ROCKY BRANDS INC

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:

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

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.

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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 undertwo* new credit facilities. See Note10 for information regarding thetwo 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 Note4* for additional information. On* September 30, 2022,we completed the sale of the NEOS brand and the related assets. See Note5* 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 withseven 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 theseven 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 2023and 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 and2021, 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 and2021, 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, and2021 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 Level2 and Level3 inputs. These Level2 and Level3 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:

(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 thetwelve 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.

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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 arenot 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 thetwelve* months ended* December 31, 2023,*2022 and2021, respectively.

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 thetwelve* 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 thetwelve* 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 thetwelve months ended* December 31,* 2022 .

6. INVENTORIES

Inventories are comprised of the following:

In accordance with ASC606, the returns reserve included within inve ntories was approximately $0.8 million and $1.1 million at* December 31, 2023* and* December 31, 2022*, respectively.

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7. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment is comprised of the following:

We incurred approximately $8.1 million, $9.2 million, and $8.8 million in depreciation expense for2023,2022 and2021, 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 arenot 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 thefourth quarter of2023 and2022, we concluded there wasno impairment in either of these years.

We didnot have any reporting units that were at risk of failing thefirst 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 both2023 and2022.

The amount of our goodwill that is deductible for tax purposes is $47.0 million.

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The changes in the carrying amount of goodwill are as follows:

(1) Relates to the divesture of the Servus brand during the year ended* December 31, 2023,see Note4* 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:

(1) Servus trademarks were reduced from approximately $2.5 million tozero at* March 30, 2023as a result of the sale of the Servus brand (see Note4*).

(2) Customer relationships relating to the Servus brand of approximately $4.3 million and related amortization of approximately $0.6 million were reduced tozero at* March 30, 2023as a result of the sale of the Servus brand (see Note4*).

(1) NEOS trademarks were reduced from approximately$0.6 million tozero at* December 31,* 2022 as a result of the sale of the NEOS brand (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 tozero at* December 31,* 2022 as a result of the sale of the NEOS brand (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 thetwelve months ended* December 31,*2023,2022 and2021 is as follows:

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A schedule of approximate expected remaining amortization expense related to finite-lived intangible assets for the years ending* December 31*is as follows:

9. OTHER ASSETS

Other assets consist of the following:

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 to4.00,* 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 than4.00, but greater than3.00, 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 than3.00, 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 asecond* 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. Thesecond 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 2023and to provide certain EBITDA adjustments with response to financial covenants, among other things. In May 2023,we entered into afourth* 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 asixth* 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.

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Our Term Facility is collateralized by asecond-lien on accounts receivable, inventory, cash and related assets, and afirst-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 maybe increased up to an additional $50 million at the Borrowers’ request and the Lenders’ option, subject to customary conditions. In Decemberof2021,* 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 athird* amendment to our ABL Facility to provide certain EBITDA adjustments with respect to our financial covenant. The ABL Facility includes a separatefirst 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 afifth* 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 and2021.

The ABL Facility is collateralized byfirst-lien on accounts receivable, inventory, cash and related assets and asecond-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:

(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:

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 thetwelve months ended* December 31, 2023*, there wereno triggering events and the covenant wasnot in effect.

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11. LEASES

The operating ROU assets and operating lease liabilities as of* December 31, 2023* and* December 31, 2022* were as follows:

Maturities of our operating lease liabilities are as follows:

For thetwelve months ended* December 31, 2023* and* December 31, 2022*, the weighted average remaining lease term and discount rate were as follows:

For thetwelve months ended* December 31, 2023*,* December 31, 2022* and* December 31, 2021* the supplemental cash flow information was as follows:

The breakdown of rent expense for our operating leases for thetwelve months ended* December 31, 2023* and* December 31, 2022* were as follows:

(1) Includes short-term lease expenses of approximately $0.5 million, $2.2 million and $1.3 million for thetwelve months ended* December 31, 2023*,* December 31, 2022* and* December 31,*2021, respectively.

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12. BENEFIT PLAN

We sponsor a401(k) savings plan for eligible employees. We provide a contribution of 3% of applicable salary to the plan for all employees with greater thansix months of service. Additionally, we match eligible employee contributions at a rate of 0.25%, perone 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 the401(k) Plan were as follows:

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* mayelect 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 31of 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 tono* 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 vest100% upon such event. Participants* mayelect 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 toten* years. In the event of a participant’s termination of employment, deferred amounts will generally be paid within60 days following the later of the date (i) of such termination or (ii) the participant attains age60, except where such termination is due to such participant’s death, in which case deferred amounts will be paid to such participant’s beneficiary within30 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.

In2020, we entered into asecond 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 offive years following the effective date of the agreement or upon the employee attaining the age of65. Payments are due within30 days of the employee's retirement. If the employee terminates their employment, for any reason, prior to their retirement andfive years after the effective date of the agreement, the employee isnot eligible to receive a payout. The funds are accrued based on service and arenot held in an investment or trust account. The total liabilities held under the Dominican Plan were approximately $0.3 million and $0.2 millionas 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:

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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:

Deferred income taxes recorded in the Consolidated Balance Sheets at* December 31, 2023and2022* consisted of the following:

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* June30,* 1994, that would be payable if such earnings were repatriated to the United States. In2001, we received abatement for Puerto Rico tollgate taxes on all earnings subsequent to* June30,* 1994; thusno 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:

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 donot believe there will be any material changes in our uncertain tax positions over the next12 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 didnot have any unrecognized tax benefits and there wasno effect on our financial condition or results of operations.

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14. SHAREHOLDERS' EQUITY

Repurchase of Common Stock

Our previous shareholder repurchase program expired on* March 4, 2022.We havenot* announced a new repurchase program since the prior program expired.

Preferred Shares

The Company has authorized 250,000 shares of voting preferred stock withno par value. No shares are issued or outstanding. Also, the Company has authorized 250,000 shares of non-voting preferred stock withno 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 whichno shares are issued or outstanding at* December 31, 2023and2022*.

15. SHARE-BASED COMPENSATION

On* May**7,* 2014, our shareholders approved the2014 Omnibus Incentive Plan and in* May 2021this plan was amended as our shareholders authorized an additional 600,000 shares (as amended, the"2014* Plan"). The2014 Plan includes 1,100,000 of our common shares that* maybe granted under various types of awards as described in the2014* Plan. As of* December 31, 2023*, we were authorized to issue 502,325 shares under the2014 Plan.

On* January 24, 2021,we adopted the2021* Inducement Option Plan (the*"2021* Plan") pursuant to which 25,000 non-qualified stock options were granted toseven key employees acquired with the Acquisition. The2021 Plan didnot require shareholder approval under Nasdaq Listing Rule5635(c). As of* December 31, 2023*, no shares were available for grant under the2021 Plan.

Stock Options

There wereno 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:*

For the years ended* December 31, 2023and2022*, we recognized share-based compensation expense and the corresponding tax benefit as follows:

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The following summarizes stock option activity for the year ended* December 31, 2023*:

For the years ended* December 31,*2023,2022, and2021 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*:

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 recognition period of 3.0 years.

During the years ended* December 31, 2023and2022*, and2021 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:

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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 over10,000 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 typicallyone 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* maybe 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 willnot* 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 wouldnot 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 thansix months there isnot 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 isnot 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 Note1 and Note6 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 ofone year or less.

Contract liabilities are performance obligations that we expect to satisfy or relieve within the nexttwelve 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.

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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 ASC340-40 in instances where the amortization period isone 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.

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

Disaggregation of Revenue

All revenues are recognized at a point in time when control of our products pass to the customer at point of shipment. Because all revenues are recognized at a point in time and are disaggregated by channel, our segment disclosures are consistent with ASC606 disaggregation requirements. See Note19 for segment disclosures.

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18. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow for the years ended* December**31,* as follows:

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 sellfirst 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:*

Segment asset information isnot 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:

Net sales to foreign countries represented approximately 5.1% of net sales in2023,6.2% of net sales in2022 and 6.9% of net sales in2021.

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 million resides in the Dominican Republic and approximately $8.0 million resides in China.

20. RESTRUCTURING CHARGES

In2023, 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:

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 willnot 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 isnot possible to predict the outcome of this litigation with certainty, we donot 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 havenot recorded any contingent liabilities within the accompanying Consolidated Financial Statements. In addition, we havenot recorded any potential favorable resolution to the litigation due in accordance with ASC450-30, 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 during2021* and2022. 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, 2023and $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 havenot* 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.

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