ROCKY BRANDS, INC. 10-K

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, 2023 and 2022 29 Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022, and 2021 30 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2023, 2022, and 2021 31 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021 32 Note 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION 33 Note 2. ACCOUNTING STANDARDS UPDATES 36 Note 3. BUSINESS ACQUISITION 36 Note 4. SALE OF SERVUS BRAND AND RELATED ASSETS 38 Note 5. SALE OF NEOS BRAND AND RELATED ASSETS 38 Note 6. INVENTORIES 38 Note 7. PROPERTY, PLANT, AND EQUIPMENT 39 Note 8. GOODWILL AND OTHER INTANGIBLE ASSETS 39 Note 9. OTHER ASSETS 41 Note 10. LONG-TERM DEBT 41 Note 11. LEASES 43 Note 12. BENEFIT PLAN 44 Note 13. TAXES 44 Note 14. SHAREHOLDERS' EQUITY 46 Note 15. SHARE-BASED COMPENSATION 46 Note 16. EARNINGS PER SHARE 47 Note 17. REVENUE 48 Note 18. SUPPLEMENTAL CASH FLOW INFORMATION 50 Note 19. SEGMENT INFORMATION 50 Note 20. RESTRUCTURING CHARGES 51 Note 21. COMMITMENTS AND CONTINGENCIES 51 26 Table of Contents 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, 2023 and 2022, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, 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 present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, 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, 2023, 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, 2024 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated 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 consolidated 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. 27 Table of Contents Valuation of Indefinite-Lived Identified Intangibles in Conjunction with Annual Impairment Testing Description of the Matter At December 31, 2023, the Company’s indefinite-lived intangible assets were approximately $126.5 million, which included $78.7 million of trade names and trademarks and $47.8 million of goodwill. 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 occurre d. This test was performed in the fourth quarter of 2023 . 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 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. We have served as the Company's auditor since 2007. /s/ Schneider Downs & Co., Inc. Columbus, Ohio March 15, 2024 28 Table of Contents Rocky Brands, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share amounts) December 31, December 31, 2023 2022 ASSETS: CURRENT ASSETS: Cash and cash equivalents $ 4,470 $ 5,719 Trade receivables – net 77,028 94,953 Contract receivables 927 - Other receivables 1,933 908 Inventories – net 169,201 235,400 Income tax receivable 1,253 - Prepaid expenses 3,361 4,067 Total current assets 258,173 341,047 LEASED ASSETS 7,809 11,014 PROPERTY, PLANT & EQUIPMENT – net 51,976 57,359 GOODWILL 47,844 50,246 IDENTIFIED INTANGIBLES – net 112,618 121,782 OTHER ASSETS 965 942 TOTAL ASSETS $ 479,385 $ 582,390 LIABILITIES AND SHAREHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable $ 49,840 $ 69,686 Contract liabilities 927 - Current Portion of Long-Term Debt 2,650 3,250 Accrued expenses: Salaries and wages 1,204 1,253 Taxes – other 925 1,325 Accrued freight 2,284 2,413 Commissions 904 1,934 Accrued duty 5,440 6,764 Accrued interest 2,104 2,822 Income tax payable - 1,172 Other 5,251 5,675 Total current liabilities 71,529 96,294 LONG-TERM DEBT 170,480 253,646 LONG-TERM TAXES PAYABLE 169 169 LONG-TERM LEASE 5,461 8,216 DEFERRED INCOME TAXES 7,475 8,006 DEFERRED LIABILITIES 716 586 TOTAL LIABILITIES 255,830 366,917 SHAREHOLDERS' EQUITY: Common stock, no par value; 25,000,000 shares authorized; issued and outstanding December 31, 2023 - 7,412,480 ; December 31, 2022 - 7,339,011 71,973 69,752 Retained earnings 151,582 145,721 Total shareholders' equity 223,555 215,473 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 479,385 $ 582,390 See notes to Consolidated Financial Statements 29 Table of Contents Rocky Brands, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands, except per share amounts) Year Ended December 31, 2023 2022 2021 NET SALES $ 461,833 $ 615,475 $ 514,227 COST OF GOODS SOLD 283,235 390,256 319,691 GROSS MARGIN 178,598 225,219 194,536 OPERATING EXPENSES 143,226 181,181 158,564 INCOME FROM OPERATIONS 35,372 44,038 35,972 INTEREST EXPENSE AND OTHER – net ( 21,218 ) ( 18,270 ) ( 10,603 ) INCOME BEFORE INCOME TAX EXPENSE 14,154 25,768 25,369 INCOME TAX EXPENSE 3,728 5,303 4,810 NET INCOME $ 10,426 $ 20,465 $ 20,559 INCOME PER SHARE Basic $ 1.42 $ 2.80 $ 2.82 Diluted $ 1.41 $ 2.78 $ 2.77 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic 7,363 7,317 7,283 Diluted 7,381 7,369 7,409 See notes to Consolidated Financial Statements 30 Table of Contents 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, 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 Net income $ 20,465 $ 20,465 Dividends paid on common stock ($ 0.62 per share) ( 4,538 ) ( 4,538 ) Repurchase of common stock - - - - Stock issued for options exercised, including tax benefits 26 $ 461 - 461 Stock compensation expense 11 1,230 - 1,230 BALANCE - December 31, 2022 7,339 $ 69,752 - $ 145,721 $ 215,473 Net income $ 10,426 $ 10,426 Dividends paid on common stock ($ 0.62 per share) ( 4,565 ) ( 4,565 ) Repurchase of common stock - - - - Stock issued for options exercised, including tax benefits 39 $ 977 - 977 Stock compensation expense 34 1,244 - 1,244 BALANCE - December 31, 2023 7,412 $ 71,973 $ - $ 151,582 $ 223,555 (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 31 Table of Contents Rocky Brands, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,426 $ 20,465 $ 20,559 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 10,939 12,320 11,342 Amortization of debt issuance costs 853 853 675 Provision for bad debts 451 3,254 302 Deferred income taxes ( 531 ) ( 2,209 ) 2,022 Loss (gain) on disposal of assets 231 ( 789 ) 41 Gain on sale of business ( 1,341 ) - - Stock compensation expense 1,244 1,230 1,265 Change in assets and liabilities: Receivables 18,150 28,222 ( 42,245 ) Contract receivables ( 927 ) 1,062 4,108 Inventories 60,034 ( 4,986 ) ( 114,226 ) Other current assets 706 440 ( 9,791 ) Other assets 3,182 389 ( 152 ) Accounts payable ( 21,228 ) ( 45,921 ) 78,626 Accrued and other liabilities ( 7,115 ) 468 2,432 Income taxes ( 2,425 ) 5,387 ( 5,313 ) Contract liabilities 927 ( 1,062 ) ( 4,520 ) Net cash provided by (used in) operating activities 73,576 19,123 ( 54,875 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets ( 3,918 ) ( 6,702 ) ( 21,055 ) Proceeds from the sale of assets - 5,468 - Acquisition of business, net of cash acquired - - ( 212,408 ) Proceeds from sale of business 17,300 - - Net cash provided by (used in) investing activities 13,382 ( 1,234 ) ( 233,463 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facility 55,681 37,492 180,072 Repayments on revolving credit facility ( 101,900 ) ( 40,263 ) ( 34,000 ) Proceeds from term loan - - 130,000 Repayments on term loan ( 38,400 ) ( 11,231 ) ( 2,438 ) Debt issuance costs - - ( 4,266 ) Proceeds from stock options 977 461 825 Dividends paid on common stock ( 4,565 ) ( 4,538 ) ( 4,299 ) Net cash (used in) provided by financing activities ( 88,207 ) ( 18,079 ) 265,894 DECREASE IN CASH AND CASH EQUIVALENTS ( 1,249 ) ( 190 ) ( 22,444 ) CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD 5,719 5,909 28,353 END OF PERIOD $ 4,470 $ 5,719 $ 5,909 See notes to Consolidated Financial Statements 32 Table of Contents ROCKY BRANDS, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The accompanying Consolidated Financial Statements include the accounts of Rocky Brands, Inc. ("Rocky Brands") and its wholly-owned subsidiaries, Lifestyle Footwear, Inc. ("Lifestyle"), Five Star Enterprises Ltd. ("Five Sta r"), Rocky Brands Canada, Inc. ("Rocky Brands 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, Muck, Georgia Boot, Durango, XTRATUF, Lehigh, 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. Our products are distributed through three distinct business 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 Outdoor Gear 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 19 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. Allowance for Credit Losses - We maintain an allowance for credit losses on accounts receivable that represents estimated losses resulting from customers’ failure to make required payments. We evaluate the allowance for credit losses based on a review of current customer status and historical collection experience along with current and reasonable supportable forecasts of future economic conditions. Trade Receivables - Trade receivables are presented net of the related allowance for credit losses of approximately $ 1.8 million and $ 3.5 million at December 31, 2023 and 2022 , 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 $ 1.5 million and $ 2.1 million at December 31, 2023 and 2022 , respectively. Concentration of Credit Risk - We have significant transactions with a large number of customers. No customer represented 10% of net trade receivables as of December 31, 2023 and 2022 . 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 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, primarily in China and Vietnam. We are not aware of any governmental or economic restrictions that would alter our current sourcing operations. Inventories - Inventories are valued at the lower of cost, determined on a first -in, first -out (FIFO) basis, or net realizable value (NRV). Reserves are established for inventories when the NRV is deemed to be less than its cost based on our periodic estimates of NRV. 33 Table of Contents 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 and Other Intangible Assets - Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Indefinite-lived intangibles include trademarks and trade names. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to impairments tests at least annually. The Company reviews the carrying amounts of goodwill and indefinite-lived intangible assets by reporting unit at least annually, or when indicators of impairment are present, to determine if such assets may be impaired. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill and indefinite-lived intangible assets are less than their carrying value. The Company would not be required to quantitatively determine the fair value unless the Company determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. The Company performs its annual testing for goodwill and indefinite-lived intangible asset impairment in the fourth quarter of the fiscal year for all reporting units. Goodwill is quantitatively evaluated for possible impairment by comparing the estimated fair value of the reporting unit with its carrying value, including the goodwill assigned to that reporting unit. An impairment charge is recorded if the carrying value of the reporting unit exceeds its estimated fair value. An indefinite-lived intangible asset is quantitatively evaluated for possible impairment by comparing the estimated fair value of the asset with its carrying value. An impairment charge is recorded if the carrying value of the asset exceeds its estimated fair value. Other intangible assets determined to have a finite life primarily consist of customer relationships and patents, which are amortized over their estimated useful lives using straight-line amortization. We review intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss occurred requires a comparison of the carrying amount to the sum of the future forecasted undiscounted cash flows expected to be generated by the asset group. For additional details on goodwill and intangible assets, including information related to our annual test, see Note 8 . Leases - Our leases primarily consist of office buildings, distribution centers, manufacturing facilities and equipment. We lease assets in the normal course of business to meet our current and future needs while providing flexibility to our operations. We enter into contracts with third parties to lease specifically identified assets. Most of our leases have contractually specified renewal periods. Our operating leases expire at various dates through 2027, and contain various provisions for rental adjustments and renewal provisions for varying periods. We determine the lease term for each lease based on the terms of each contract and factor in renewal and early termination options if such options are reasonably certain to be exercised. Under FASB ASC Topic 842, Leases, we have elected the practical expedient to account for lease components and nonlease components associated with individual leases as a single lease component for all leases. In addition, we have elected to account for multiple lease components as a single lease component. Our leases may include variable lease costs such as payments based on changes to an index, payments based on a percentage of retail store sales, and maintenance, utilities, shared marketing or other service costs that are paid directly to the lessor under terms of the lease. We recognize variable lease payments when the amounts are incurred and determinable. We have elected to account for leases of twelve months or less as short-term leases and accordingly do not recognize a right-of-use asset or lease liability for these leases. We recognize lease expense for these leases on a straight-line basis over the lease term. 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. 34 Table of Contents Revenue Recognition - Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of and obtain substantially all the remaining benefits from the goods transferred. We recognize wholesale and e-commerce revenue at the time the products are shipped and retail store revenue transactions at the point of sale. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less estimated sales discounts and returns based upon specific customer agreements and historical trends. The Company presents revenue gross of fees and sales commissions. Sales commissions are expensed as incurred and are recorded in operating expenses in the accompanying consolidated statements of operations. The Company's customer contracts do not have a significant financing component due to their short durations, which are typically effective for one year or less and have payment terms that generally range from net 30 to net 120 days. Cost of Goods Sold - Cost of goods sold represents our costs to manufacture products in our own facilities, including raw materials costs and all overhead expenses related to production, as well as the cost to purchase finished products from our third -party manufacturers. Cost of goods sold also includes the cost to transport these products to our distribution centers. Advertising - We expense advertising costs as incurred. Advertising expense was approximately $ 16.6 million, $ 15.4 million and $ 17.9 million for 2023 , 2022 and 2021 , 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 $ 25.1 million, $ 38.5 million and $ 25.1 million in 2023 , 2022 and 2021 , respectively. Stock Compensation Expense - We recognize compensation expense for awards of stock options, restricted stock units ("RSUs"), and director stock units based on the fair value on the grant date and on a straight-line basis over the requisite service period for the awards that are expected to vest, with forfeitures estimated based on our historical experience and future expectations. Stock-based compensation is included in operating expenses in the consolidated statements of operations. 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. ● 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, our Board of Directors adopted 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 ). 35 Table of Contents 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 Periods Effect on the financial statements or other significant matters ASU 2023 - 07, Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosures This pronouncement is intended to improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analysis. Q4 2024 (fiscal year) Q1 2025 (interim period) We are currently evaluating the impact adopting this standard will have on our Consolidated Financial Statements. ASU 2023 - 09, Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures The amendments in this update improve the transparency, effectiveness, and comparability of income tax disclosures by requiring ( 1 ) consistent categories and greater disaggregation by jurisdiction. The amendments allow investors to better assess, in their capital allocation decisions, how an entity's worldwide operations and related tax risks and tax planning and operational opportunities affect its income tax rate and prospects for future cash flows. Q1 2025 We are currently evaluating the impact adopting this standard will have on our Consolidated Financial Statements. In addition to the recently issued accounting pronouncements, the SEC recently issued its final rule regarded climate change disclosures. We are evaluating the impact this final rule will have on our Consolidated Financial Statements. Accounting Standards Adopted in Current Year Standard Description Effect on the financial statements or other significant matters ASU 2016 - 13, Measurement of Credit Losses on Financial Instruments The pronouncement seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted this standard in Q1 2023 and it did not have a material impact on our 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, adjusted purchase price of $ 212 million. 36 Table of Contents 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 10 for information regarding the two credit facilities. The Acquisition expanded our brand portfolio to include Muck, XTRATUF, Servus, Ranger and NEOS 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. On March 30, 2023, we completed the sale of the Servus brand and the related assets. See Note 4 for additional information. On September 30, 2022, we completed the sale of the NEOS brand and the related assets. See Note 5 for additional information. 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. We closed the Rock Island manufacturing Facility in September 2023 and we closed the office in Westwood, Massachusetts in December 2022. The Acquisition contributed net sales of $ 161.9 million, $ 242.8 million, and $ 179.0 million to our consolidated operating results for the years ended December 31, 2023, 2022 and 2021, respectively. The Acquisition contributed net income of $ 16.4 million, $ 9.3 million, and $ 16.5 million to our consolidated operating results for the years ended December 31, 2023, 2022 and 2021, respectively. 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 years ended December 31, 2023, 2022, and 2021 there were approximately $ 2.8 million, $ 3.5 million and $ 11.9 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. 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 was as follows: ($ in thousands) Fair Value Cash $ 2,655 Accounts receivable (1) 36,734 Inventories (2) 41,057 Property, plant and equipment 16,243 Goodwill (3) 50,246 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. 37 Table of Contents Unaudited Pro Forma Financial Information The following unaudited pro forma results of operations assume that the Acquisition occurred at the beginning of the periods presented. These unaudited pro forma results are presented for information purposes only and are not necessarily indicative of what the results of operations would have been if the Acquisition had occurred at the beginning of the periods presented, nor are they indicative of the future results of operations. The pro forma results presented below are adjusted for the removal of the step up value of finished goods inventory associated with the Acquisition of approximately $ 3.5 million for the year ended December 31, 2021. The pro forma results presented below are also adjusted for the removal of Acquisition-related costs of approximately $ 2.8 million, $ 3.5 million and $ 11.9 million for the twelve months ended December 31, 2023, 2022 and 2021, respectively. Year Ended December 31, ($ in thousands, except per share amount) 2023 2022 2021 Net sales $ 461,833 $ 615,475 $ 552,905 Net income $ 12,518 $ 23,250 $ 40,248 Diluted earnings per share $ 1.70 $ 3.16 $ 5.43 4. SALE OF SERVUS BRAND AND RELATED ASSETS On March 30, 2023, we completed the sale of the Servus brand and related assets to PQ Footwear, LLC and Petroquim S.R.L. (collectively "the Buyer"). Total consideration for this transaction was approximately $ 19.0 million, of which $ 17.3 million was received at closing. The remaining $ 1.7 million will be paid out in accordance with the purchase agreement. The sale of the Servus brand included the sale of inventory, fixed assets, customer relationships, tradenames and goodwill, all of which related to our Wholesale segment. In connection with the sale of the Servus brand we also are licensing the rights to certain proprietary processes to the Buyer. We recorded a gain on the sale of Servus of approximately $ 1.3 million which is recorded within Interest Expense and Other - net on the accompanying consolidated statement of operations for the twelve months ended December 31, 2023. 5. SALE OF NEOS BRAND AND RELATED ASSETS On September 30, 2022, we completed the sale of the NEOS brand and related assets to certain entities controlled by SureWerx pursuant to terms of an asset purchase agreement dated September 30, 2022. Total consideration for this transaction was approximately $ 5.8 million, of which $ 5.5 million was received at closing. The remaining $ 0.3 million was deposited in escrow and shall be managed and paid out in accordance with the terms of the asset purchase agreement and the escrow agreement. The sale of the NEOS brand included the sale of inventory, fixed assets, customer relationships, and tradenames, all of which related to our Wholesale segment. This transaction resulted in the sale of inventory of approximately $ 3.6 million recorded in net sales and approximately $ 2.4 million recorded in costs of goods sold in the accompanying consolidated statement of operations for the twelve months ended December 31, 2022 . Fixed assets, customer relationships and tradenames sold in connection with the sale of the NEOS brand resulted in reduction of operating expenses of approximately $ 0.7 million recorded in the accompanying consolidated statement of operations for the twelve months ended December 31, 2022 . 6. INVENTORIES Inventories are comprised of the following: December 31, December 31, ($ in thousands) 2023 2022 Raw materials $ 16,774 $ 16,541 Work-in-process 912 933 Finished goods 151,515 217,926 Total $ 169,201 $ 235,400 In accordance with ASC 606, the returns reserve included within inve ntories was approximatel y $ 0.8 million and $ 1.1 million at December 31, 2023 and December 31, 2022 , respectively. 38 Table of Contents 7. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment is comprised of the following: December 31, December 31, ($ in thousands) 2023 2022 Land $ 972 $ 972 Buildings 37,581 37,601 Machinery and equipment 61,148 60,942 Furniture and fixtures 2,006 2,022 Lasts, dies and patterns 11,271 13,973 Construction work-in-progress 8,453 11,798 Total 121,431 127,308 Less - accumulated depreciation ( 69,455 ) ( 69,949 ) Net Fixed Assets $ 51,976 $ 57,359 We incurred approximately $ 8.1 million, $ 9.2 million, and $ 8.8 million in depreciation expense for 2023 , 2022 and 2021 , respectively. 8. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and indefinite-lived intangibles are tested for impairment at least annually by comparing the estimated fair values of our reporting units and indefinite-lived intangible assets to their respective carrying values. For goodwill, we estimated the fair value of each reporting unit by weighing the results of the income and market approaches. These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and future profitability of our business. When performing the income approach, we utilize the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income, and other factors (such as working capital and capital expenditures). The discount rates used were based on a weighted-average cost of capital determined from relevant market comparisons and take into consideration the risk and nature of the respective reporting unit's cash flows. For the market approach, we use the guideline public company method which relies upon valuation multiples derived from stock prices and enterprise values of publicly traded companies that are comparable to the reporting unit being evaluated. To further confirm fair value, we compare the aggregate fair value of our reporting units to our total market capitalization. The fair value of our trade names was determined based on the income approach using the Relief from Royalty Method. This method requires us to estimate the future revenues for the related brands, the appropriate royalty rate, and the weighted-average cost of capital. We consider the assumptions used in our determination of the estimated fair value of our reporting units and indefinite-lived intangible assets to be reasonable and comparable to those that would be used by other marketplace participants; however, actual events and results could differ substantially from the estimates used in our valuations. These assumptions include, among other things, estimating future cash flows, including projected revenue and operating results, as well as selecting appropriate discount rates, pricing multiples, and an assumed royalty rate. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the fair value of our goodwill and other intangible assets, the revision could result in a non-cash impairment charge that could have a material impact on our financial results. Estimates utilized in the projected cash flows include consideration of macroeconomic conditions, expected growth rates, cost containment and margin expansion, business plans, market position, and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances such as supply chain disruptions and the loss of key customers could negatively affect key assumptions used for the recent fair value test and potentially result in goodwill impairment. After completing our annual impairment test for each reporting unit and our indefinite-lived intangible assets during the fourth quarter of 2023 and 2022, we concluded there was no impairment in either of these years. We did not have any reporting units that were at risk of failing the first step of the goodwill impairment test. The estimated fair values of the Wholesale and the Retail reporting unit exceeded their carrying amounts at the date of testing by more than 20 % for both 2023 and 2022. The amount of our goodwill that is deductible for tax purposes is $ 47.0 million. 39 Table of Contents The changes in the carrying amount of goodwill are as follows: ($ in thousands) 2023 2022 Goodwill balance at beginning of the year $ 50,246 $ 50,246 Sale of Business (1) ( 2,402 ) - Goodwill balance at end of the year (2) $ 47,844 $ 50,246 ( 1 ) Relates to the divesture of the Servus brand during the year ended December 31, 2023, see Note 4 for additional information. ( 2 ) As of December 31, 2023, goodwill allocated to our Wholesale and Retail reporting segments was $ 23.0 million and $ 24.8 million, respectively. As of December 31, 2022, goodwill allocated to our Wholesale and Retail reporting segments was $ 25.4 million and $ 24.8 million, respectively. No goodwill was allocated to our Contract Manufacturing segment for either period presented. A schedule of identified intangible assets is as follows: Gross Accumulated Carrying ($ in thousands) Amount Amortization Amount December 31, 2023 Trademarks (1) $ 78,654 - $ 78,654 Patents 895 $ 845 50 Customer relationships (2) 41,659 7,745 33,914 Total Intangibles $ 121,208 $ 8,590 $ 112,618 ( 1 ) Servus trademarks were reduced from approximately $ 2.5 million to zero at March 30, 2023 as a result of the sale of the Servus brand (see Note 4 ). ( 2 ) Customer relationships relating to the Servus brand of approximately $ 4.3 million and related amortization of approximately $ 0.6 million were reduced to zero at March 30, 2023 as a result of the sale of the Servus brand (see Note 4 ). Gross Accumulated Carrying ($ in thousands) Amount Amortization Amount December 31, 2022 Trademarks (1) $ 81,199 - $ 81,199 Patents 895 $ 826 69 Customer relationships (2) 46,006 5,492 40,514 Total Intangibles $ 128,100 $ 6,318 $ 121,782 ( 1 ) NEOS trademarks were reduced from approximately $0.6 million to zero at December 31, 2022 as a result of the sale of the NEOS bran d (see Note 5 ). ( 2 ) Customer relationships relating to the NEOS brand of approximately $ 0.9 million and related amortization of approximately $ 0.1 million were reduced to zero at December 31, 2022 as a result of the sale of the NEOS br and (see Note 5 ). The weighted average remaining life for our patents is 6.0 years. A schedule of approximate amortization expense related to finite-lived intangible assets for the twelve months ended December 31, 2023 , 2022 and 2021 is as follows: Twelve Months Ended December 31, ($ in thousands) 2023 2022 2021 Amortization expense $ 2,878 $ 3,131 $ 2,514 40 Table of Contents A schedule of approximate expected remaining amortization expense related to finite-lived intangible assets for the years ending December 31 is as follows: Amortization ($ in thousands) Expense 2024 2,795 2025 2,790 2026 2,788 2027 2,785 2028 2,781 2029+ 20,025 9. OTHER ASSETS Other assets consist of the following: December 31, December 31, ($ in thousands) 2023 2022 Long-term deposits $ 556 $ 607 NQDC plan assets 409 335 Total $ 965 $ 942 10. 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 4.00, the effective interest rate will be SOFR plus 7.50 % (or at our option, Prime Rate plus 6.50 %). If our total leverage ratio is less than 4.00, but greater than 3.00, the effective interest rate will be SOFR plus 7.00 % (or at our option, Prime Rate plus 6.00 %). If our total leverage ratio is less than 3.00, the effective interest rate will be SOFR plus 6.50 % (or at our option, Prime Rate plus 5.50 %). The Term Facility also has a SOFR floor rate of 1.00 %. In June 2022, we entered into a second amendment with TCW to amend our Term Facility to consent to modifications in our borrowing capacity under the ABL Facility as described below, and to adjust certain pricing and prepayment terms, among other things. The second amendment also modified the interest index whereas SOFR will be used to calculate interest rather than LIBOR. The effective interest rate was increased to SOFR plus 7.50 % through November 2022. In November 2022, the Term Facility was amended to increase the effective interest rate to LIBOR plus 7.00 % until June 2023 and to provide certain EBITDA adjustments with response to financial covenants, among other things. In May 2023, we entered into a fourth amendment with TCW to further amend our Term Facility to provide certain EBITDA adjustments in respect of the financial covenants, adjust the method to calculate total debt, continue certain pricing terms, extend certain prepayment terms, and pay such lenders certain amendment fees, among other things. In October 2023, we entered into a sixth amendment with TCW to further amend our Term Facility to provide certain EBITDA adjustments with respect to the financial covenants, adjust the performance pricing grid, and adjust the total leverage ratio periodically through June 30, 2025, among other things. 41 Table of Contents 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 would have went down to $ 165 million. In June 2022, we further amended our ABL Facility to temporarily increase our borrowing capacity by $ 25 million to $ 200 million through December 31, 2022, which thereafter would have been reduced to $ 175 million . In November 2022, we entered into a third amendment to our ABL Facility to provide certain EBITDA adjustments with respect to our financial covenant. 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. In October 2023, we entered into a fifth amendment to our ABL Facility to provide certain EBITDA adjustments with respect to our financial covenant. As of December 31, 2023, we had borrowing capacity of $ 31.1 million. Interest expense was approximately $ 22.7 million, $ 18.3 million and $ 10.6 million, respectively, for the years ended December 31, 2023 , 2022 and 2021 . 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: Revolver Pricing Level Average Availability as a Percentage of Commitments Base Rate Term SOFR Loan Base Rate for FILO Term SOFR FILO Loans I > 66.7% 0.00 % 1.25 % 0.50 % 1.75 % II >33.3% and < or equal to 66.7% 0.00 % 1.50 % 0.50 % 2.00 % III < or equal to 33.3% 0.25 % 1.75 % 0.75 % 2.25 % ( 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, December 31, ($ in thousands) 2023 2022 Term Facility that matures in 2026 with an effective interest rate of 13.20 % and 12.14 % as of December 31, 2023 and December 31, 2022, respectively $ 77,932 $ 116,332 ABL Facility that matures in 2026: SOFR borrowings with an effective interest rate of 7.31 % and 5.47 % as of December 31, 2023 and December 31, 2022, respectively 83,144 140,000 Prime borrowings with an effective interest rate of 8.75 % and 7.27 % as of December 31, 2023 and December 31, 2022, respectively 13,938 3,301 Total debt 175,014 259,633 Less: Unamortized debt issuance costs ( 1,884 ) ( 2,737 ) Total debt, net of debt issuance costs 173,130 256,896 Less: Debt maturing within one year ( 2,650 ) ( 3,250 ) Long-term debt $ 170,480 $ 253,646 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 are in compliance with all Term Facility covenants as of December 31, 2023 . 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, 2023 , there were no triggering events and the covenant was not in effect. 42 Table of Contents 11. LEASES The operating ROU assets and operating lease liabilities as of December 31, 2023 and December 31, 2022 were as follows: December 31, December 31, ($ in thousands) 2023 2022 Financial Statement Line Item Assets: Operating ROU Assets $ 7,809 $ 11,014 Leased assets Liabilities: Current Operating $ 2,628 $ 3,071 Other accrued expenses Noncurrent Operating 5,461 8,216 Long-term lease Total leased liabilities $ 8,089 $ 11,287 Maturities of our operating lease liabilities are as follows: Operating ($ in thousands) Leases 2024 $ 2,810 2025 2,727 2026 2,359 2027 503 2028 67 Total lease payments 8,466 Less: Interest ( 377 ) Present value of lease liabilities $ 8,089 For the twelve months ended December 31, 2023 and December 31, 2022 , the weighted average remaining lease term and discount rate were as follows: December 31, December 31, 2023 2022 Weighted-average remaining lease term (years) Operating leases 2.1 2.8 Weighted-average discount rate Operating leases 2.6 % 1.4 % For the twelve months ended December 31, 2023 , December 31, 2022 and December 31, 2021 the supplemental cash flow information was as follows: December 31, December 31, December 31, ($ in thousands) 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,853 $ 1,492 $ 1,230 Right-of-use assets obtained in exchange for lease obligations Operating leases $ 628 $ 2,786 $ 13,186 The breakdown of rent expense for our operating leases for the twelve months ended December 31, 2023 and December 31, 2022 were as follows: Twelve Months Ended December 31, December 31, December 31, ($ in thousands) 2023 2022 2021 Financial Statement Line Item Operating lease expenses - Manufacturing & Sourcing (1) $ 2,826 $ 784 $ 813 Cost of goods sold Operating lease expenses (1) 1,617 4,595 1,417 Operating expenses Total lease expenses $ 4,443 $ 5,379 $ 2,230 ( 1 ) Includes short-term lease expenses of approximately $ 0.5 million, $ 2.2 million and $ 1.3 million for the twelve months ended December 31, 2023 , December 31, 2022 and December 31, 2021 , respectively. 43 Table of Contents 12. 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) 2023 2022 2022 401k plan sponsor contributions $ 1,531 $ 1,798 $ 1,311 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 $ 0.4 million and $ 0.3 million as of December 31, 2023 and December 31, 2022 , respectively, and are classified as trading securities within other assets in the accompanying consolidated balance sheets. The liabilities held under the Executive Deferred Compensation Plan were approximately $ 0.2 million and $ 0.1 million, as of December 31, 2023 and December 31, 2022 , 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 $ 0.3 million and $ 0.2 million as of December 31, 2023 and December 31, 2022 , respectively, and are classified within deferred liabilities in the accompanying consolidated balance sheets. 13. 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) 2023 2022 2021 Federal: Current $ 3,877 $ 5,993 $ 1,554 Deferred ( 977 ) ( 1,417 ) 1,729 Total Federal 2,900 4,576 3,283 State & local: Current 262 1,415 833 Deferred 123 ( 247 ) ( 176 ) Total State & local 385 1,168 657 Foreign Current 106 182 907 Deferred 337 ( 623 ) ( 37 ) Total Foreign 443 ( 441 ) 870 Total $ 3,728 $ 5,303 $ 4,810 44 Table of Contents 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) 2023 2022 2021 Expected expense at statutory rate $ 2,975 $ 5,414 $ 5,327 Increase (decrease) in income taxes resulting from: Exempt income from Dominican Republic operations due to tax holiday ( 476 ) ( 632 ) ( 1,238 ) Tax Rate Differential effect of Foreign Operations 106 160 45 Tax on repatriated earnings from Dominican Republic operations 190 316 941 State and local income taxes 407 734 222 Foreign Tax Credit ( 227 ) ( 348 ) ( 547 ) Meals and entertainment 66 5 2 Nondeductible penalties 3 6 3 Provision to return filing adjustments 684 ( 352 ) 55 Total $ 3,728 $ 5,303 $ 4,810 Deferred income taxes recorded in the Consolidated Balance Sheets at December 31, 2023 and 2022 consisted of the following: ($ in thousands) 2023 2022 Deferred tax assets: Asset valuation allowances and accrued expenses $ 1,651 $ 2,257 Inventories 2,428 3,300 State and local income taxes 305 293 Pension and deferred compensation 54 42 Net operating losses 866 794 163(J) Interest limitation 4,644 1,077 Lease asset 1,853 2,608 Total deferred tax assets 11,801 10,371 Valuation allowances ( 355 ) - Total deferred tax assets 11,446 10,371 Deferred tax liabilities: Fixed assets 4,166 4,490 Intangible assets 11,713 10,262 Other assets 748 793 Tollgate tax on Lifestyle earnings 228 228 State and local income taxes 280 59 Lease Liability 1,786 2,545 Total deferred tax liabilities 18,921 18,377 Net deferred tax liability $ 7,475 $ 8,006 The valuation allowance as of December 31, 2023 is related to certain foreign income tax net operating loss carry forwards. We have provided Puerto Rico tollgate taxes on approximately $ 3.7 million 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, $ 0.2 million of tollgate tax would be due as of December 31, 2023. 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 2020 Various U.S. States 2019 Puerto Rico (U.S. Territory) 2018 Canada 2018 China 2020 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, 2023 , 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. 45 Table of Contents 14. SHAREHOLDERS' EQUITY Repurchase of Common Stock Our previous shareholder repurchase program expired on March 4, 2022. We have not announced a new repurchase program since the prior program expired. 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 $0.06 per share, of which no shares are issued or outstanding at December 31, 2023 and 2022 . 15. 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, 2023 , we were authoriz ed to issue 502,325 shares und er 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, 2023 , no shares were available for grant under the 2021 Plan. Stock Options There were no options granted for the year ended December 31, 2023. 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: 2022 2021 Assumptions: Risk-free interest rate 0.82 % 0.32 % Expected dividend yield 2.15 % 1.18 % Expected volatility of Rocky's common stock 54.70 % 51.87 % Expected option term (years) 5.1 5.6 Weighted-average grant date fair value per share $ 12.85 $ 12.16 For the years ended December 31, 2023 and 2022 , we recognized share-based compensation expense and the corresponding tax benefit as follows: ($ in thousands) 2023 2022 2021 Share-based compensation expense $ 1,244 $ 1,230 $ 1,265 Tax benefit 302 221 192 46 Table of Contents The following summarizes stock option activity for the year ended December 31, 2023 : Weighted Weighted Average Average Remaining Aggregate ($ amounts are per share) Shares Exercise Price Actual Term Intrinsic Value Options outstanding at January 1, 2023 341,436 $ 28.87 Issued - - Exercised ( 38,400 ) 25.44 Forfeited or expired ( 37,950 ) 32.05 Options outstanding at December 31, 2023 265,086 $ 38.92 4.3 $ 909,038 Expected to vest 61,550 $ 32.79 7.1 $ 74,333 Exercisable at December 31, 2023 203,536 $ 27.75 3.5 $ 834,705 For the years ended December 31, 2023 , 2022 , and 2021 cash received for the exercise of stock options was approximately $ 1.0 million, $ 0.5 million, and $ 0.8 million, respectively. Restricted Stock Units The following table summarizes the status of the Company's restricted stock units and activity as of December 31, 2023 : Restricted Stock Units Weighted-Average Grant Date ($ amounts are per share) Quantity Fair Value Per Share Nonvested at January 1, 2023 1,954 $ 12.79 Granted 40,812 23.89 Vested ( 651 ) 12.79 Forfeited ( 9,703 ) 23.70 Nonvested at December 31, 2023 32,412 $ 23.49 As of December 31, 2023 , the total unrecognized compensation cost related to non-vested stock options and restricted stock units was approxi mately $ 1.1 million with a weighted-average expense recogniti on period of 3.0 years. During the years ended December 31, 2023 and 2022 , and 2021 we issued 34,418 shares, 10,762 shares and 6,868 shares of common stock to members of our Board of Directors, respectively. 16. EARNINGS PER SHARE Basic earnings per share ("EPS") is computed by dividing net income applicable to common shareholders by the weighted average number of common shares outstanding during each period. The diluted earnings per share computation includes common share equivalents, when dilutive. A reconciliation of the shares used in the basic and diluted income per common share computation for the years ended December 31, as follows: Twelve Months Ended December 31, (shares in thousands) 2023 2022 2021 Basic - weighted average shares outstanding 7,363 7,317 7,283 Dilutive restricted share units 5 - - Dilutive stock options 13 52 126 Diluted - weighted average shares outstanding 7,381 7,369 7,409 Anti-dilutive securities 229 162 25 47 Table of Contents 17. 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 in 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 Outdoor Gear Store, and Lehigh business. We also sell footwear under the Rocky Brands label to the U.S. Military. Significant Accounting Policies and Judgements Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; this generally occurs upon shipment of our product to our customer, which is when the transfer of control of our 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, 2023 . Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net revenue and earnings in the period such variances become known. When a customer has a right to a prompt payment discount, we estimate the likelihood that the customer will earn the discount using historical data and adjust our estimate when the estimate of the likelihood that a customer will earn the discount changes or the consideration becomes fixed, whichever occurs earlier. The estimated amount of variable consideration is recognized as a credit to trade receivables and a reduction in revenue until the uncertainty of the variable consideration is alleviated. Because most of our customers have payment terms less than six months there is not a significant financing component in our contracts with customers. When a customer is offered a rebate on purchases retroactively, this is accounted for as variable consideration because the consideration for the current and past purchases is not fixed until it is known if the discount is earned. We estimate the expected discount the customer will earn at contract inception using historical data and projections and update our estimates when projections materially change or consideration becomes fixed. The estimated rebate is recognized as a credit to trade receivables and offset against revenue until the rebate is earned or the earning period has lapsed. When a right of return is part of the arrangement with the customer, we estimate the expected returns based on an analysis using historical data. We adjust our estimate either when the most likely amount of consideration we expect to receive changes or when the consideration becomes fixed, whichever occurs earlier. Please see Note 1 and Note 6 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. 48 Table of Contents 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) 2023 2022 Contract liabilities $ 927 $ - Significant changes in the contract liabilities balance during the period are as follows: ($ in thousands) Contract liabilities Balance, December 31, 2022 - Non-cancelable contracts with customers entered into during the period $ 2,990 Revenue recognized related to non-cancelable contracts with customers during the period ( 2,063 ) Balance, December 31, 2023 $ 927 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 19 for segment disclosures. 49 Table of Contents 18. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow for the years ended December 31, as follows: Twelve Months Ended December 31, ($ in thousands) 2023 2022 2021 Interest paid $ 13,302 $ 17,501 $ 7,930 Federal, state, and local income taxes paid, net $ 6,656 $ 1,930 $ 8,638 Change in contract receivables, net $ ( 927 ) $ 1,062 $ 4,108 Change in contract liabilities, net $ 927 $ ( 1,062 ) $ ( 4,520 ) Property, plant, and equipment purchases in accounts payable $ 881 $ 976 $ 2,191 19. SEGMENT INFORMATION 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 in 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 Outdoor Gear Store. Through our outdoor gear 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: Year Ended December 31, ($ in thousands) 2023 2022 2021 NET SALES: Wholesale $ 337,019 $ 484,779 $ 391,070 Retail 116,960 115,354 94,658 Contract Manufacturing 7,854 15,342 28,499 Total Net Sales $ 461,833 $ 615,475 $ 514,227 GROSS MARGIN: Wholesale $ 119,485 $ 165,059 $ 140,166 Retail 58,391 57,817 47,792 Contract Manufacturing 722 2,343 6,578 Total Gross Margin $ 178,598 $ 225,219 $ 194,536 Segment asset information is not prepared or used to assess segment performance. 50 Table of Contents Product Group Information - The following is supplemental information on net sales by product group for the years ended December 31: ($ in thousands) 2023 % of Sales 2022 % of Sales 2021 % of Sales Work footwear $ 198,096 42.9 % $ 256,162 41.6 % $ 280,235 54.5 % Outdoor footwear 130,424 28.2 183,121 29.8 76,031 14.8 Western 70,374 15.2 108,697 17.7 87,425 17.0 Duty and commercial military footwear 50,482 10.9 46,177 7.5 39,715 7.7 Military footwear 7,999 1.7 15,342 2.5 22,767 4.4 Other 3,103 0.7 3,581 0.6 5,149 1.0 Apparel 1,355 0.3 2,395 0.4 2,905 0.6 $ 461,833 100.0 % $ 615,475 100.0 % $ 514,227 100.0 % Net sales to foreign countries represented approximately 5.1 % of net sales in 2023 , 6.2 % of net sales in 2022 and 6.9 % of net sales in 2021 . The net book value of fixed assets located outside of the U.S. totaled $ 11.9 million at December 31, 2023 , of which approx imately $ 3.9 mill ion resides in the Dominican Republic and approximatel y $ 8.0 mil lion resides in China. 20. RESTRUCTURING CHARGES In 2023 , we completed a cost savings review aimed at operating efficiencies to better position us for profitable growth. Following the integration of the Acquired Brands, we identified a number of operational synergies and cost savings opportunities, including a reduction in workforce. In addition to the accrued expenses below, we incurred approximately $ 1.5 million in restructuring costs that are included in operating expenses in the accompanying consolidated statements of operations for the year ended December 31, 2023 . For the year ended December 31, 2023 , the following activity was recorded: Employee Severance, Benefits and Related Costs Twelve Months Ended December 31, ($ in thousands) 2023 2022 Accrued expenses, beginning of period $ 381 - Restructuring charges 1,486 $ 1,201 Cash payments ( 885 ) ( 820 ) Accrued expenses, end of period $ 982 $ 381 21. 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. Litigation We are currently party to litigation with a manufacturing supplier of the Acquired Brands. While it is not possible to predict the outcome of this litigation with certainty, we do not anticipate the resolution will have a material, adverse impact on our financial position. We believe that the likelihood of the resolution being materially adverse to our financial statements is remote and as such have not recorded any contingent liabilities within the accompanying Consolidated Financial Statements. In addition, we have not recorded any potential favorable resolution to the litigation due in accordance with ASC 450 - 30, Gain Contingencies. Gain Contingency In June 2022, we became aware of a misclassification of Harmonized Tariff Schedule (HTS) codes filed with the U.S. Customs and Border Protection (U.S. Customs) on certain products imported into the U.S. associated with the Acquired Brands during 2021 and 2022. As a result of the misclassification of HTS codes we have paid duties in excess of the required amount. We are in the process of filing multiple post summary corrections with U.S. Customs to seek refunds of duties paid in excess of the correct HTS codes. We have the potential to recover the total amount of overpaid duties resulting in a potential refund of approximately $ 7.7 million, of which we have received $ 1.9 million in refunds during the year ended December 31, 2023 and $ 3.2 million in refunds during the year ended December 31, 2022. We are accounting for these post summary corrections as a gain contingency, and as such have not recorded these potential refunds within the accompanying unaudited condensed consolidated balance sheet due to uncertainty of collection. Refunds received will be recognized as a reduction to the cost of goods sold when, and if, the refunds are received. 51 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.