 
 
 
INCOME PER SHARE
 
 
 
 
 
 
 
 
Basic
 
$
2.87
 
 
$
2.36
 
Diluted
 
$
2.86
 
 
$
2.35
 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
7,304
 
 
 
7,387
 
Diluted
 
 
7,337
 
 
 
7,439
 
 
See notes to consolidated financial statements
 
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Rocky Brands, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity
(In thousands, except per share amounts)
 
    Common Stock and
    Accumulated
                 
    Additional Paid-in Capital
    Other
            Total
 
    Shares
            Comprehensive
    Retained
    Shareholders'
 
    Outstanding
    Amount
    Income
    Earnings
    Equity
 
                                         
BALANCE - December 31, 2018
    7,368     $ 68,387     $ -     $ 83,188     $ 151,575  
                                         
TWELVE MONTHS ENDED DECEMBER 31, 2019
                                       
Net income
                          $ 17,462     $ 17,462  
Dividends paid on common stock ($ 0.54 per share) (1)
                            ( 3,987 )     ( 3,987 )
Repurchase of common stock
    ( 54 )   $ ( 1,500 )                     ( 1,500 )
Stock issued for options exercised, including tax benefits
    28       444                       444  
Stock compensation expense
    13       662                       662  
BALANCE - December 31, 2019
    7,355     $ 67,993     $ -     $ 96,663     $ 164,656  
                                         
TWELVE MONTHS ENDED DECEMBER 31, 2020
                                       
Net income
                          $ 20,964     $ 20,964  
Dividends paid on common stock ($ 0.56 per share)
                            ( 4,093 )     ( 4,093 )
Repurchase of common stock
    ( 129 )   $ ( 2,938 )                     ( 2,938 )
Stock issued for options exercised, including tax benefits
    8       136                       136  
Stock compensation expense
    14       780                       780  
BALANCE - December 31, 2020
    7,248     $ 65,971     $ -     $ 113,534     $ 179,505  
 
 
(1)
Dividend was increased from $0.12 per share to $0.14 per share in the second quarter of 2019
 
See notes to consolidated financial statements
 
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Rocky Brands, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
 
 
 
Twelve Months Ended
 
 
 
December 31,
 
 
 
2020
 
 
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
Net income
 
$
20,964
 
 
$
17,462
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
5,240
 
 
 
5,037
 
Deferred income taxes
 
 
164
 
 
 
328
 
Loss on disposal of fixed assets
 
 
28
 
 
 
108
 
Stock compensation expense
 
 
780
 
 
 
662
 
Change in assets and liabilities:
 
 
 
 
 
 
 
 
Receivables
 
 
( 2,697
)
 
 
( 4,547
)
Inventories
 
 
( 845
)
 
 
( 3,909
)
Other current assets
 
 
( 993
)
 
 
( 4,302
)
Other assets
 
 
( 80
)
 
 
( 145
)
Accounts payable
 
 
4,459
 
 
 
456
 
Accrued and other liabilities
 
 
3,402
 
 
 
6,938
 
Income taxes payable
 
 
1,019
 
 
 
-
 
Net cash provided by operating activities
 
 
31,441
 
 
 
18,088
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
Purchase of fixed assets
 
 
( 11,716
)
 
 
( 7,719
)
Proceeds from sales of fixed assets
 
 
5
 
 
 
19
 
Net cash used in investing activities
 
 
( 11,711
)
 
 
( 7,700
)
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
Proceeds from revolving credit facility
 
 
20,000
 
 
 
-
 
Repayments on revolving credit facility
 
 
( 20,000
)
 
 
-
 
Proceeds from stock options
 
 
136
 
 
 
444
 
Repurchase of common stock
 
 
( 2,938
)
 
 
( 1,500
)
Dividends paid on common stock
 
 
( 4,093
)
 
 
( 3,987
)
Net cash used in financing activities
 
 
( 6,895
)
 
 
( 5,043
)
 
 
 
 
 
 
 
 
 
INCREASE IN CASH AND CASH EQUIVALENTS
 
 
12,835
 
 
 
5,345
 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
 
 
 
 
 
BEGINNING OF PERIOD
 
 
15,518
 
 
 
10,173
 
END OF PERIOD
 
$
28,353
 
 
$
15,518
 
 
See notes to consolidated financial statements
 
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ROCKY BRANDS, INC. AND SUBSIDIARIES
 
Notes to the Consolidated Financial Statements For the Years Ended December 31, 2020 and 2019
 
 
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Rocky Brands, Inc. (“Rocky”) and its wholly-owned subsidiaries, Lifestyle Footwear, Inc. (“Lifestyle”), Five Star Enterprises Ltd. (“Five Star”), Rocky Brands Canada, Inc. (“Rocky Canada”), Rocky Brands US, LLC, Rocky Brands International, LLC, Lehigh Outfitters, LLC, and Rocky Outdoor Gear Store, LLC (collectively referred to as the “Company”). All inter-company transactions have been eliminated.
 
Business Activity - We are a leading designer, manufacturer and marketer of premium quality footwear marketed under a portfolio of well recognized brand names including Rocky, Georgia Boot, Durango, Lehigh and the licensed brand Michelin. Our brands have a long history of representing high quality, comfortable, functional and durable footwear and our products are organized around six target markets: outdoor, work, duty, commercial military, western, and military. 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.
 
Our products are distributed through three distinct business segments: Wholesale, Retail and Military. 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. and Canada. Our Wholesale channels vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores, specialty retailers and online retailers. Our Retail business includes direct sales of our products to consumers through our business to business web-platform, e-commerce websites, third -party marketplaces, and our Rocky outlet store. We also sell footwear under the Rocky label to the U.S. military.
 
Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Cash and Cash Equivalents - We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Balances may exceed federally insured limits.
 
Trade Receivables - Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $ 242,000 and $ 952,000 at December 31, 2020 and 2019 , respectively. The Company records 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 $ 1,348,000 and $ 1,050,000 at December 31, 2020 and 2019 , respectively.
 
Concentration of Credit Risk - We have significant transactions with a large number of customers. No customer represented 10% of trade receivables - net as of December 31, 2020 and 2019 . Our exposure to credit risk is impacted by the economic climate affecting the retail shoe industry. We manage this risk by performing ongoing credit evaluations of our customers, maintaining reserves for potential uncollectible accounts and utilizing credit insurance for some of our key customers.
 
Supplier and Labor Concentrations - We purchase raw materials from a number of domestic and foreign sources. We produce a portion of our shoes and boots in our Dominican Republic operation and in our Puerto Rico operation. We are not aware of any governmental or economic restrictions that would alter these current operations.
 
We source a significant portion of our footwear, apparel and gloves from manufacturers in Asia, primarily China. We are not aware of any governmental or economic restrictions that would alter our current sourcing operations.
 
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Inventories - Inventories are valued at the lower of cost, determined on a first -in, first -out (FIFO) basis, or net realizable value. Reserves are established for inventories when the net realizable value (NRV) is deemed to be less than its cost based on our periodic estimates of NRV.
 
Property, Plant and Equipment - The Company records fixed assets at historical cost and generally utilizes the straight-line method of computing depreciation for financial reporting purposes over the estimated useful lives of the assets as follows:
 
    Years
 
Buildings and improvements
  5 - 40  
Machinery and equipment
  3 - 8  
Furniture and fixtures
  3 - 8  
Lasts, dies, and patterns
  3  
 
For income tax purposes, the Company generally computes depreciation utilizing accelerated methods.
 
Identified intangible assets - Identified intangible assets consist of indefinite lived trademarks and definite lived trademarks, and patents. Indefinite lived intangible assets are not amortized.
 
If events or circumstances change, a determination is made by management, in accordance with the accounting standard for “Property, Plant and Equipment” to ascertain whether property, equipment and certain finite-lived intangibles have been impaired based on the sum of expected future undiscounted cash flows from operating activities. If the estimated net cash flows are less than the carrying amount of such assets, we will recognize an impairment loss in an amount necessary to write down the assets to fair value as determined from expected future discounted cash flows.
 
In accordance with the accounting standard for “Intangibles – Goodwill and Other”, we test intangible assets with indefinite lives for impairment annually or when conditions indicate impairment may have occurred. We perform such testing of our indefinite-lived intangible assets in the fourth quarter of each year or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. See Note 5 for more information.
 
Comprehensive Income - Comprehensive income includes changes in equity that result from transactions and economic events from non-core operations. Comprehensive income is composed of two subsets – net income and other comprehensive income. There were no material other comprehensive income items therefore no Statements of Comprehensive Income were presented.
 
Advertising - We expense advertising costs as incurred. Advertising expense was approximately $ 8,406,000 and $ 8,106,000 for 2020 and 2019 , respectively.
 
Shipping Costs - All shipping costs billed to customers have been included in net sales. All outbound shipping costs to customers have been included in operating expenses and totaled approximately $ 10,523,000 and $ 10,641,000 in 2020 and 2019 , respectively.
 
Fair Value Measurements – 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.
 
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  ●
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 revolving line of credit is categorized as Level 2.
 
Deferred Compensation Plan Assets and Liabilities
 
On December 14, 2018, our Board of Directors adopted the Rocky Brands, Inc. Executive Deferred Compensation Plan (the “ Executive Deferred Compensation Plan”), which became effective January 1, 2019. The Executive Deferred Compensation Plan is an unfunded nonqualified deferred compensation plan in which certain executives are eligible to participate. The deferrals are held in a separate trust, which has been established for the administration of the Executive Deferred Compensation Plan. The trust assets are classified as trading securities within prepaid expenses and other current assets in the accompanying consolidated balance sheets, with changes in the deferred compensation charged to operating expenses in the accompanying consolidated statements of operations. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1 ).
 
 
2. ACCOUNTING STANDARDS UPDATES
 
Recently Issued Accounting Pronouncements
 
Rocky Brands, Inc. is currently evaluating the impact of certain ASUs on its Consolidated Financial Statements or Notes to the Consolidated Financial Statements:
 
Standard
  Description
  Anticipated Adoption Period   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.
  Q1 2023 as long as we continue to qualify as a smaller reporting company
  We are evaluating the impacts of the new standard on our existing financial instruments, including trade receivables.
ASU 2019 - 12, Income Taxes (Topic 740 ): Simplifying the Accounting for Income Taxes
  This pronouncement is intended to simplify various aspects related to accounting for income taxes. ASU 2019 - 12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.
  Q1 2021
  We are evaluating the impacts of the new standard on our Consolidated Financial Statements but do not anticipate it will have a material impact.
 
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Accounting Standards Adopted in the Current Year
 
Standard 
  Description
  Effect on the financial statements
or other significant matters
ASU 2018 - 13 Fair Value Measurement (Topic 820 ): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
  This pronouncement changes the fair value measurement disclosure requirements of ASC 820. The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements.
  We adopted the new standard in Q1 2020 and the standard did not have a significant impact on our Consolidated Financial Statements.
 
 
3. INVENTORIES
 
Inventories are comprised of the following:
 
 
 
December 31,
 
 
December 31,
 
($ in thousands)
 
2020
 
 
2019
 
Raw materials
 
$
12,875
 
 
$
12,466
 
Work-in-process
 
 
1,128
 
 
 
856
 
Finished goods
 
 
63,573
 
 
 
63,409
 
Total
 
$
77,576
 
 
$
76,731
 
 
In accordance with ASC 606, the returns reserve asset included within inventories was approximately $ 744,000 at December 31, 2020 . The returns reserve was $ 613,000 as of December 31, 2019 .
 
 
4. PROPERTY, PLANT, AND EQUIPMENT
 
Property, plant, and equipment is comprised of the following:
 
    December 31,
    December 31,
 
($ in thousands)
  2020
    2019
 
Land
    956       956  
Buildings
    27,596       20,810  
Machinery and equipment
    44,472       41,727  
Furniture and fixtures
    2,109       2,577  
Lasts, dies and patterns
    10,833       11,596  
Construction work-in-progress
    5,849       6,265  
Total
    91,815       83,931  
Less - accumulated depreciation
    ( 58,065 )     ( 56,508 )
                 
Net Fixed Assets
    33,750       27,423  
 
We incurred approximately $ 5.2 million and $ 5.0 million in depreciation expense for 2020 and 2019 , respectively.
 
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5. IDENTIFIED INTANGIBLE ASSETS
 
A schedule of identified intangible assets is as follows:
    Gross
    Accumulated
    Carrying
 
($ in thousands)
  Amount
    Amortization
    Amount
 
December 31, 2020
                       
Trademarks
                       
Wholesale
  $ 27,192       -     $ 27,192  
Retail
    2,900       -       2,900  
Patents
    895     $ 778       117  
Total Intangibles
  $ 30,987     $ 778     $ 30,209  
 
    Gross
    Accumulated
    Carrying
 
    Amount
    Amortization
    Amount
 
December 31, 2019
                       
Trademarks
                       
Wholesale
  $ 27,192       -     $ 27,192  
Retail
    2,900       -       2,900  
Patents
    895     $ 747       148  
Total Intangibles
  $ 30,987     $ 747     $ 30,240  
 
The weighted average remaining life for our patents is  3.4 years.
 
A schedule of approximate actual and expected amortization expense related to finite-lived intangible assets is as follows:
 
    Amortization
 
($ in thousands)
  Expense
 
2019
  $ 33  
2020
    31  
2021
    26  
2022
    22  
2023
    20  
2024
    17  
2025
    12  
2026+
    20  
 
Intangible assets, including trademarks and patents are reviewed for impairment annually, and more frequently, if necessary. We perform such testing of indefinite-lived intangible assets in the fourth quarter of each year or as events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. Fair value of other indefinite-lived intangible assets is determined using the relief from royalty method.
 
In assessing whether indefinite-lived intangible assets are impaired, we must make certain estimates and assumptions regarding future cash flows, long-term growth rates of our business, operating margins, weighted average cost of capital and other factors such as; discount rates, royalty rates, cost of capital, and market multiples to determine the fair value of our assets. These estimates and assumptions require management’s judgment, and changes to these estimates and assumptions could materially affect the determination of fair value and/or impairment for each of our indefinite-lived intangible assets. Future events could cause us to conclude that indications of intangible asset impairment exist. Impairment may result from, among other things, deterioration in the performance of our business, adverse market conditions, adverse changes in applicable laws and regulations, competition, or the sale or disposition of a reporting segment. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
 
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2020 and 2019 Impairment Testing
 
We evaluate our finite and indefinite lived trademarks under the terms and provisions of the accounting standards for “Intangibles - Goodwill and Other”; and “Property, Plant and Equipment.” These pronouncements require that we compare the fair value of an intangible asset with its carrying amount. The results of our 2020 and 2019 indefinite-lived intangible impairment testing indicated that all reporting unit intangible asset fair values exceed their respective carrying values.
 
 
6. OTHER ASSETS
 
Other assets consist of the following:
 
 
 
December 31,
 
 
December 31,
 
($ in thousands)
 
2020
 
 
2019
 
Deferred financing costs, net
 
$
109
 
 
$
143
 
Other
 
 
265
 
 
 
151
 
Total
 
$
374
 
 
$
294
 
 
In February 2019, we deferred financing costs of approximately $ 174,000 related to the new credit agreement with Huntington National Bank that will be amortized over the life of the loan.
 
 
 
7.     LONG-TERM DEBT
 
On February 13, 2019 we entered into a Revolving Credit, Guaranty, and Security Agreement (“Credit Agreement”) with the Huntington National Bank (“Huntington”) as administrative agent. The Credit Agreement provides for a new senior secured asset-based revolving credit facility up to a principal amount of $ 75 million, which includes a sublimit for the issuance of letters of credit up to $ 7.5 million (the “Credit Facility”). The Credit Facility may be increased up to an additional $ 25 million at the Borrowers’ request and the Lenders’ option, subject to customary conditions. The Credit Agreement matures on February 13, 2024. This Credit Agreement replaced our previous financing agreement with PNC Bank (“PNC”).
 
                Applicable
 
                Spread Rates for
 
        Applicable Spread Rates
    Domestic Rate
 
    Average Excess Revolver Availability
  for Eurodollar Rate
    Revolving
 
Revolver Pricing Level
  for Previous Quarter
  Revolving Advances
    Advances
 
I
  $25,000,000+
    1.00 %     0.50 %
II
  $17,500,000 to < 25,000,000
    1.25 %     0.50 %
III
  $10,000,000 to < 17,500,000
    1.50 %     2.50 %
IV
  $< 10,000,000
    1.75 %     0.00 %
 
The total amount available under our new Credit Facility is subject to a borrowing base calculation based on various percentages of accounts receivable and inventory. As of December 31, 2020 , we had total capacity of $ 70.8 million.
 
We had no outstanding borrowings against the Credit Facility for fiscal years ending December 31, 2020 or December 31, 2019 .
 
Credit Facility Covenants
 
Our Credit Facility contains restrictive covenants which require us to maintain a fixed charge coverage ratio. These restrictive covenants are only in effect upon a triggering event taking place (as defined in the agreement). Our Credit Facility contains restrictions on the amount of dividends that may be paid. During the twelve months ended December 31, 2020 , there were no triggering events and the covenant was not in effect for our Credit Facility.
 
 
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On March 15, 2021, we entered into a senior secured asset-based credit facility with Bank of America, N.A. ("Bank of America"), as agent, for the lenders party thereto and a senior secured term loan facility with TCW Asset Management Company LLC ("TCW"), as agent, for the lenders party thereto, which collectively replaced our existing Credit Agreement with Huntington. Refer to Note 19  for additional information regarding these new credit agreements with Bank of America and TCW.
 
 
8. LEASES
 
In February 2016, the FASB issued ASU No. 2016 - 02, Leases (“ASU 2016 - 02” ), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. ASU 2016 - 02 was subsequently amended by ASU No. 2018 - 01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018 - 10, Codification Improvements to Topic 842, Leases; and ASU No. 2018 - 11, Targeted Improvements. For additional detail regarding these updates to Topic 842, please see below. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the Audited Consolidated Statements of Operations.
 
The new standard was effective for us on January 1, 2019, with early adoption permitted. We adopted the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either ( 1 ) its effective date or ( 2 ) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We used the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
 
The new standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight with respect to determining the lease term (i.e., considering the actual outcome and updated expectations of lease renewals, termination option and purchase options). We also did not elect the use of the practical expedient pertaining to land easements because we do not have any such easements.
 
The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for our leases.
 
This standard had a material effect on our Audited Consolidated Balance Sheets. Specifically, the most significant effects relate to ( 1 ) the recognition of new ROU assets and lease liabilities on our balance sheet for our factories in the Dominican Republic and Puerto Rico and various equipment leases, all currently accounted for as operating leases; and ( 2 ) providing significant new disclosures about our leasing activities. Adoption of the standard did not have a material impact on our Audited Consolidated Statements of Cash Flows. We do not expect a significant change in our leasing activities as a result of this standard. Many of our leases contain renewal options, most of which are not included in the measurement of the right-of-use asset as they are not considered reasonably certain of exercise (i.e. we do not currently have a significant economic incentive to exercise these options).
 
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The operating ROU asset and operating lease liabilities as of December 31, 2020 and December 31, 2019 are as follows:
 
    December 31,
    December 31,
   
($ in thousands)
  2020
    2019
  Financial Statement Line Item
Assets:
                 
Operating ROU Assets
  $ 1,572     $ 1,743   Leased assets
                   
Liabilities:
                 
Current
                 
Operating
  $ 629     $ 586   Other accrued expenses
Noncurrent
                 
Operating
    944       1,158   Long-term lease
Total leased liabilities
  $ 1,573     $ 1,744    
 
Maturity of our operating lease liabilities are as follows:
 
    Operating
 
($ in thousands)
  Leases
 
2021
  $ 675  
2022
    505  
2023
    348  
2024
    107  
2025
    17  
Total lease payments
    1,652  
Less: Interest
    79  
Present value of lease liabilities
  $ 1,573  
 
For the twelve months ended December 31, 2020 and December 31, 2019 the weighted average remaining lease term and discount rate were as follows:
 
    December 31,
    December 31,
 
    2020
    2019
 
Weighted-average remaining lease term (years)
           
Operating leases
  2.0     2.2  
             
Weighted-average discount rate
           
Operating leases
  3.7 %     4.6 %  
 
For the twelve months ended December 31, 2020 and December 31, 2019 the supplemental cash flow information is as follows:
 
    December 31,
    December 31,
 
($ in thousands)
  2020
    2019
 
Cash paid for amounts included in the measurement of lease liabilities
               
Operating cash flows from operating leases
  $ 711     $ 909  
                 
Right-of-use assets obtained in exchange for lease obligations
               
Operating leases
  $ 481     $ 1,419  
 
The breakdown of rent expense for our operating leases for the twelve months ended December 31, 2020 and December 31, 2019 are as follows:
 
    Twelve Months Ended
   
    December 31,
    December 31,
   
($ in thousands)
  2020
    2019
  Financial Statement Line Item
Operating lease expenses - Manufacturing & Sourcing (1)
  $ 678     $ 636   Cost of goods sold
Operating lease expenses (1)
    433       367   Operating expenses
Total lease expenses
  $ 1,111     $ 1,003    
 
( 1 ) Includes short-term lease expenses of approximately $ 103,000  and $ 126,000  for the twelve months ended December 31, 2020  and  December 31, 2019 , respectively.
 
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9.    BENEFIT PLAN
 
We sponsor a 401 (k) savings plan for eligible employees. We provide a contribution of 3 % of applicable salary to the plan for all employees with greater than six months of service. Additionally, we match eligible employee contributions at a rate of 0.25 %, per one percent of applicable salary contributed to the plan by the employee. This matching contribution will be made by us up to a maximum of 1 % of the employee’s applicable salary for all qualified employees.
 
Our approximate contributions to the 401 (k) Plan were as follows:
 
($ in thousands)
 
2020
 
 
2019
 
401k plan sponsor contributions
 
$
961
 
 
$
955
 
 
Deferred Compensation Plans
 
The Executive Deferred Compensation Plan, which became effective January 1, 2019, is an unfunded non-qualified deferred compensation plan in which certain executives are eligible to participate.
 
Under the Executive Deferred Compensation Plan, participants may elect to defer up to 75 % of their base compensation and up to 100 % of their bonuses, commissions, and other compensation. The deferred amounts are paid in accordance with each participant’s elections made on or before December 31 of the prior year. In addition to elective deferrals, the Executive Deferred Compensation Plan permits the Company to make discretionary contributions to eligible participants, provided that any participant who is employed on the last day of a plan year will receive a Company contribution equal to no less than 3 % of the participant’s base compensation, bonus earned, and non-equity incentive plan compensation in the plan year. Company contributions will vest in accordance with the vesting schedule determined by the Committee, except in the event of the participant’s death, disability or retirement, in which case the contributions will vest 100% upon such event. Participants may elect to receive payment in a lump sum cash payment or, in the event of the participant’s retirement, in annual installments for a period of up to ten years. In the event of a participant’s termination of employment, deferred amounts will generally be paid within 60 days following the later of the date (i) of such termination or (ii) the participant attains age 60, except where such termination is due to such participant’s death, in which case deferred amounts will be paid to such participant’s beneficiary within 30 days of confirmation of the participant’s death.
 
The deferrals are held in a separate trust, which has been established by the Company to administer the Executive Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The assets held by the trust were approximately $ 150,000 and $ 40,000 as of  December 31, 2020 and December 31, 2019 , respectively, and are classified as trading securities within prepaid expenses and other current assets in the accompanying consolidated balance sheets, with changes in the deferred compensation charged to operating expenses in the accompanying consolidated statements of operations.
 
During 2020, we entered into a second deferred compensation plan ("the Dominican Plan"), which became effective August 18, 2020 and is a non-qualified deferred compensation plan for certain key employees at our Dominican Republic manufacturing facility.
 
Under the Dominican Plan, key employees will receive a set dollar amount, as defined in the agreement, at the later of five years following the effective date of the agreement or upon the employee attaining the age of 65. Payments are due within 30 days of the employee's retirement. If the employee terminates their employment, for any reason, prior to their retirement and five years after the effective date of the agreement, the employee is not eligible to receive a payout. The funds are accrued based on service and are not held in an investment or trust account. The total assets held under the Dominican Plan were approximately $ 150,000 as of  December 31, 2020 .
 
 
10. TAXES
 
The Company accounts for income taxes in accordance with the accounting standard for “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred income taxes have been provided for the temporary differences between the financial reporting and the income tax basis of the Company’s assets and liabilities by applying enacted statutory tax rates applicable to future years to the basis differences.
 
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A breakdown of our income tax expense (benefit) for the years ended December  31 is as follows:
 
($ in thousands)
  2020
    2019
 
Federal:
               
Current
  $ 4,942     $ 3,706  
Deferred
    67       336  
Total Federal
    5,009       4,042  
                 
State & local:
               
Current
    793       497  
Deferred
    97       ( 8 )
Total State & local
    890       489  
                 
Foreign
               
Current
    102       238  
Deferred
    -       -  
Total Foreign
    102       238  
                 
Total
  $ 6,001     $ 4,769  
 
A reconciliation of recorded Federal income tax expense to the expected expense computed by applying the applicable Federal statutory rate for all periods to income before income taxes follows:
 
    Years Ended December 31,
 
($ in thousands)
  2020
    2019
 
Expected expense at statutory rate (21% in 2020 and 2019)
  $ 5,662     $ 4,682  
                 
Increase (decrease) in income taxes resulting from:
               
Exempt income from Dominican Republic operations due to tax holiday
    ( 942 )     ( 821 )
GILTI tax
    438       410  
State and local income taxes
    766       369  
Foreign Tax Credit/Expense
    ( 30 )     ( 278 )
Meals and entertainment
    27       48  
Nondeductible penalties
    20       -  
Provision to return filing adjustments and other
    60       359  
Total
  $ 6,001     $ 4,769  
 
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Deferred income taxes recorded in the Consolidated Balance Sheets at December 31, 2020 and 2019 consist of the following:
 
($ in thousands)
  2020
    2019
 
Deferred tax assets:
               
Asset reserves and accrued expenses
  $ 301     $ 526  
Inventories
    528       471  
State and local income taxes
    169       192  
Pension and deferred compensation
    18       27  
Net operating losses
    298       388  
Lease asset     269       -  
Total deferred tax assets
    1,583       1,604  
Valuation allowances
    ( 298 )     ( 372 )
Total deferred tax assets
    1,285       1,232  
                 
Deferred tax liabilities:
               
Fixed assets
    1,571       1,519  
Intangible assets
    6,587       6,756  
Other assets
    278       231  
Tollgate tax on Lifestyle earnings
    228       228  
State and local income taxes
    623       606  
Lease Liability     269       -  
Total deferred tax liabilities
    9,556       9,340  
                 
Net deferred tax liability
  $ 8,271     $ 8,108  
 
The valuation allowance is related to certain state and local income tax net operating loss carry forwards.
 
We have provided Puerto Rico tollgate taxes on approximately $ 3,684,000 of accumulated undistributed earnings of Lifestyle prior to the fiscal year ended June  30, 1994, that would be payable if such earnings were repatriated to the United States. In 2001, we received abatement for Puerto Rico tollgate taxes on all earnings subsequent to June  30, 1994, thus no other provision for tollgate tax has been made on earnings after that date. If we repatriate the earnings from Lifestyle, $ 227,563 of tollgate tax would be due.
 
We are subject to tax examinations in various taxing jurisdictions. The earliest exam years open for examination are as follows:
 
    Earliest Exam Year
 
Taxing Authority Jurisdiction:
     
U.S. Federal
  2017
 
Various U.S. States
  2016
 
Puerto Rico (U.S. Territory)
  2015
 
Canada
  2015
 
 
Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. As of December 31, 2020 , no such expenses were recognized during the year. 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.
 
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11. SHAREHOLDERS' EQUITY
 
Repurchase of Common Stock
 
A summary of our authorized share repurchase plans is as follows:
 
($ in thousands, except share and per share amounts)
  2020
    2019
 
Maximum authorized share repurchase amount (1)
  $ 7,500     $ 7,500  
Date of plan's authorization by the Board
  February 2020
    February 2019
 
Funding source
  Working capital
    Working capital
 
Number of shares repurchased under the plan (shares)
    129,095       54,249  
Amount paid for shares repurchased
  $ 2,938     $ 1,500  
Weighted average price paid per share
  $ 22.76     $ 27.65  
Remaining amount of shares authorized to be purchased under the plan (in dollars)
  $ 4,562     $ 6,000  
 
  ( 1 )
Common shares can be purchased in the open market or privately negotiated transactions over the next twelve months from the date of plan authorization.
 
On March 8, 2021, we announced a new $ 7,500,000 share repurchase program that will terminate on March 4, 2022 . This program is replacing the 2020 share repurchase program that expired on February 27, 2021 .
 
Preferred Shares
 
The Company has authorized  250,000 shares of voting preferred stock with no par value. No shares are issued or outstanding. Also, the Company has authorized  250,000 shares of non-voting preferred stock with no par value. Of these,  125,000 shares have been designated Series A non-voting convertible preferred stock with a stated value of $ .06 per share, of which no shares are issued or outstanding at December 31, 2020 and 2019 , respectively.
 
 
12. SHARE-BASED COMPENSATION
 
On May  7, 2014, our shareholders approved the 2014 Omnibus Incentive Plan (the “2014 Plan”). The 2014 Plan includes 500,000 of our common shares that may be granted under various types of awards as described in the 2014 Plan. As of December 31, 2020 , we were authorized to issue 94,560  shares under the 2014 Plan.
 
Stock options
 
The following table presents the weighted average assumptions used in the option-pricing model at the grant date for options granted during the years ended December  31:
 
    2020
    2019
 
Assumptions:
               
Risk-free interest rate
    1.61 %     2.84 %
Expected dividend yield
    2.00 %     1.81 %
Expected volatility of Rocky's common stock
    42.27 %     42.05 %
Expected option term (years)
    6.3       6.3  
Weighted-average grant date fair value per share
  $ 9.36     $ 8.77  
 
For the years ended December 31, 2020 and 2019 , we recognized share-based compensation expense and the corresponding tax benefit as follows:
 
($ in thousands)
  2020
    2019
 
Share-based compensation expense
  $ 780     $ 662  
Tax benefit
    58       109  
 
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The following summarizes stock option activity for the year ended December 31, 2020 :
 
                    Weighted
         
            Weighted
    Average
         
            Average
    Remaining
    Aggregate
 
($ amounts are per share)
  Shares
    Exercise Price
    Actual Term
    Intrinsic Value
 
Options outstanding at January 1, 2020
    192,000     $ 19.46                  
Issued
    78,000       29.43                  
Exercised
    ( 8,800 )     15.39                  
Forfeited or expired
    ( 3,800 )     19.96                  
Options outstanding at December 31, 2020
    257,400     $ 22.61       5.6     $ 1,510,216  
Expected to vest
    150,500     $ 24.91       6.9     $ 580,937  
Exercisable at December 31, 2020
    106,900     $ 19.38       3.8     $ 929,279  
 
In the first quarter of 2020 , our officers and certain employees were granted  42,000 options. The plans generally provided for grants with the exercise price equal to fair value on the date of grant, graduated vesting periods of up to 5 years, and lives not exceeding 10 years. For the years ended 2020 and 2019 , cash received for the exercise of stock options was approximately $ 136,000 and $ 444,000 , respectively.
 
In the first quarter of 2020 , Board of Director members were granted  36,000 stock options that vest over a year and will expire in 5 years.
 
Restricted stock units
 
The following table summarizes the status of the Company’s restricted stock units and activity as of December 31, 2020 :
 
    Restricted Stock Units
 
            Weighted-Average Grant Date
 
($ amounts are per share)
  Quantity
    Fair Value Per Share
 
Nonvested at January 1, 2020
    2,500     $ 11.35  
Granted
    -       -  
Vested
    ( 2,500 )     11.35  
Forfeited
    -       -  
Nonvested at December 31, 2020
    -     $ -  
 
As of December 31, 2020 , the total unrecognized compensation cost related to non-vested stock options and restricted stock units was $ 190,939 with a weighted-average expense recognition period of 3.7 years.
 
During the years ended December 31, 2020 and 2019 , we issued  10,456 and  7,925 shares of common stock to members of our Board of Directors, respectively.
 
 
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.
 
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A reconciliation of the shares used in the basic and diluted income per common share computation for the years ended December  31, as follows:
 
    Twelve Months Ended
 
    December 31,
 
(shares in thousands)
  2020
    2019
 
                 
Basic - weighted average shares outstanding
    7,304       7,387  
Dilutive restricted share units
    -       4  
Dilutive stock options
    33       48  
Diluted - weighted average shares outstanding
    7,337       7,439  
Anti-dilutive securities
    149       73  
 
 
1 4 .   REVENUE
 
Nature of Performance Obligations
 
Our products are distributed through three distinct channels, which represent our business segments: Wholesale, Retail, and Military. 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. Our Wholesale channels vary by product line and include sporting goods stores, outdoor specialty stores, online retailers, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail business includes direct sales of our products to consumers through our e-commerce websites, our Rocky outlet store, and Lehigh business. We also sell footwear under the Rocky label to the U.S. 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 as of December 31, 2020 . 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 less than six months there is not a significant financing component in our contracts with customers.
 
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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 see Note 1 and Note 3  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. This treatment is consistent with how we accounted for these costs in prior periods.
 
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.
 
    December 31,
    December 31,
 
($ in thousands)
  2020
    2019
 
Contract liabilities
  $ 5,582     $ 4,746  
 
Significant changes in the contract liabilities balance during the period are as follows:
 
($ in thousands)
  Contract liabilities
 
Balance, December 31, 2019
    4,746  
Non-cancelable contracts with customers entered into during the period
    8,060  
Revenue recognized related to non-cancelable contracts with customers during the period
    ( 7,224 )
Balance, December 31, 2020
    5,582  
 
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 16 for segment disclosures.
 
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15. SUPPLEMENTAL CASH FLOW INFORMATION
 
Supplemental cash flow for the years ended December  31, as follows:
 
($ in thousands)
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
 
Interest paid
 
$
151
 
 
$
120
 
 
 
 
 
 
 
 
 
 
Federal, state, and local income taxes paid, net
 
$
4,669
 
 
$
5,327
 
 
 
 
 
 
 
 
 
 
Change in contract receivables, net
 
$
( 424
)
 
$
( 2,144
)
 
 
 
 
 
 
 
 
 
Change in contract liabilities, net
 
$
836
 
 
$
2,144
 
 
 
 
 
 
 
 
 
 
Property, plant, and equipment purchases in accounts payable
 
$
2,316
 
 
$
2,460
 
 
 
16. SEGMENT INFORMATION
 
Reportable Segments - We operate our business through three reportable segments: Wholesale, Retail and Military.
 
Wholesale. In our Wholesale segment, our products are offered in over  10,000 retail locations representing a wide range of distribution channels in the U.S. and Canada. These distribution channels vary by product line and target market and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores, specialty retailers and online retailers.
 
Retail. In our Retail segment, we market directly to consumers through our Lehigh business-to-business including direct sales and through our CustomFit websites, consumer e-commerce websites, third -party marketplaces, and our Rocky outlet store. Through our outlet store, we generally sell first quality or discontinued products in addition to a limited amount of factory damaged goods, which typically carry lower gross margins.
 
Military. While we are focused on continuing to build our Wholesale and Retail business, we also actively bid, from time to time, on footwear contracts with the U.S. military. Our sales under such contracts are dependent on us winning the bids for these contracts. We are currently fulfilling several multiyear contracts for the U.S. military.
 
The following is a summary of segment results for the Wholesale, Retail, and Military segments for the years ended December  31,
 
    Twelve Months Ended
 
    December 31,
 
($ in thousands)
  2020
    2019
 
NET SALES:
               
Wholesale
  $ 185,554     $ 179,519  
Retail
    72,877       64,824  
Military
    18,878       26,065  
Total Net Sales
  $ 277,309     $ 270,408  
                 
GROSS MARGIN:
               
Wholesale
  $ 66,336     $ 61,133  
Retail
    34,283       28,941  
Military
    4,116       7,611  
Total Gross Margin
  $ 104,735     $ 97,685  
 
Segment asset information is not prepared or used to assess segment performance.
 
Product Group Information - The following is supplemental information on net sales by product group for the years ended December  31:
 
($ in thousands)
  2020
    % of Sales
    2019
    % of Sales
 
Work footwear
  $ 126,268       45.5 %   $ 123,021       45.5 %
Western footwear
    61,127       22.0       52,976       19.6  
Duty and commercial military footwear
    41,005       14.8       42,583       15.7  
Outdoor footwear
    21,074       7.6       18,494       6.8  
Military footwear
    18,878       6.8       26,064       9.6  
Apparel
    3,382       1.2       2,782       1.0  
Other
    5,575       2.0       4,488       1.7  
    $ 277,309       100.0 %   $ 270,408       100.0 %
 
Net sales to foreign countries represented approximately  0.8 % of net sales in 2020 and  1.4 % of net sales in 2019 .  
 
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17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
 
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2020 and 2019 :
 
    2020
 
    1st Quarter
    2nd Quarter
    3rd Quarter
    4th Quarter
    Total Year
 
                                         
Net sales
  $ 55,720     $ 56,186     $ 77,785     $ 87,618     $ 277,309  
Gross margin
  $ 19,320     $ 19,462     $ 29,832     $ 36,121     $ 104,735  
Net income
  $ 1,188     $ 2,442     $ 7,613     $ 9,721     $ 20,964  
Dividends paid
  $ 1,030     $ 1,023     $ 1,023     $ 1,017     $ 4,093  
                                         
Net income per common share:
                                       
Basic
  $ 0.16     $ 0.33     $ 1.04     $ 1.34     $ 2.87  
Diluted
  $ 0.16     $ 0.33     $ 1.04     $ 1.33     $ 2.86  
 
    2019
 
    1st Quarter
    2nd Quarter
    3rd Quarter
    4th Quarter
    Total Year
 
                                         
Net sales
  $ 65,929     $ 61,959     $ 67,179     $ 75,341     $ 270,408  
Gross margin
  $ 22,978     $ 21,441     $ 25,014     $ 28,252     $ 97,685  
Net income
  $ 3,605     $ 3,156     $ 5,616     $ 5,085     $ 17,462  
Dividends paid
  $ 887     $ 1,035     $ 1,036     $ 1,029     $ 3,987  
                                         
Net income per common share:
                                       
Basic
  $ 0.49     $ 0.43     $ 0.76     $ 0.68     $ 2.36  
Diluted
  $ 0.48     $ 0.42     $ 0.75     $ 0.70     $ 2.35  
 
 
18 . COMMITMENTS AND CONTINGENCIES
 
We are, from time to time, a party to litigation which arises in the normal course of business. Although the ultimate resolution of pending proceedings cannot be determined, in the opinion of management, the resolution of such proceedings in the aggregate will not have a material adverse effect on our financial position, results of operations, or liquidity.
 
 
19. SUBSEQUENT EVENTS
 
Subsequent to year-end, we closed on the acquisition of the performance and lifestyle footwear business of Honeywell International, Inc., which expanded our brand portfolio to include The Original Muck Boot Company, XTRATUF, Servus, NEOS and Ranger Brands. We acquired 100 % of the voting interests of the performance and lifestyle footwear business of Honeywell International, Inc. with this acquisition. The total purchase price for these brands was $ 230 million, funded through cash on hand and two new credit facilities.
 
With the acquisition of The Original Muck Boot Company along with the XTRATUF, Servus, NEOS and Ranger brands, we will greatly enhance our powerful portfolio of footwear brands and significantly increase our sales and profitability. We are acquiring a well-run business with a corporate culture and a customer base similar to ours, which provides meaningful growth opportunities within our existing 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 new brands to wholesale customers and accelerate direct-to-consumer penetration.
 
In connection with this acquisition, we incurred approximately $ 705,000 of transaction related expenses for year ended December 31, 2020, which are included in operating expenses in the consolidated statements of operations. From the period January 1, 2021 to March 15, 2021, we incurred approximately $4.5 million of transaction related costs.
 
We also entered into employment agreements with seven key employees from the performance and lifestyle footwear business of Honeywell International, Inc., 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 the us.
 
Certain financial information and related disclosures pertaining to the acquisition completed on March 15, 2021 are not available as of March 16, 2021, the date of issuance of this filing because the closing statements have not yet been completed by the Seller.
 
On March 15, 2021, we entered into a senior secured term loan facility (“Term Facility”) with TCW, as agent, for the lenders party thereto in the amount of $ 130 million. The Term Facility provides for quarterly payments of principal and bears interest of LIBOR plus 7.00 % through June 30, 2021. After this date, interest will be 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 3.25, the effective interest rate will be LIBOR plus 7.00% (or at our option, Prime Rate plus 6.00 %). If our total leverage ratio is less than 3.25, the effective interest rate will be LIBOR plus 6.50 % (or at our option, Prime Rate plus 5.50 %). The term facility also has a LIBOR floor rate of 1.00 %.
 
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 entered into a senior secured asset-based credit facility (“ABL Facility”) with 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 to an additional $ 50 million at the Borrowers’ request and the Lenders’ option, subject to customary conditions. As of March 16, 2021, the total amount available on the ABL Facility was $ 150 million, with $ 80 million funded at the close of our recent acquisition. The ABL Facility includes a separate first in, last out (FILO) tranche, which allows the Company to borrow at higher advance rates on eligible accounts receivables and inventory balances.
 
The ABL Facility is collateralized by first -lien on accounts receivable, inventory, cash and related assets and a second -lien on substantially all other assets. 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:
 
    Average Availability as a
                               
Revolver Pricing Level (1)
  Percentage of Commitments
  Base Rate
    LIBOR Rate
    Base Rate for FILO
    LIBOR Rate for FILO
 
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 %
 
( 1 ) Until June 30, 2021, Tier II shall apply
 
Credit Facility Covenants
 
The Term Facility contains restrictive covenants which requires us to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio. The fixed charge coverage ratio is calculated as (a) EBITDA minus the sum of (i) Capital Expenditures (except those financed with Borrowed Money other than under the Financing Agreements) and (ii) cash income taxes paid, to (b) Fixed Charges, with Fixed Charges being the sum of ( x ) interest expense (other than payment-in-kind), (y) scheduled principal payments made on Borrowed Money, and (c) Distributions paid in cash by the Company.
 
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 agreement).
 
Both the Term Facility and the ABL Facility contain restrictions on the amount of dividends that may be paid.
 
Deferred Financing Fees
 
In connection with the Term Facility and ABL Facility, we had to pay certain fees that will be capitalized and amortized over the life of each respective loan. In addition, the ABL Facility requires us to pay an annual collateral management in the amount of $ 75,000 due on each anniversary of the ABL Facility issuance date, until it matures.
 
 
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.