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  (PCAOB ID: 358 )
27
Consolidated Balance Sheets as of December 31, 2021 and 2020
29
Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020
30
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2021 and 2020
31
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020
32
 
 
Note 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
33
Note 2. ACCOUNTING STANDARDS UPDATES
35
Note 3. BUSINESS ACQUISITION
36
Note 4. INVENTORIES
37
Note 5. PROPERTY, PLANT, AND EQUIPMENT
37
Note 6. IDENTIFIED INTANGIBLE ASSET
38
Note 7. OTHER ASSETS
39
Note 8. LONG-TERM DEBT
39
Note 9. LEASES
40
Note 10. BENEFIT PLAN
41
Note 11. TAXES
41
Note 12. SHAREHOLDERS' EQUITY 
43
Note 13. SHARE-BASED COMPENSATION
43
Note 14. EARNINGS PER SHARE
45
Note 15. REVENUE
45
Note 16. SUPPLEMENTAL CASH FLOW INFORMATION
47
Note 17. SEGMENT INFORMATION
47
Note 18. COMMITMENTS AND CONTINGENCIES
48
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and Shareholders 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, 2021 and 2020, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes and the financial statement schedule listed in the index at Item 15(a)(2), (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
 
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, 2021, 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 15, 2022 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 Matters
 
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
 
 
 
Valuation of Indefinite-Lived Identified Intangibles in Conjunction with Annual Impairment Testing
 
 
 
Description of the Matter
 
At December 31, 2021, the Company’s indefinite-lived intangible assets were approximately $132.4 million, which included $30.1 million of existing trade names and trademarks and $51.7 million of trademarks and $50.6 million of goodwill that were acquired through the acquisition of the performance and lifestyle footwear brands of Honeywell International Inc. (Boston Group) on March 15, 2021. 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 2021.
 
Auditing management’s indefinite-lived intangible assets, including goodwill, was challenging because there is significant judgment required in determining the methodologies and assumptions used to estimate the fair values of the Company’s goodwill by reporting unit, and trade names and trademarks by brand. In particular, the fair value estimates were sensitive to significant judgment assumptions including future cash flows, long-term growth rates of the business, financial projections, 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, with the assistance of an independent valuation specialist, in its analysis for completeness and accuracy. We compared the significant assumptions used by management to current industry and economic trends, recent historical performance, changes to the reporting unit’s business model and other relevant factors. We evaluated the reasonableness of the Company’s financial projections used in the analysis.  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 and performed a sensitivity analysis on certain key assumptions.
 
 
 
 
 
 
Valuation of Customer Relationships, Trade Names and Goodwill Acquired through the Boston Group Acquisition
Description of the Matter
 
On March 15, 2021, the Company completed the acquisition of the Boston Group for an aggregate purchase price of approximately $212 million, net of cash acquired, based on working capital and other adjustments. The acquisition was accounted for under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of approximately $149.2 million, which consisted of customer relationships, trade names and goodwill of approximately $46.9 million, $51.7 million and $50.6 million, respectively. The Company, with the assistance of an independent valuation specialist, estimated the fair values of the customer relationships and trade names using the multi-period excess earnings method and the relief from royalty method, respectively. The multi-period excess earnings method determines the fair value as the estimation of revenues and cash flows derived from the intangible assets reduced by portions of the cash flow attributed to supporting assets. The determination of fair value of the customer relationships involves significant estimates and assumptions related to annual attrition and the selected discount rate. The relief from royalty method determines the fair value based on the measurement of license payments that has been saved as a consequence of having the ownership of the asset. The determination of fair value of the trade names involves significant estimates and assumptions related to the selection of the royalty and discount rates. The Company, with the assistance of an independent valuation specialist, estimated the allocation of goodwill to reporting units using the discounted cash flow method, which determines fair value based on significant estimates and assumptions of future cash flows.
 
Auditing the valuation of the acquired intangible assets was challenging because there is significant judgment required in determining the methodologies and assumptions used to estimate the fair values of the Company’s acquired customer relationships, trademarks and goodwill. In particular, the fair value estimates were sensitive to significant judgment assumptions including annual attrition, financial projections, and royalty and discount rates. 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 acquired 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 valuation methodology. To test the estimated fair value of the acquired intangible assets, we performed audit procedures that included, among others, involving our valuation specialists in evaluating the methodologies used and significant assumptions described above, and testing the underlying data used by the Company in its analysis for completeness and accuracy. We compared the significant assumptions used by management to current industry and economic trends, recent historical performance, changes to the reporting unit’s business model and other relevant factors.  We evaluated the reasonableness of the Company’s financial projections used in the analysis.  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 15, 2022
 
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Rocky Brands, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
  
    December 31,
    December 31,
 
    2021
    2020
 
ASSETS:
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 5,909     $ 28,353  
Trade receivables – net
    126,807       48,010  
Contract receivables
    1,062       5,170  
Other receivables
    242       364  
Inventories – net
    232,464       77,576  
Income tax receivable
    4,294       -  
Prepaid expenses
    4,507       3,713  
Total current assets
    375,285       163,186  
LEASED ASSETS
    11,428       1,572  
PROPERTY, PLANT & EQUIPMENT – net
    59,989       33,750  
GOODWILL
    50,641       -  
IDENTIFIED INTANGIBLES – net
    126,315       30,209  
OTHER ASSETS
    917       374  
TOTAL ASSETS
  $ 624,575     $ 229,091  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY:
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 114,632     $ 20,090  
Contract liabilities
    1,062       5,582  
Current Portion of Long-Term Debt
    3,250       -  
Accrued expenses:
               
Salaries and wages
    3,668       4,463  
Taxes - other
    849       893  
Accrued freight
    1,798       911  
Commissions
    2,447       712  
Accrued duty
    5,469       4,270  
Accrued interest
    2,133       -  
Income tax payable
    -       1,019  
Other
    4,828       2,043  
Total current liabilities
    140,136       39,983  
LONG-TERM DEBT
    266,794       -  
LONG-TERM TAXES PAYABLE
    169       169  
LONG-TERM LEASE
    8,809       944  
DEFERRED INCOME TAXES
    10,293       8,271  
DEFERRED LIABILITIES
    519       219  
TOTAL LIABILITIES
    426,720       49,586  
SHAREHOLDERS' EQUITY:
               
Common stock, no par value;
               
25,000,000 shares authorized; issued and outstanding December 31, 2021 - 7,302,199 ; December 31, 2020 - 7,247,631
    68,061       65,971  
Retained earnings
    129,794       113,534  
Total shareholders' equity
    197,855       179,505  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 624,575     $ 229,091  
 
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)
 
    Year Ended
 
    December 31,
 
    2021
    2020
 
NET SALES
  $ 514,227     $ 277,309  
COST OF GOODS SOLD
    319,691       172,574  
GROSS MARGIN
    194,536       104,735  
                 
OPERATING EXPENSES
    158,564       77,565  
                 
INCOME FROM OPERATIONS
    35,972       27,170  
                 
OTHER EXPENSES
    ( 10,603 )     ( 205 )
                 
INCOME BEFORE INCOME TAX EXPENSE
    25,369       26,965  
                 
INCOME TAX EXPENSE
    4,810       6,001  
                 
NET INCOME
  $ 20,559     $ 20,964  
                 
INCOME PER SHARE
               
Basic
  $ 2.82     $ 2.87  
Diluted
  $ 2.77     $ 2.86  
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
               
                 
Basic
    7,283       7,304  
Diluted
    7,409       7,337  
 
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, 2019
    7,355     $ 67,993       -     $ 96,663     $ 164,656  
                                         
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  
                                         
Net income
                          $ 20,559     $ 20,559  
Dividends paid on common stock ( $0.59 per share)(1)
                            ( 4,299 )     ( 4,299 )
Repurchase of common stock
    -       -                       -  
Stock issued for options exercised, including tax benefits
    47     $ 825               -       825  
Stock compensation expense
    7       1,265               -       1,265  
BALANCE - December 31, 2021
    7,302     $ 68,061     $ -     $ 129,794     $ 197,855  
 
(1)  Quarterly dividend was increased from $0.14 per share to $0.155 per share in the third quarter of 2021.
 
See notes to consolidated financial statements
 
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Rocky Brands, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
 
    Year Ended
 
    December 31,
 
    2021
    2020
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 20,559     $ 20,964  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Depreciation and amortization
    11,342       5,240  
Amortization of debt issuance costs
    675       -  
Deferred income taxes
    2,022       164  
Loss on disposal of fixed assets
    41       28  
Stock compensation expense
    1,265       780  
Change in assets and liabilities:
               
Receivables
    ( 41,943 )     ( 2,273 )
Contract receivables
    4,108       ( 424 )
Inventories
    ( 114,226 )     ( 845 )
Other current assets
    ( 9,791 )     ( 993 )
Other assets
    ( 152 )     ( 80 )
Accounts payable
    78,626       4,459  
Accrued and other liabilities
    2,432       2,566  
Income taxes
    ( 5,313 )     1,019  
Contract liabilities
    ( 4,520 )     836  
Net cash (used in) provided by operating activities
    ( 54,875 )     31,441  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of fixed assets
    ( 21,055 )     ( 11,716 )
Acquisition of business, net of cash acquired
    ( 212,408 )     -  
Proceeds from sales of fixed assets
    -       5  
Net cash used in investing activities
    ( 233,463 )     ( 11,711 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from revolving credit facility
    180,072       20,000  
Repayments on revolving credit facility
    ( 34,000 )     ( 20,000 )
Proceeds from term loan
    130,000       -  
Repayments on term loan
    ( 2,438 )     -  
Debt issuance costs
    ( 4,266 )     -  
Proceeds from stock options
    825       136  
Repurchase of common stock
    -       ( 2,938 )
Dividends paid on common stock
    ( 4,299 )     ( 4,093 )
Net cash provided by (used in) financing activities
    265,894       ( 6,895 )
                 
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    ( 22,444 )     12,835  
                 
CASH AND CASH EQUIVALENTS:
               
BEGINNING OF PERIOD
    28,353       15,518  
END OF PERIOD
  $ 5,909     $ 28,353  
 
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, 2021 and 2020
 
 
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, US Footwear Holdings, LLC, Rocky Brands (Australia) Pty Ltd., Mexico FW Holdings, S. de R.L. de C.V., Rocky Footwear (Chuzhou) Co. Ltd., UK Footwear Holdings Limited 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, Muck, XTRATUF, Servus, NEOS, Ranger and the licensed brand Michelin. Our brands have a long history of representing high quality, comfortable, functional and durable footwear and our products are organized around six target markets: 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.
 
We report our segment information in accordance with prov isions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 280,   Segment Reporting . We evaluate business performance based upon several metrics, using segment profit as the primary financial measure. During the three months ended June 30, 2021, we changed our reporting segments when compared to our Annual Report on Form 10 -K for the fiscal year ended December 31, 2020, to change our Military reporting segment to "Contract Manufacturing" and to change the composition thereof to continue to include sales to the U.S. Military ("Military Contracts") and to include sales under manufacturing contracts for private label or other specific footwear products sold through our Wholesale and Retail channels ("Private Contracts"). Previously, only Military Contracts were included in this segment. The Private Contract sales have characteristics more like Military Contracts, with similar sales, delivery processes and gross margins. This segment reporting change reflects a corresponding change in how our Chief Executive Officer and our Chief Financial Officer, our chief operating decision makers ("CODMs"), review financial information in order to allocate resources and assess performance. Previously, Private Contracts were included in the Wholesale segment, but with the Acquisition, our Wholesale segment has substantially increased in size and our CODMs determined that the change in segment reporting was appropriate at that time to mirror how they evaluate and manage our business.
 
There has been no change in our total consolidated financial condition, results of operations, or segment information previously reported, as the result of the change in our reportable segments, as we had no Private Contract sales during the quarterly period ended March 31, 2021 or the fiscal year ended December 31, 2020.  Each of our reporting segments continue to employ consistent accounting policies. As a result of this assessment, we now report our activities in the following three reporting segments: Wholesale, Retail and Contract Manufacturing. Wholesale includes sales of footwear and accessories to several classifications of retailers, including sporting goods stores, outdoor specialty stores, online retailers, marine stores, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail business includes direct sales of our products to consumers through our e-commerce websites, marketplaces, our Rocky outlet store, and Lehigh businesses. Contract Manufacturing includes sales to the U.S. Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer. See  Note 17  – Segment Information for further information.
 
Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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. We also hold cash outside of the U.S. that is not federally insured. 
 
Trade Receivables - Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $ 613,000 and $ 242,000 at December 31, 2021 and 2020 , respectively. We record the allowance based on historical experience, the age of the receivables, and identification of customer accounts that are likely to prove difficult to collect due to various criteria including pending bankruptcy. However, estimates of the allowance in any future period are inherently uncertain and actual allowances may differ from these estimates. If actual or expected future allowances were significantly greater or less than established reserves, a reduction or increase to bad debt expense would be recorded in the period this determination was made. Our credit policy generally provides that trade receivables will be deemed uncollectible and written-off once we have pursued all reasonable efforts to collect on the account. In accordance with ASC 606, the return reserve liability netted against trade receivables was $ 1,670,000 and $ 1,348,000 at December 31, 2021 and 2020 , respectively.
 
Concentration of Credit Risk - We have significant transactions with a large number of customers. No customer represented 10% of trade receivables - net as of December 31, 2021 and 2020 . 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, Puerto Rico, Illinois and China operations. We are not aware of any governmental or economic restrictions that would alter these current operations.
 
We source a significant portion of our footwear, apparel and gloves from manufacturers in Asia, and primarily in China, Vietnam and Indonesia. We 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 - We record fixed assets at historical cost and generally utilizes the straight-line method of computing depreciation for financial reporting purposes over the estimated useful lives of the assets as follows:
 
    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, we generally compute depreciation utilizing accelerated methods.
 
Goodwill -  Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill arose from the Acquisition and largely consists of the workforce acquired, expected cost synergies and economies of scale resulting from the business combination. The amount of our Goodwill that is deductible for tax purposes is $ 49.4 million.
 
GAAP has established guidance for reporting information about a company's operating segments, including disclosures related to a company's products and services, geographic areas and major customers. We monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments, as well as our reporting units. As previously stated, our operations represent three reporting segments, Wholesale, Retail and Contract Manufacturing. Goodwill impairment analysis will be performed for our Wholesale and Retail reporting segments. There is no goodwill allocated to our Contract Manufacturing segment. As of December 31, 2021, Goodwill allocated to our Wholesale and Retail reporting segments was $ 25.8  million and $ 24.8  million, respectively.
 
Goodwill is subject to impairment tests at least annually. We review the carrying amounts of goodwill by reporting unit at least annually, or when indicators of impairment are present, to determine if goodwill may be impaired. We include assumptions about the expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying value of these assets is not recoverable, based on the discounted cash flow analysis, management compares the fair value of the assets to the carrying value. Goodwill is considered impaired if the recorded value exceeds the fair value.
 
We may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. We would not be required to quantitatively determine the fair value of goodwill unless we determine, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projection and operating plans. We perform our annual testing for goodwill at the beginning of the fourth quarter of each fiscal year, starting with our fiscal year ended December 31, 2021.
 
Identified intangible assets - Identified intangible assets consist of indefinite lived trademarks and definite lived trademarks, patents and customer relationships. 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 6  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 $ 17,911,000 and  $ 8,406,000 for 2021 and 2020 , respectively. The increase in advertising expense was attributed to the Acquisition.
 
Shipping Costs - All shipping costs billed to customers have been included in net sales. All outbound shipping costs to customers have been included in operating expenses and totaled approximately  $ 25,139,000 and  $ 10,523,000 in 2021 and 2020 , respectively. The increase in shipping costs was due to the Acquisition.
 
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 (salespersons’ 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 facilities 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 and liabilities are classified as trading securities within prepaid expenses and other current assets and deferred liabilities, respectively 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 ).
 
Effective August 18, 2020, we entered into a second deferred compensation plan (the "Dominican Plan"). The Dominican Plan is an unfunded nonqualified deferred compensation plan for key employees at our Dominican Republic manufacturing facility. The funds are held in a separate trust, which has been established for the administration of the Dominican Plan. The trust liabilities are classified as trading securities within deferred liabilities 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
  We are evaluating the impacts of the new standard on our existing financial instruments, including trade receivables.
 
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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.
         
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.   We adopted the new standard in Q1 2021 and the standard did not have a significant impact on our Consolidated Financial Statements.
 
 
3. BUSINESS ACQUISITION
 
The Performance and Lifestyle Footwear Business of Honeywell International Inc.
 
On January 24, 2021, we entered into a Purchase Agreement (the "Purchase Agreement") with certain subsidiaries of Honeywell International Inc. (collectively, "Honeywell"), to purchase Honeywell's performance and lifestyle footwear business, including brand names, trademarks, assets and liabilities associated with Honeywell's performance and lifestyle footwear business (the "Acquisition") for an aggregate purchase price of $ 212  million.
 
On March 15, 2021 ( the "Acquisition Date"), pursuant to the terms and conditions set forth in the Purchase Agreement, we completed the Acquisition for an aggregate preliminary closing price of approximately $ 207 million, net of cash acquired, based on preliminary working capital and other adjustments. Upon a final agreement of net working capital as of the Acquisition Date, we owed Honeywell an additional $ 5.4 million. The Acquisition was funded through cash on hand and borrowings under two new credit facilities. See  Note 8  for information regarding the two credit facilities.
 
The Acquisition expanded our brand portfolio to include Muck, XTRATUF, Servus, NEOS and Ranger brands (the "Acquired Brands"). We acquired 100 % of the voting interests of certain subsidiaries and additional assets comprising the performance and lifestyle footwear business of Honeywell with the Acquisition.
 
Through the Acquisition, we have greatly enhanced our powerful portfolio of footwear brands and significantly increased our sales and profitability. We acquired a well-run business with a corporate culture and a customer base similar to ours, which provides meaningful growth opportunities within our existing product categories as well as an entry into new market segments. Its innovative and authentic product collections complement our existing offering with minimal overlap, which we believe will allow us to strengthen our wholesale relationships and serve a wider consumer audience. At the same time, we plan to leverage our existing advanced fulfillment capabilities to improve distribution of the Acquired Brands to wholesale customers and accelerate direct-to-consumer penetration.
 
In connection with the Acquisition, we also entered into employment agreements with seven key employees from the performance and lifestyle footwear business of Honeywell, pursuant to which, among other things, we agreed to grant 25,000 non-qualified stock options in the aggregate to the seven employees as an inducement for continuing their employment with us.
 
We acquired multiple leases through the Acquisition including the lease of our Rock Island and China manufacturing facilities and an office building lease in Westwood, Massachusetts.
 
The Acquisition contributed net sales of $ 179.0  million to our consolidated operating results for the year ended December 31, 2021. The Acquisition contributed net income of $ 16.5  million to our consolidated operating results for the year ended December 31, 2021.
 
Acquisition-related costs
 
Costs incurred to complete and integrate the Acquisition are expensed as incurred and included in "operating expenses" in the accompanying consolidated statements of operations. During the year ended December 31, 2021 and 2020, there were approximately $ 11.9  million and $ 0.7  million, respectively, of acquisition-related costs recognized. These costs represent investment banking fees, legal and professional fees, transaction fees, integration costs, amortization and consulting fees associated with the Acquisition.
 
Preliminary Purchase Price Allocation
 
The Acquisition has been accounted for under the business combinations accounting guidance. As a result, we have applied acquisition accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the Acquisition Date. The aggregate closing price noted above was allocated to the major categories of assets acquired and liabilities assumed based on their fair values at the Acquisition Date using primarily Level 2 and Level 3 inputs. These Level 2 and Level 3 valuation inputs include an estimate of future cash flows and discount rates. Additionally, estimated fair values are based, in part, upon outside valuation for certain assets, including specifically identified intangible assets.
 
The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill is not finalized and is subject to adjustment until the final valuation related to assets acquired and liabilities assumed is obtained (up to one year from the Acquisition Date).
 
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The following table summarizes the consideration paid and estimated fair value of the assets acquired and liabilities assumed as of the Acquisition Date.
 
($ in thousands)
  Fair Value
 
Cash
  $ 2,655  
Accounts receivable (1)
    36,734  
Inventories (2)
    40,662  
Property, plant and equipment
    16,243  
Goodwill (3)
    50,641  
Intangible assets
    98,620  
Other assets
    1,250  
Accounts payable
    ( 18,108 )
Accrued expenses
    ( 13,634 )
Total identifiable net assets
    215,063  
Cash acquired
    ( 2,655 )
Total cash paid, net of cash acquired
  $ 212,408  
 
( 1 )  The recorded amount for accounts receivable considers expected uncollectible amounts of approximately $ 0.6  million in its determination of fair value.
 
( 2 )  Fair value of finished goods inventories included step up value of approximately $ 3.5 million, all of which was expensed during the  twelve months ended December 31, 2021, and is included in "Cost of Goods Sold" in the accompanying consolidated statement of operations.
 
( 3 )  Goodwill largely consists of the acquired workforce, expected costs synergies and economies of scale resulting from the Acquisition.
 
Unaudited Pro Forma Financial Information
 
The following unaudited pro forma results of operations assume that the Acquisition occurred at the beginning of the periods presented. These unaudited pro forma results are presented for information purposes only and are not necessarily indicative of what the results of operations would have been if the Acquisition had occurred at the beginning of the periods presented, nor are they indicative of the future results of operations. The pro forma results presented below are adjusted for the removal the step of value of finished goods inventory associated with the Acquisition of approximately $ 3.5 million. The pro forma results presented below are also adjusted for the removal of acquisition-related costs of approximately $ 11.9  million and $ 0.7 million for the  twelve months ended December 31, 2021 and 2020, respectively. 
 
    Twelve Months Ended December 31,
 
($ in thousands, except per share amount)
  2021
    2020
 
Net sales
  $ 552,905     $ 482,562  
Net income
  $ 40,248     $ 41,726  
Diluted earnings per share
  $ 5.43     $ 5.69  
 
 
4. INVENTORIES
 
Inventories are comprised of the following:
 
    December 31,
    December 31,
 
($ in thousands)
  2021
    2020
 
Raw materials
  $ 20,933     $ 12,875  
Work-in-process
    1,316       1,128  
Finished goods
    210,215       63,573  
Total
  $ 232,464     $ 77,576  
 
In accordance with ASC 606, the returns reserve asset included within inventories was approximately $ 0.9  million and $ 0.7  million at December 31, 2021  and  December 31, 2020 , respectively.
 
 
5. PROPERTY, PLANT, AND EQUIPMENT
 
Property, plant, and equipment is comprised of the following:
 
    December 31,
    December 31,
 
($ in thousands)
  2021
    2020
 
Land
  $ 972     $ 956  
Buildings
    36,456       27,596  
Machinery and equipment
    57,304       44,472  
Furniture and fixtures
    2,548       2,109  
Lasts, dies and patterns
    12,360       10,833  
Construction work-in-progress
    14,452       5,849  
Total
    124,092       91,815  
Less - accumulated depreciation
    ( 64,103 )     ( 58,065 )
                 
Net Fixed Assets
  $ 59,989     $ 33,750  
 
We incurred approximately $ 8.8 million and $ 5.2 million in depreciation expense for 2021 and 2020 , respectively.
 
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6. IDENTIFIED INTANGIBLE ASSETS
 
A schedule of identified intangible assets is as follows:
    Gross
    Accumulated
    Carrying
 
($ in thousands)
  Amount
    Amortization
    Amount
 
December 31, 2021
                       
Trademarks
                       
Wholesale (1)
  $ 72,579       -     $ 72,579  
Retail (2)
    9,220       -       9,220  
Patents
    895     $ 804       91  
Customer relationships (3)
    46,900       2,475       44,425  
Total Intangibles
  $ 129,594     $ 3,279     $ 126,315  
 
    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  
 
( 1 )  $ 45.4 million of the total resulted from our Acquisition that occurred on March 15, 2021.
 
( 2 )  $ 6.3 million of the total resulted from our Acquisition that occurred on March 15, 2021.
 
( 3 )  Resulted from our Acquisition that occurred on March 15, 2021.
 
The weighted average remaining life for our patents is  3.1 years.
 
A schedule of approximate actual and expected amortization expense related to finite-lived intangible assets is as follows:
 
    Amortization
 
($ in thousands)
  Expense
 
2020
  $ 31  
2021
    2,501  
2022
    3,149  
2023
    3,147  
2024
    3,143  
2025
    3,139  
2026
    3,136  
2027+
    28,802  
 
Indefinite lived intangible assets, such as trademarks are reviewed for impairment testing annually, 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. Definite lived intangible assets, such as patents and customer relationships are only reviewed for impairment if a triggering event has occurred to indicate that its fair value of the asset is below its carrying value.
 
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.
 
2021 and 2020 Impairment Testing
 
We evaluate our finite and indefinite lived intangible assets 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 2021 and 2020  finite and indefinite-lived intangible impairment testing indicated that all reporting unit intangible asset fair values exceed their respective carrying values.
 
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7. OTHER ASSETS
 
Other assets consist of the following:
 
    December 31,
    December 31,
 
($ in thousands)
  2021
    2020
 
Long-term deposits
  $ 606     $ 109  
NQDC plan assets
    311       150  
Other
    -       115  
Total
  $ 917     $ 374  
 
 
8.     LONG-TERM DEBT
 
On March 15, 2021, we entered into a senior secured term loan facility ("Term Facility") with TCW Asset Management Company, LLC, as agent, for the lenders party thereto in the amount of $ 130 million. The Term Facility provided for quarterly payments of principal and bears interest of LIBOR plus 7.00 % through June 30, 2021. After this date, interest was 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 %. In December 2021, the Term Facility was amended to increase the effective interest rate to LIBOR plus 7.00 % until June 2022.
 
Our Term Facility is collateralized by a second -lien on accounts receivable, inventory, cash and related assets and a first -lien on substantially all other assets. The Term Facility matures on March 15, 2026.
 
On March 15, 2021, we also entered into a senior secured asset-based credit facility ("ABL Facility") with Bank of America, N.A. ("Bank of America") as agent, for the lenders party thereto. The ABL Facility provides a new senior secured asset-based revolving credit facility up to a principal amount of $ 150 million, which includes a sub-limit for the issuance of letters of credit up to $ 5 million. The ABL Facility may be increased up to an additional $ 50 million at the Borrowers’ request and the Lenders’ option, subject to customary conditions. In December of  2021, we amended our ABL Facility to temporarily increase our borrowing capacity from $ 150 million to $ 175 million until June 2022, at which time our borrowing capacity will go down to $ 165 million. The ABL Facility includes a separate first in, last out (FILO) tranche, which allows the Company to borrow at higher advance rates on eligible accounts receivables and inventory balances. As of December 31, 2021, we had borrowing capacity of $ 28.9  million.
 
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 )  Tier II applied until June 30, 2021.
 
In connection with the Term Facility and ABL Facility, we had to pay certain fees that were capitalized and will be amortized over the life of each respective loan. In addition, the ABL Facility requires us to pay an annual collateral management fee in the amount of $ 75,000 due on each anniversary of the ABL Facility issuance date, until it matures.
 
Current and long-term debt consisted of the following:
 
    December 31,
 
($ in thousands)
  2021
 
Term Facility that matures in 2026 with an effective interest rate of 8.00%
  $ 127,563  
ABL Facility that matures in 2026:
       
LIBOR borrowings with an effective interest rate of 1.88%
    140,000  
Prime borrowings with an effective interest rate of 3.50%
    6,072  
Total debt
    273,635  
Less: Unamortized debt issuance costs
    ( 3,591 )
Total debt, net of debt issuance costs
    270,044  
Less: Debt maturing within one year
    ( 3,250 )
Long-term debt
  $ 266,794  
 
Credit Facility Covenants
 
The Term Facility contains restrictive covenants which require us to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio, as defined in the agreement. We believe we are in compliance with all Term Facility covenants as of  December 31, 2021 .
 
Our ABL Facility contains a restrictive covenant which requires us to maintain a fixed charge coverage ratio upon a triggering event taking place (as defined in the ABL Facility agreement). During the  twelve months ended  December 31, 2021 , there were no triggering events and the covenant was not in effect.
 
Huntington Credit Facility
 
On February 13, 2019, we entered into a Revolving Credit, Guaranty, and Security Agreement ("Credit Agreement") with the Huntington National Bank ("Huntington") as administrative agent. The Credit Agreement provided for a new senior secured asset-based revolving credit facility up to a principal amount of $ 75 million, which included a sublimit for the issuance of letters of credit up to $ 7.5 million (the "Huntington Credit Facility"). The Huntington Credit Facility permitted increases up to an additional $ 25 million at our request and the lenders’ option, subject to customary conditions. The Huntington credit facility was terminated in March 2021 and was replaced by the ABL Facility.
 
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The total amount available under our Huntington Credit Facility was subject to a borrowing base calculation based on various percentages of accounts receivable and inventory. As of December 31, 2020, we had total capacity of $ 70.8 million.
 
We had no outstanding borrowings against Huntington Credit Facility for fiscal year ending  December 31, 2020 .
 
Huntington Credit Facility Covenants
 
Our Huntington Credit Facility contained restrictive covenants which required us to maintain a fixed charge coverage ratio. These restrictive covenants are only in effect upon a triggering event taking place (as defined in the agreement). Our Huntington Credit Facility contains restrictions on the amount of dividends that may be paid. During the twelve months ended December 31, 2020, there were no triggering events and the covenant was not in effect for our Huntington Credit Facility.
 
On March 15, 2021, the Term Facility and ABL Facility collectively replaced our Huntington Credit Agreement.
 
9. LEASES
 
The operating ROU asset and operating lease liabilities as of December 31, 2021 and December 31, 2020 are as follows:
 
    December 31,
    December 31,
   
($ in thousands)
  2021
    2020
  Financial Statement Line Item
Assets:
                 
Operating ROU Assets
  $ 11,428     $ 1,572   Leased assets
                   
Liabilities:
                 
Current
                 
Operating
  $ 2,985     $ 629   Other accrued expenses
Noncurrent
                 
Operating
    8,809       944   Long-term lease
Total leased liabilities
  $ 11,794     $ 1,573    
 
Maturity of our operating lease liabilities are as follows:
 
    Operating
 
($ in thousands)
  Leases
 
2022
  $ 3,162  
2023
    2,564  
2024
    2,386  
2025
    2,302  
2026
    1,828  
Total lease payments
    12,242  
Less: Interest
    448  
Present value of lease liabilities
  $ 11,794  
 
For the twelve months ended December 31, 2021 and December 31, 2020 the weighted average remaining lease term and discount rate were as follows:
 
    December 31,
    December 31,
 
    2021
    2020
 
Weighted-average remaining lease term (years)
           
Operating leases
  2.8
    2..0
 
             
Weighted-average discount rate
           
Operating leases
  1.7 %
    3.7 %
 
 
For the twelve months ended December 31, 2021 and December 31, 2020 the supplemental cash flow information is as follows:
 
    December 31,
    December 31,
 
($ in thousands)
  2021
    2020
 
Cash paid for amounts included in the measurement of lease liabilities
               
Operating cash flows from operating leases
  $ 1,230     $ 711  
                 
Right-of-use assets obtained in exchange for lease obligations
               
Operating leases
  $ 13,186     $ 481  
 
The breakdown of rent expense for our operating leases for the twelve months ended December 31, 2021 and December 31, 2020 are as follows:
 
    Twelve Months Ended
   
    December 31,
    December 31,
   
($ in thousands)
  2021
    2020
  Financial Statement Line Item
Operating lease expenses - Manufacturing & Sourcing (1)
  $ 813     $ 678   Cost of goods sold
Operating lease expenses (1)
    1,417       433   Operating expenses
Total lease expenses
  $ 2,230     $ 1,111    
 
( 1 ) Includes short-term lease expenses of approximately $ 1,310,000  and $ 103,000  for the twelve months ended December 31, 2021  and  December 31, 2020 , respectively.
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10.    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)
  2021
    2020
 
401k plan sponsor contributions
  $ 1,311     $ 961  
 
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 $ 311,000  and $ 150,000 as of  December 31, 2021 and December 31, 2020 , respectively, and are classified as trading securities within other assets in the accompanying consolidated balance sheets. The liabilities by the trust were approximately $ 119,000 and $ 20,000 , as of  December 31, 2021 and December 31, 2020 , respectively, and are classified within deferred liabilities in the accompanying consolidated balance sheets. Changes in the deferred compensation assets and liabilities are charged to operating expenses in the accompanying consolidated statements of operations.
 
In 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 liabilities held under the Dominican Plan were approximately $ 107,000  and $ 44,000 as of  December 31, 2021  and  December 31, 2020 , respectively, and are classified within deferred liabilities in the accompanying consolidated balance sheets.
 
 
11. TAXES
 
We account 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.
 
A breakdown of our income tax expense (benefit) for the years ended December  31 is as follows:
 
($ in thousands)
  2021
    2020
 
Federal:
               
Current
  $ 1,554     $ 4,942  
Deferred
    1,729       67  
Total Federal
    3,283       5,009  
                 
State & local:
               
Current
    833       793  
Deferred
    ( 176 )     97  
Total State & local
    657       890  
                 
Foreign
               
Current
    907       102  
Deferred
    ( 37 )     -  
Total Foreign
    870       102  
                 
Total
  $ 4,810     $ 6,001  
 
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A reconciliation of recorded Federal income tax expense to the expected expense computed by applying the applicable Federal statutory rate for all periods to income before income taxes follows:
 
    Year Ended December 31,
 
($ in thousands)
  2021
    2020
 
Expected expense at statutory rate
  $ 5,327     $ 5,662  
                 
Increase (decrease) in income taxes resulting from:
               
Exempt income from Dominican Republic operations due to tax holiday
    ( 1,238 )     ( 942 )
Tax Rate Differential effect of Foreign Operations
    45       -  
Tax on repatriated earnings from Dominican Republic operations
    941       438  
State and local income taxes
    222       766  
Foreign Tax Credit
    ( 547 )     ( 30 )
Meals and entertainment
    2       27  
Nondeductible penalties
    3       20  
Provision to return filing adjustments and other
    55       60  
Total
  $ 4,810     $ 6,001  
 
Deferred income taxes recorded in the Consolidated Balance Sheets at December 31, 2021 and 2020 consist of the following:
 
($ in thousands)
  2021
    2020
 
Deferred tax assets:
               
Asset valuation allowances and accrued expenses
  $ 239     $ 301  
Inventories
    1,564       528  
State and local income taxes
    346       169  
Pension and deferred compensation
    38       18  
Net operating losses
    302       298  
Lease asset
    2,696       269  
Total deferred tax assets
    5,185       1,583  
Valuation allowances
    -       ( 298 )
Total deferred tax assets
    5,185       1,285  
                 
Deferred tax liabilities:
               
Fixed assets
    4,144       1,571  
Intangible assets
    7,179       6,587  
Other assets
    317       278  
Tollgate tax on Lifestyle earnings
    228       228  
State and local income taxes
    1,001       623  
Lease Liability
    2,609       269  
Total deferred tax liabilities
    15,478       9,556  
                 
Net deferred tax liability
  $ 10,293     $ 8,271  
 
The valuation allowance as of December 31, 2020  is related to certain state and local income tax net operating loss carry forwards.
 
We have provided Puerto Rico tollgate taxes on approximately $ 3,684,000 of accumulated undistributed earnings of Lifestyle prior to the fiscal year ended June  30, 1994, that would be payable if such earnings were repatriated to the United States. In 2001, we received abatement for Puerto Rico tollgate taxes on all earnings subsequent to June  30, 1994, thus no other provision for tollgate tax has been made on earnings after that date. If we repatriate the earnings from Lifestyle, $ 227,563 of tollgate tax would be due as of December 31, 2021.
 
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
  2018
 
Various U.S. States
  2017
 
Puerto Rico (U.S. Territory)
  2016
 
Canada
  2016
 
China
  2018  
Mexico
  2021  
United Kingdom
  2021  
Australia
  2021  
 
Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. As of December 31, 2021 , 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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12. 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)
  2021
    2020
 
Maximum authorized share repurchase amount (1)
  $ 7,500     $ 7,500  
Date of plan's authorization by the Board
  March 2021
    February 2020
 
Funding source
  Working capital
    Working capital
 
Number of shares repurchased under the plan (shares)
    -       129,095  
Amount paid for shares repurchased
    -     $ 2,938  
Weighted average price paid per share
    -     $ 22.76  
Remaining amount of shares authorized to be purchased under the plan (in dollars)
  $ 7,500     $ 4,562  
 
  ( 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.
 
Our shareholder repurchase program terminated on March 4, 2022.
 
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, 2021 and 2020 , respectively.
 
 
13. SHARE-BASED COMPENSATION
 
On May  7, 2014, our shareholders approved the 2014 Omnibus Incentive Plan and in May 2021 this plan was amended as our shareholders authorized an additional 600,000 shares (as amended, the "2014 Plan"). The 2014 Plan includes 1,100,000 of our common shares that may be granted under various types of awards as described in the 2014 Plan. As of December 31, 2021 , we were authorized to issue 573,250  shares under the 2014 Plan.
 
On January 24, 2021, we adopted the 2021 Inducement Option Plan (the "2021 Plan") pursuant to which 25,000 non-qualified stock options were granted to seven key employees acquired with the Acquisition. The 2021 Plan did not require shareholder approval under Nasdaq Listing Rule 5635 (c). As of December 31, 2021 , there were no remaining shares available to grant under the 2021 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:
 
    2021
    2020
 
Assumptions:
               
Risk-free interest rate
    0.32 %     1.61 %
Expected dividend yield
    1.18 %     2.00 %
Expected volatility of Rocky's common stock
    51.87 %     42.27 %
Expected option term (years)
    5.6       6.3  
Weighted-average grant date fair value per share
  $ 12.16     $ 9.36  
 
For the years ended December 31, 2021 and 2020 , we recognized share-based compensation expense and the corresponding tax benefit as follows:
 
($ in thousands)
  2021
    2020
 
Share-based compensation expense
  $ 1,265     $ 780  
Tax benefit
    192       58  
 
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The following summarizes stock option activity for the year ended December 31, 2021 :
 
                    Weighted
         
            Weighted
    Average
         
            Average
    Remaining
    Aggregate
 
($ amounts are per share)
  Shares
    Exercise Price
    Actual Term
    Intrinsic Value
 
Options outstanding at January 1, 2021
    257,400     $ 22.61                  
Issued
    121,250       32.32                  
Exercised
    ( 47,700 )     17.29                  
Forfeited or expired
    ( 2,950 )     26.84                  
Options outstanding at December 31, 2021
    328,000     $ 26.94       5.6     $ 1,510,216  
Expected to vest
    153,700     $ 29.62       6.9     $ 580,937  
Exercisable at December 31, 2021
    174,300     $ 24.57       3.8     $ 929,279  
 
In the first quarter of 2021 , our officers and certain employees were granted  76,250 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 2021 and 2020 , cash received for the exercise of stock options was approximately $ 825,000 and $ 136,000 , respectively.
 
In the first quarter of 2021 , Board of Director members were granted  45,000 stock options that vest over a year and will expire in 5 years.
 
As of December 31, 2021 , the total unrecognized compensation cost related to non-vested stock options and restricted stock units was approximately $ 1,303,000 with a weighted-average expense recognition period of 3.8 years.
 
During the years ended December 31, 2021 and 2020 , we issued  6,868  and  10,456  shares of common stock to members of our Board of Directors, respectively.
 
 
14. 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)
  2021
    2020
 
                 
Basic - weighted average shares outstanding
    7,283       7,304  
Dilutive stock options
    126       33  
Diluted - weighted average shares outstanding
    7,409       7,337  
Anti-dilutive securities
    25       149  
 
 
15 .   REVENUE
 
Nature of Performance Obligations
 
Our products are distributed through three distinct channels, which represent our business segments: Wholesale, Retail, and Contract Manufacturing. In our Wholesale business, we distribute our products through a wide range of distribution channels representing over  10,000 retail store locations in the U.S., Canada, and internationally, mainly Europe. Our Wholesale channels vary by product line and include sporting goods stores, outdoor specialty stores, online retailers, 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 product 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, 2021 . 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 4  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 costs incurred to obtain a contract would be subject to this practical expedient.
 
Contract Liabilities
 
The following table provides information about contract liabilities from contracts with our customers.
 
    December 31,
    December 31,
 
($ in thousands)
  2021
    2020
 
Contract liabilities
  $ 1,062     $ 5,582  
 
Significant changes in the contract liabilities balance during the period are as follows:
 
($ in thousands)
  Contract liabilities
 
Balance, December 31, 2020
  $ 5,582  
Non-cancelable contracts with customers entered into during the period
    2,017  
Revenue recognized related to non-cancelable contracts with customers during the period
    ( 6,537 )
Balance, December 31, 2021
  $ 1,062  
 
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 17  for segment disclosures.
 
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16. SUPPLEMENTAL CASH FLOW INFORMATION 
 
Supplemental cash flow for the years ended December  31, as follows:
 
($ in thousands)
  2021
    2020
 
                 
Interest paid
  $ 7,930     $ 151  
                 
Federal, state, and local income taxes paid, net
  $ 8,638     $ 4,669  
                 
Change in contract receivables, net
  $ 4,108     $ ( 424 )
                 
Change in contract liabilities, net
  $ ( 4,520 )   $ 836  
                 
Property, plant, and equipment purchases in accounts payable
  $ 2,191     $ 2,316  
 
 
17. SEGMENT INFORMATION
 
During the three months ended June 30, 2021,  we changed our reporting segments to change our Military reporting segment to "Contract Manufacturing" and to change the composition thereof to continue to include Military Contracts and to include sales under manufacturing contracts for private label or other Private Contracts. Previously, only Military Contracts were included in this segment. The Private Contract sales have characteristics more like Military Contracts, with similar sales, delivery processes and gross margins. This segment reporting change reflects a corresponding change in how our CODMs review financial information in order to allocate resources and assess performance. Previously, Private Contracts were included in the Wholesale segment, but with our Acquisition, our Wholesale segment has substantially increased in size and our CODMs determined that the change in segment reporting was appropriate at this time to mirror how they evaluate and manage our business.
 
There has been no change in our total consolidated financial condition, results of operations, or segment information previously reported, as the result of the change in our reportable segments, as we had no Private Contract sales during the quarterly period ended March 31, 2021 or the fiscal year ended December 31, 2020.
 
Reportable Segments - We have identified three reportable segments: Wholesale, Retail and Contract Manufacturing.
 
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., Canada, U.K. and other international markets, mainly Europe. These distribution channels vary by product line and target market and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores, specialty retailers and online retailers.
 
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.
 
Contract Manufacturing.  In our Contract Manufacturing segment, we include sales to the U.S. Military, private label sales and any sales to customers in which we are contracted to manufacture or source a specific footwear product for a customer
 
The following is a summary of segment results for the Wholesale, Retail, and Contract Manufacturing segments for the years ended December  31,
 
 
    Twelve Months Ended
 
    December 31,
 
($ in thousands)
  2021
    2020
 
NET SALES:
               
Wholesale
  $ 391,070     $ 185,554  
Retail
    94,658       72,877  
Contract Manufacturing
    28,499       18,878  
Total Net Sales
  $ 514,227     $ 277,309  
                 
GROSS MARGIN:
               
Wholesale
  $ 140,166     $ 66,336  
Retail
    47,792       34,283  
Contract Manufacturing
    6,578       4,116  
Total Gross Margin
  $ 194,536     $ 104,735  
 
Segment asset information is not prepared or used to assess segment performance.
 
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Product Group Information - The following is supplemental information on net sales by product group for the years ended December  31:
 
($ in thousands)
  2021
    % of Sales
    2020
    % of Sales
 
Work footwear
  $ 280,235       54.5 %   $ 126,268       45.5 %
Western footwear
    87,425       17.0       61,127       22.0  
Outdoor footwear
    76,031       14.8       21,074       7.6  
Duty and commercial military footwear
    39,715       7.7       41,005       14.8  
Military footwear
    22,767       4.4       18,878       6.8  
Other
    5,149       1.0       5,575       2.0  
Apparel
    2,905       0.6       3,382       1.2  
    $ 514,227       100.0 %   $ 277,309       100.0 %
 
Net sales to foreign countries represented approximately  6.9 % of net sales in 2021 and  0.8 % of net sales in 2020 .  
 
The net book value of fixed assets located outside of the U.S. totaled $ 13.0  million at December 31, 2021, of which approximately $ 4.6  million resides in the Dominican Republic and approximately $ 8.4 million resides in China. The net book value of fixed assets located outside of the U.S. totaled $ 4.5 million at December 31, 2020, all of which resides in the Dominican Republic.
 
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.
 
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.