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Rocky BrandsTable of Contents Financial Highlights Letter to Shareholders Family of Brands New Markets II III IV-VII VIII Direct Business Form Financial Statements IX 10-K 1-37 F-1-F-25 Financial Highlights Income Statement Data ($000, except per share data) 2016 2015 2014 2013 2012 Net sales Gross margin Income from Operations Net income $ 260,259 $ 269,302 $ 286,242 $ 244,871 $ 228,537 29.5% -1.2% 33.0% 33.7% 34.1% 35.2% 3.9% 5.5% 4.5% 6.0% $ (2,139) $ 6,603 $ 9,845 $ 7,373 $ 8,855 Net income per diluted share $ (0.29) $ 0.87 $ 1.30 $ 0.98 $ 1.18 Weighted average number of fully diluted shares outstanding 7,505 7,574 7,548 7,517 7,503 Balance Sheet Inventories Total assets Total debt $ 69,168 $ 76,991 $ 85,237 $ 78,172 $ 67,196 180,573 193,865 213,228 199,025 174,844 14,584 23,700 36,270 38,388 23,461 Shareholders’ equity 135,093 142,121 138,348 131,213 125,637 II Letter to Shareholders I am honored to be addressing you again as Chief Executive Officer. My family’s association with Rocky Brands goes back 85 years to when my great uncle founded the Company in 1932. My involvement spans 42 years and includes several roles starting with footwear design and sales management in 1975. I have spent my entire career working at Rocky Brands and even when I took a step back from the day-to-day operations in 2011 to serve solely as Chairman of the Board, the majority of my time and energy was still dedicated to driving improved performance at the Company for the benefit of our shareholders. Now that I am back in the CEO role my full attention is focused on achieving this critical goal, and I’m confident that the current management team is up to the task. The world has changed a lot since Rocky Brands sold its first pair of shoes 85 years ago. During this time the Company has evolved significantly including establishing a global supply chain, diversifying our brand portfolio through the acquisition of EJ Footwear and expanding our channels of distribution. More recently the pace of change has accelerated especially in retail as consumer shopping behavior has been reshaped by technology while more volatile weather and macroeconomic conditions have created temporary headwinds for several of our categories. What hasn’t changed is the need to have authentic brands and innovative product to be successful over the long-term and for this reason I am optimistic about the future outlook for our Company. With Rocky, Georgia Boot and Durango we own some of the oldest, most authentic brands in the Hunting, Work, and Western categories, each of which is known for the quality and value proposition of its footwear offering. Furthermore, in the case of Rocky, we’ve leveraged its strong history into a leadership position in military footwear. Despite our strong foundation we are not immune to many of the near-term pressures facing our industry, including reduced store traffic at many of our key wholesale accounts, weakening local economies tied to oil and gas and other commodities, and general soft demand for non-athletic footwear. Therefore we’ve needed to make adjustments to our operating strategies and organizational structure in order to find new avenues for growth and enhance profitability in the current environment. To better capitalize on the growing demand for military footwear we made strategic investments in our Puerto Rican manufacturing facility to increase our production capacity. This included capital spending on new machinery and tooling as well as additional operating expenses to expand our labor force. Without these upgrades we would not have been in the position to fulfill a record $38 million of contract military footwear orders in 2016. While we did experience some temporary growing pains as we ramped up internal production, which pressured gross margins, these issues are now fully behind us. I am confident that we are well positioned to post another record year of Military sales in 2017 and deliver segment gross margins that are back to or above historical levels. At the same time, we expect our commercial military business to continue growing nicely on the strength of several boots that are popular with enlisted soldiers. While the selling environment across retail remains challenging many of our accounts started 2017 with cleaner inventories compared with a year ago. We will continue to be cautious about the near-term prospects for our wholesale business until we see a sustained increase in consumer demand. That said, I am confident that when market conditions eventually get better and retailers rebuild their inventories they will look to the Georgia Boot, Durango and Rocky brands and our strong product offerings for their work, western, and hunting footwear needs. With respect to our efforts toward building a lifestyle category, we still believe we have the brand strength and expertise to gain share in the casual footwear market. Since acquiring Creative Recreation in late 2013, our teams have done a great deal of work improving the operations and supply chain of the business as well as developing more compelling product collections. Unfortunately, due to challenging selling conditions in the brand’s narrow distribution channel, it has been difficult to grow revenue to the level needed for Creative Recreation to achieve operating profitability. In response to this headwind, we recently made the decision to adjust our go-to-market strategies by introducing less fashion forward product at more accessible price points in order to attract a larger consumer audience and open up new wholesale accounts. We also executed a licensing agreement for Creative Recreation in Europe to accelerate growth which, at the same time, reduces our overhead costs and improves the margin profile of this business. The dramatic and ongoing shift to online shopping is creating compelling opportunities for our direct-to-consumer segment that we are committed to capitalizing on. We continue to make inroads leveraging the investments we have made in our digital infrastructure over the past few years to drive traffic to our branded e-commerce websites and increase conversion. At the same time, we are expanding our current capabilities through new technologies and additional expertise that give us new ways to engage with our loyal consumers and fuel increased purchasing activity. This includes increasing the assortments available on our sites to better reflect the depth of our merchandise offerings and provide visitors with a great selection of our footwear. We are also directing more of our marketing investments to digital and social media campaigns to ensure we are staying in front of consumers and fueling increased awareness and demand for our brands and products. Below the revenue line, we implemented a number of organizational changes aimed at gaining greater efficiencies and designing an expense structure more appropriate for the current business. In total, our actions generated approximately $5 million in annualized savings with an approximately $3.5 million incremental benefit to be realized in 2017. When combined with the return to normalized gross margins in our military segment, we are well positioned to deliver improved bottom line trends beginning in 2017. In closing, I want to reiterate how excited I am to have resumed the role as Chief Executive Officer of Rocky Brands. While I am disappointed in our recent financial performance, I am confident that the operational initiatives we executed during 2016 have created a stronger foundation and placed the company on the right course toward delivering sustained profitable growth and increased shareholder value. I want to thank the entire Rocky Brands organization for their efforts the past year and for what they will contribute to the Company’s success in 2017 and beyond. Sincerely, Mike Brooks Chairman & Chief Executive Officer III WHOLESALE I FAMILY OF BRANDS Rocky footwear and clothing is for people who are active, engaged and on the go. ROCKY’s superior comfort, design, insulation, and waterproofing system empowers them to achieve their personal best and gives them the confidence to succeed. - CONFIDENCE IN ACTION ONE CHANCE. ONE SHOT. ONE CAMO. “By far this is the best pair of boots I have ever bought. I walk on concrete 8 to 12 hours a day and these boots are outstanding. Thanks for a great pair of boots. I would buy these again and again.” - Patrick Callands, VA IV ROCKYBOOT.COM WHOLESALE I FAMILY OF BRANDS Georgia Boot empowers those who work hard – the workers that pride themselves in building real value with their hands. We help them achieve personal success by creating performance-enhancing footwear designed for the physical demands of their specific trades. - America’s Hardest Working Boot GEORGIABOOT.COM V WHOLESALE I FAMILY OF BRANDS Slipping on your Durangos allows you to boldly embrace your inner cowboy. You’re ready to be mischievous, have fun, kick up your heels and celebrate freedom. Durango is not just a boot, it’s an attitude… we call it OUTLAW FUN. VI DURANGOBOOTS.COM Defy gravity in our newest collection! showroom #3535 WHOLESALE I FAMILY OF BRANDS Creative Recreation was founded in Los Angeles in 2002 with the sole purpose of designing footwear that fuses work and play. Inspired by the spirit of street art – with its bold creative expression and out of bounds thinking – Creative Rec doesn’t sit quietly or complacently on the sideline. We thrive in energy- charged environments, where statements are made and are unified by a single idea - that creativity matters. CR8REC.COM VII WHOLESALE I FAMILY OF BRANDS BRAND PROMISE: 4EurSole will demonstrate great empathy for active women who are on their feet all day with innovative products that address their footwear needs and a marketing strategy that speaks directly to them with great respect for their lifestyle choices while aligning with key values. “They are so comfortable they barely need any breaking in… I could feel the arch support and cushion immediately. It helps when you are on your feet a lot and walking around during the day.” Laura Bambrick is a speech therapist and blogger from Wisconsin who created her blog, I Do DeClaire, to explore fashion. idodeclaire.com VIII 4EURSOLE.COM B2C B2B RETAIL I DIRECT BUSINESS Lehigh Outfitters is one of the largest providers and manufacturers of safety footwear in the industry. Selling both direct to the consumer through three branded retail websites offering over 60 brands and to businesses through our branded online service of Lehigh CustomFit, we are the leader in managed safety footwear programs. One of the unrivaled benefits of our customized program is our on- site kiosk. Our newly launched SlipGrips slip-resistant tread design DragonGrip tests superior to competitive tread patterns and is guaranteed to bring the market to its feet. LEHIGHOUTFITTERS.COM I LEHIGHSAFETYSHOES.COM I SLIPGRIPS.COM I CUSTOMFIT.ME IX United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 OR Commission File Number: 001-34382 ROCKY BRANDS, INC. (Exact name of Registrant as specified in its charter) Ohio (State or other jurisdiction of incorporation or organization) No. 31-1364046 (I.R.S. Employer Identification No.) 39 East Canal Street Nelsonville, Ohio 45764 (Address of principal executive offices, including zip code) (740) 753-1951 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Shares, without par value Name of each exchange on which registered The NASDAQ Stock Market, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. YES NO Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2). (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $77,716,400 on June 30, 2016. There were 7,435,467 shares of the Registrant's Common Stock outstanding on February 21, 2017. Portions of the Registrant's Proxy Statement for the 2017 Annual Meeting of Shareholders are incorporated by reference in Part III. DOCUMENTS INCORPORATED BY REFERENCE 1 Page 3 11 16 16 16 16 17 19 19 29 30 30 30 32 32 32 32 32 32 33 37 TABLE OF CONTENTS PART I Business. Risk Factors. Unresolved Staff Comments. Properties. Legal Proceedings. Mine Safety Disclosures PART II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Selected Consolidated Financial Data. Management's Discussion and Analysis of Financial Condition and Results of Operations. Quantitative and Qualitative Disclosures About Market Risk. Financial Statements and Supplementary Data. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Controls and Procedures. Other Information. PART III Directors, Executive Officers and Corporate Governance. Executive Compensation. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. Certain Relationships and Related Transactions, and Director Independence. Principal Accounting Fees and Services. Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Item 15. Exhibits, Financial Statement Schedules. PART IV SIGNATURES 2 This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “anticipate,” “believe,” “expect,” “estimate,” and “project” and similar words and expressions identify forward-looking statements which speak only as of the date hereof. Investors are cautioned that such statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results due to many factors, including, but not limited to, the factors discussed in “Item 1A, Risk Factors.” The Company undertakes no obligation to publicly update or revise any forward-looking statements. ITEM 1. BUSINESS. PART I All references to “we,” “us,” “our,” “Rocky Brands,” or the “Company” in this Annual Report on Form 10-K mean Rocky Brands, Inc. and our subsidiaries. We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of well recognized brand names including Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation 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 lifestyle. Our footwear products incorporate varying features and are positioned across a range of suggested retail price points from $29.99 for our value priced products to $359.99 for our premium products. In addition, as part of our strategy of outfitting consumers from head-to-toe, we market complementary branded apparel and accessories that we believe leverage the strength and positioning of each of our brands. Our products are distributed through three distinct business segments: wholesale, retail and military. In our wholesale business, we distribute our products through a wide range of distribution channels representing over 10,000 retail store locations in the U.S. and Canada as well as in several international markets. Our wholesale channels vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores and other specialty retailers. Our retail business includes direct sales of our products to consumers through our e-commerce websites and our Rocky outlet store. We operate four mobile trucks to service the New York Transit Authority’s employees. We also sell footwear under the Rocky label to the U.S. military. Competitive Strengths Our competitive strengths include: • Strong portfolio of brands. We believe the Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation and Michelin brands are well recognized and established names that have a reputation for performance, quality and comfort in the markets they serve: outdoor, work, duty, commercial military, western and lifestyle. We plan to continue strengthening these brands through product innovation in existing footwear markets, by extending certain of these brands into our other target markets and by introducing complementary apparel and accessories under our owned brands. • Commitment to product innovation. We believe a critical component of our success in the marketplace has been a result of our continued commitment to product innovation. Our consumers demand high quality, durable products that incorporate the highest level of comfort and the most advanced technical features and designs. We have a dedicated group of product design and development professionals, including well recognized experts in the footwear and apparel industries, who continually interact with consumers to better understand their needs and are committed to ensuring our products reflect the most advanced designs, features and materials available in the marketplace. • Long-term retailer relationships. We believe that our long history of designing, manufacturing and marketing premium quality, branded footwear has enabled us to develop strong relationships with our retailers in each of our distribution channels. We reinforce these relationships by continuing to offer innovative footwear products, by continuing to meet the individual needs of each of our retailers and by working with our retailers to improve the visual merchandising of our products in their stores. We believe that strengthening our relationships with retailers will allow us to increase our presence through additional store locations and expanded shelf space, improve our market position in a consolidating retail environment and enable us to better understand and meet the evolving needs of both our retailers and consumers. 3 • Diverse product sourcing and manufacturing capabilities. We believe our strategy of utilizing both company operated and third-party facilities for the sourcing of our products, offers several advantages. Operating our own facilities significantly improves our knowledge of the entire production process, which allows us to more efficiently source product from third parties that is of the highest quality and at the lowest cost available. We intend to continue to source a higher proportion of our products from third-party manufacturers, which we believe will enable us to obtain high quality products at lower costs per unit. Growth Strategy We intend to increase our sales through the following strategies: • Expand into new target markets under existing brands. We believe there is significant opportunity to extend certain of our brands into our other target markets. We intend to continue to introduce products across varying feature sets and price points in order to meet the needs of our retailers. • Cross-sell our brands to our retailers. We believe that many retailers of our existing and acquired brands target consumers with similar characteristics and, as a result, we believe there is significant opportunity to offer each of our retailers a broader assortment of footwear and apparel that target multiple markets and span a range of feature sets and price points. • Expand business internationally. We intend to extend certain of our brands into international markets. We believe this is a significant opportunity because of the long history and authentic heritage of these brands. We intend on growing our business internationally through a network of distributors. • Increase apparel offerings. We believe the long history and authentic heritage of our owned brands provide significant opportunity to extend each of these brands into complementary apparel. We intend to continue to increase our Rocky apparel offerings and believe that similar opportunities exist for our Georgia Boot and Durango brands in their respective markets. • Acquire or develop new brands. We intend to continue to acquire or develop new brands that are complementary to our portfolio and could leverage our operational infrastructure and distribution network. Product Lines Our product lines consist of high quality products that target the following markets: • Outdoor. Our outdoor product lines consist of footwear, apparel and accessory items marketed to outdoor enthusiasts who spend time actively engaged in activities such as hunting, fishing, camping or hiking. Our consumers demand high quality, durable products that incorporate the highest level of comfort and the most advanced technical features, and we are committed to ensuring our products reflect the most advanced designs, features and materials available in the marketplace. Our outdoor product lines consist of all-season sport/hunting footwear, apparel and accessories that are typically waterproof and insulated and are designed to keep outdoorsmen comfortable on rugged terrain or in extreme weather conditions. • Work. Our work product lines consist of footwear and apparel marketed to industrial and construction workers, as well as workers in the hospitality industry, such as restaurants or hotels. All of our work products are specially designed to be comfortable, incorporate safety features for specific work environments or tasks and meet applicable federal and other standards for safety. This category includes products such as safety toe footwear for steel workers and non-slip footwear for kitchen workers. • Duty. Our duty product line consists of footwear products marketed to law enforcement, security personnel and postal employees who are required to spend a majority of time at work on their feet. All of our duty footwear styles are designed to be comfortable, flexible, lightweight, slip resistant and durable. Duty footwear is generally designed to fit as part of a uniform and typically incorporates stylistic features, such as black leather uppers in addition to the comfort features that are incorporated in all of our footwear products. • Commercial Military. Our commercial military product line consists of footwear products marketed to military personnel as a substitute for the government issued military boots. Our commercial military boots are designed to be comfortable, lightweight, and durable and are marketed under the Rocky brand name. 4 • Western. Our western product line currently consists of authentic footwear products marketed to farmers and ranchers who generally live in rural communities in North America. We also selectively market our western footwear to consumers enamored with the western lifestyle. • Lifestyle. Our lifestyle product line currently consists of footwear products marketed to more fashion minded urban consumers. • U.S. Military. Our U.S. Military product line consists of footwear products designed specifically for U.S. Military personnel. These footwear products are designed and manufactured to meet the rigorous specification requirements, which include lightweight, durable, waterproof footwear products manufactured in the U.S.A. The U.S. Military products are marketed under the Rocky Brand name. Our products are marketed under five well-recognized, proprietary brands, Rocky, Georgia Boot, Durango, Creative Recreation and Lehigh, in addition to the licensed brand Michelin. Rocky Rocky, established in 1979, is our premium priced line of branded footwear, apparel and accessories. We currently design Rocky products for each of our five target markets and offer our products at a range of suggested retail price points: $39.99 to $279.99 for our footwear products, $34.99 to $239.99 for tops and bottoms in our apparel lines and $6.99 to $59.99 for our basic and technical outerwear. The Rocky brand originally targeted outdoor enthusiasts, particularly hunters, and has since become the market leader in the hunting boot category. In 2002, we also extended into hunting apparel, including jackets, pants, gloves and caps. Our Rocky products for hunters and other outdoor enthusiasts are designed for specific weather conditions and the diverse terrains of North America. These products incorporate a range of technical features and designs such as Gore-Tex waterproof breathable fabric, 3M Thinsulate insulation, nylon Cordura fabric and camouflaged uppers featuring either Mossy Oak or Realtree patterns. We use rugged outsoles made by industry leaders like Vibram as well as our own proprietary design features like the “Rocky Ride Comfort System” to make the products durable and easy to wear. We also produce Rocky duty and commercial military footwear targeting law enforcement professionals, military, security workers and postal service employees, and we believe we have established a leading market share position in this category. In 2002, we introduced Rocky work footwear designed for varying weather conditions or difficult terrain, particularly for people who make their living outdoors such as those in lumber or forestry occupations. These products typically include many of the proprietary features and technologies that we incorporate in our hunting and outdoor products. We have also introduced western influenced work boots for farmers and ranchers. Most of these products are waterproof, insulated and utilize our proprietary comfort systems. We also recently introduced some men’s and women’s casual western footwear for consumers enamored with western influenced fashion. Georgia Boot Georgia Boot was launched in 1937 and is our moderately priced, high quality line of work footwear. Georgia Boot footwear is sold at suggested retail price points ranging from $54.99 to $359.99. This line of products primarily targets construction workers and those who work in industrial plants where special safety features are required for hazardous work environments. Many of our boots incorporate steel toes or metatarsal guards to protect wearers’ feet from heavy objects and non-slip outsoles to prevent slip related injuries in the work place. All of our boots are designed to help prevent injury and subsequent work loss and are designed according to standards determined by the Occupational Safety & Health Administration or other standards required by employers. In addition, we market a line of Georgia Boot footwear to brand loyal consumers for hunting and other outdoor activities. These products are primarily all leather boots distributed in the western and southwestern states where hunters do not require camouflaged boots or other technical features incorporated in our Rocky footwear. 5 We believe the Georgia Boot brand can be extended into moderately priced duty footwear as well as outdoor and work apparel. Durango Durango is our moderately priced, high quality line of western footwear and leather goods. Launched in 1965, the brand has developed broad appeal and earned a reputation for authenticity and quality in the western footwear and apparel market. Our current line of products is offered at suggested retail price points ranging from $29.99 to $199.99, and we market products designed for both work and casual wear. Our Durango line of products primarily targets farm and ranch workers who live in the heartland where western influenced footwear and apparel is worn for work and casual wear and, to a lesser extent, this line appeals to urban consumers enamored with western influenced fashion. Many of our western boots marketed to farm and ranch workers are designed to be durable, including special “barn yard acid resistant” leathers to maintain integrity of the uppers, and incorporate our proprietary “Comfort Core” system to increase ease of wear and reduce foot fatigue. Other products in the Durango line that target casual and fashion oriented consumers have colorful leather uppers and shafts with ornate stitch patterns and are offered for men, women and children. Creative Recreation In December 2013, we completed the acquisition of certain assets of Kommonwealth, Inc. including the Creative Recreation brand and trademark. Headquartered in Los Angeles, California, since 2002, Creative Recreation was first to create and market versatile footwear that could easily transition between casual and more formal environments. Creative Recreation’s collections of upscale sneakers quickly gained strong acceptance and support from a wide array of key influencers across multiple categories including music, sports, and acting. Creative Recreation’s ability to successfully fuse style and versatility across a diversified assortment of products has created a wide target demographic and a strong distribution network that spans multiple channels and price points. The current line of products is offered at suggested retail price points ranging from $30.00 to $200.00. Lehigh The Lehigh brand was launched in 1922 and is our moderately priced, high quality line of safety shoes sold at suggested retail price points ranging from $79.99 to $234.99. Our current line of products is designed to meet occupational safety footwear needs. Most of this footwear incorporates steel toes to protect workers and often incorporates other safety features such as metatarsal guards or non-slip outsoles. Additionally, certain models incorporate durability features to combat abrasive surfaces or caustic substances often found in some work places. With the shift in manufacturing jobs to service jobs in the U.S., Lehigh began marketing products for the hospitality industry. These products have non-slip outsoles designed to reduce slips, trips and falls in kitchen environments where floors are often tiled and greasy. Price points for this kind of footwear range from $44.99 to $89.99. Michelin Michelin is a premier price point line of work footwear targeting specific industrial professions, primarily indoor professions. The license to design, develop and manufacture footwear under the Michelin name was secured in 2006. Suggested retail prices for the Michelin brand are from $34.99 to $249.99. The license agreement for the Michelin brand expires on December 31, 2017, with the option to renew. Sales and Distribution Our products are distributed through three distinct business segments: wholesale, retail and military. You can find more information regarding our three business segments in Note 13 to our consolidated financial statements. Wholesale In the U.S., we distribute Rocky, Georgia Boot, Durango, Creative Recreation and Michelin products through a wide range of wholesale distribution channels. As of December 31, 2016, our products were offered for sale at over 10,000 retail locations in the U.S. and Canada. We sell our products to wholesale accounts in the U.S. primarily through a dedicated in-house sales team who carry our branded products exclusively, as well as independent sales representatives who carry our branded products and other non-competing products. Our sales force for Rocky is organized around major accounts, including Bass Pro 6 Shops, Cabela’s, Dick’s Sporting Goods, Tractor Supply Company and Gander Mountain, and around our target markets: outdoor, work, duty, commercial military, lifestyle and western. For our Georgia Boot and Durango brands, our sales employees are organized around each brand and target a broad range of distribution channels. All of our sales people actively call on their retail customer base to educate them on the quality, comfort, technical features and breadth of our product lines and to ensure that our products are displayed effectively at retail locations. Our wholesale distribution channels vary by market: • Our outdoor products are sold primarily through sporting goods stores, outdoor specialty stores, catalogs and mass merchants. • Our work-related products are sold primarily through retail uniform stores, catalogs, farm store chains, specialty safety stores, independent shoe stores and hardware stores. • Our duty products are sold primarily through uniform stores and catalog specialists. • Our commercial military products are sold primarily through base exchanges such as AAFES and consumer e-commerce websites. • Our western products are sold through western stores, work specialty stores, specialty farm and ranch stores and more recently, fashion oriented footwear retailers. • Our lifestyle products are sold primarily through fashion oriented footwear retailers. Retail We market products directly to consumers through three retail strategies under the Lehigh retail brand: Lehigh business-to-business including direct sales and through our Custom Fit websites, consumer e-commerce websites, and our stores, which include our outlet store, mobile and retail stores. Websites We sell our product lines on our websites at www.rockyboots.com, www.georgiaboot.com, www.durangoboot.com, www.lehighoutfitters.com, www.lehighsafetyshoes.com, www.slipgrips.com, 4eursole.com and cr8rec.com. We believe that our internet presence allows us to showcase the breadth and depth of our product lines in each of our target markets and enables us to educate our consumers about the unique technical features of our products. We also sell to our business customers directly through our Custom Fit websites that are tailored to the specific needs of our customers. Our customers’ employees order directly through their employers’ established Custom Fit website and the footwear is delivered directly to the consumer via a common freight carrier. Our customers include large, national companies such as Carnival Cruise Lines, Pepsi, Schneider, Hagemeyer, Holland America Cruise Lines, and Waste Management. Outlet Store We operate the Rocky outlet store in Nelsonville, Ohio. Our outlet store primarily sells first quality or discontinued products in addition to a limited amount of factory damaged goods. Related products from other manufacturers are also sold in the store. Our outlet store allows us to showcase the breadth of our product lines as well as to cost- effectively sell slow-moving inventory. Our outlet store also provides an opportunity to interact with consumers to better understand their needs. Mobile and Retail Stores Lehigh’s successful continued focus on converting our customers from delivery via our mobile and retail stores to purchasing via our Custom Fit sites and delivery direct has led to the continued reduction of the mobile and retail stores in the past several years. In 2017 we will continue to service the New York City Transit Authority with mobile stores. 7 Military While we are focused on continuing to build our wholesale and retail business, we also actively bid, from time to time, on footwear contracts with the U.S. military. Our sales under such contracts are dependent on us winning the bids for these contracts. We are currently fulfilling several multiyear contracts for the U.S. military. Total sales to the U.S. military represented 14.4%, 6.5% and 2.8% of total sales for the years ending December 31, 2016, 2015 and 2014, respectively. Marketing and Advertising We believe that our brands have a reputation for high quality, comfort, functionality and durability built through their long history in the markets they serve. To further increase the strength and awareness of our brands, we have developed comprehensive marketing and advertising programs to gain national exposure and expand brand awareness for each of our brands in their target markets. We have focused the majority of our advertising efforts on consumers in support of our retail partners. A key component of this strategy includes in-store point of purchase materials that add a dramatic focus to our brands and the products our retail partners carry. We also advertise through targeted national and local cable programs and print publications aimed at audiences that share the demographic profile of our typical customers. In addition, we promote our products on national radio broadcasts and through event sponsorships. These sponsorship’s provide significant national exposure for all of our brands as well as a direct connection to our target consumer. Our print advertisements and radio and television commercials emphasize the technical features of our products as well as their high quality, comfort, functionality and durability. We also support independent dealers by listing their locations in our national print advertisements. In addition to our national advertising campaigns, we have developed attractive merchandising displays and store-in-store concept fixturing that are available to our retailers who purchase the breadth of our product lines. We also attend numerous tradeshows which allow us to showcase our entire product line to retail buyers and have historically been an important source of new accounts. Product Design and Development We believe that product innovation is a key competitive advantage for us in each of our markets. Our goal in product design and development is to continue to create and introduce new and innovative footwear and apparel products that combine our standards of quality, functionality and comfort and that meet the changing needs of our retailers and consumers. Our product design and development process is highly collaborative and is typically initiated both internally by our development staff and externally by our retailers and suppliers, whose employees are generally active users of our products and understand the needs of our consumers. Our product design and development personnel, marketing personnel and sales representatives work closely together to identify opportunities for new styles, camouflage patterns, design improvements and newer, more advanced materials. We have a dedicated group of product design and development professionals, some of whom are well recognized experts in the footwear and apparel industries, who continually interact with consumers to better understand their needs and are committed to ensuring our products reflect the most advanced designs, features and materials available in the marketplace. Manufacturing and Sourcing We manufacture footwear in facilities that we operate in the Dominican Republic and Puerto Rico, and source footwear, apparel and accessories from third-party facilities, primarily in China. We do not have long-term contracts with any of our third-party manufacturers. The products purchased from GuangDong Dongguan YongDu Shoes Company, one of our third-party manufacturers in China with whom we have had a long-term relationship, represented approximately 6.7% of our net sales in 2016. The products purchased from General Shoes US Corporation and its subsidiaries, another one of our third-party manufacturers in China with whom we have had a relationship for over 20 years and which has historically accounted for a significant portion of our manufacturing, represented approximately 8.8% of our net sales in 2016. We believe that operating our own facilities significantly improves our knowledge of the entire raw material sourcing and manufacturing process enabling us to more efficiently source finished goods from third parties that are of the highest quality and at the lowest cost available. In addition, our Puerto Rican facilities allow us to produce footwear for the U.S. military and other commercial businesses that require production by a U.S. manufacturer. Sourcing products from offshore third-party facilities 8 generally enables us to lower our costs per unit while maintaining high product quality and it limits the capital investment required to establish and maintain company operated manufacturing facilities. Because quality is an important part of our value proposition to our retailers and consumers, we source products from manufacturers who have demonstrated the intent and ability to maintain the high quality that has become associated with our brands. Quality control is stressed at every stage of the manufacturing process and is monitored by trained quality assurance personnel at each of our manufacturing facilities, including our third-party factories. In addition, we utilize a team of procurement, quality control and logistics employees in our China office to visit factories to conduct quality control reviews of raw materials, work in process inventory and finished goods. We also utilize quality control personnel at our finished goods distribution facilities to conduct quality control testing on incoming sourced finished goods and raw materials and inspect random samples from our finished goods inventory from each of our manufacturing facilities to ensure that all items meet our high quality standards. Foreign Operations and Sales Outside of the United States Our products are primarily distributed in the United States, Canada, South America, Europe and Asia. We ship our products from our finished goods distribution facility located in Logan, Ohio and third-party logistics operations in Sumner, Washington and Ontario, Canada. Certain of our retailers receive shipments directly from our manufacturing sources, including all of our U.S. military sales, which are shipped directly from our manufacturing facilities in Puerto Rico. Net sales to foreign countries, primarily Canada, represented approximately 2.8% of net sales in 2016, 4.8% of net sales in 2015, and 6.3% of net sales in 2014. As previously mentioned, we maintain manufacturing facilities that we operate in the Dominican Republic and Puerto Rico. In addition, we utilize a third party distribution facility in Canada and an office in China to support our contract manufacturers. The net book value of fixed assets located outside of the U.S. totaled $3.7 million at December 31, 2016, $4.1 million at December 31, 2015, and $4.7 million at December 31, 2014. Suppliers We purchase raw materials from sources worldwide. We do not have any long-term supply contracts for the purchase of our raw materials, except for limited blanket purchase orders on leather to protect wholesale selling prices for an extended period of time. The principal raw materials used in the production of our products, in terms of dollar value, are leather, Gore-Tex waterproof breathable fabric, Cordura nylon fabric and soling materials. We believe these materials will continue to be available from our current suppliers. However, in the event these materials are not available from our current suppliers, we believe these products, or similar products, would be available from alternative sources. Seasonality and Weather Historically, we have experienced significant seasonal fluctuations in our business as many of our footwear products are used by consumers in adverse weather conditions. In order to meet these demands, we must manufacture and source footwear year round to be in a position to ship advance and at once orders for these products during the last two quarters of each year. Accordingly, average inventory levels have been highest during the second and third quarters of each year and sales have been highest in the last two quarters of the year. In addition, mild or dry weather conditions historically have had a material adverse effect on sales of our outdoor products, particularly if they occurred in broad geographical areas during late fall or early winter. With the acquisition of the Creative Recreation brand and the move toward more lifestyle geared products that are less dependent on weather conditions, we hope to reduce the seasonality and dependence on the variations in the weather. Backlog At December 31, 2016, our backlog was $17.0 million compared to $43.0 million at December 31, 2015. The decrease at December 31, 2016 is primarily related to the US Military contract for 2016. The backlog related to this contract is $0.3 million at December 31, 2016, compared to $27.7 million at December 31, 2015. Factors other than seasonality could have a significant impact on our backlog and, therefore, our backlog at any one point in time may not be indicative of future results. 9 Patents, Trademarks and Trade Names We own numerous design and utility patents for footwear, footwear components (such as insoles and outsoles) and outdoor apparel in the U.S. and in foreign countries including Canada, Mexico, China and Taiwan. We own U.S. and certain foreign registrations for the trademarks used in our business, including our trademarks Rocky, Georgia Boot, Durango, Lehigh and Creative Recreation. In addition, we license trademarks, including Gore-Tex and Michelin, in order to market our products. Our license with W. L. Gore & Associates, Inc. permits us to use the Gore-Tex and related marks on products and styles that have been approved in advance by Gore. The license agreement has a one year term that automatically renews each year, unless either party elects to terminate by giving advance written notice to the other party by October 1 for termination effective December 31 of that same year. Our license with Michelin Lifestyle Limited permits us to use the Michelin and related marks on our products. Our license agreement with Michelin Lifestyle Limited to use the Michelin name expires on December 31, 2017, with the option to renew. In the U.S., our patents are generally in effect for up to 20 years from the date of the filing of the patent application. Our trademarks are generally valid as long as they are in use and their registrations are properly maintained and have not been found to become generic. Trademarks registered outside of the U.S. generally have a duration of 10 years depending on the jurisdiction and are also generally subject to an indefinite number of renewals for a like period upon appropriate application. While we have an active program to protect our intellectual property by filing for patents and trademarks, we do not believe that our overall business is materially dependent on any individual patent or trademark. We are not aware of any infringement of our intellectual property rights or that we are infringing any intellectual property rights owned by third parties. Moreover, we are not aware of any material conflicts concerning our trademarks or our use of trademarks owned by others. Competition We operate in a very competitive environment. Product function, design, comfort, quality, technological and material improvements, brand awareness, timeliness of product delivery and pricing are all important elements of competition in the markets for our products. We believe that the strength of our brands, the quality of our products and our long-term relationships with a broad range of retailers allows us to compete effectively in the footwear and apparel markets that we serve. However, we compete with footwear and apparel companies that have greater financial, marketing, distribution and manufacturing resources than we do. In addition, many of these competitors have strong brand name recognition in the markets they serve. The footwear and apparel industry is also subject to rapid changes in consumer preferences. Some of our product lines are susceptible to changes in both technical innovation and fashion trends. Therefore, the success of these products and styles are more dependent on our ability to anticipate and respond to changing product, material and design innovations as well as fashion trends and consumer demands in a timely manner. Our inability or failure to do so could adversely affect consumer acceptance of these product lines and styles and could have a material adverse effect on our business, financial condition and results of operations. Employees At December 31, 2016, we had approximately 2,407 employees of which approximately 2,383 are full time employees. Approximately 2,004 of our employees work in our manufacturing facilities in the Dominican Republic and Puerto Rico. None of our employees are represented by a union. We believe our relations with our employees are good. Available Information We make available free of charge on our corporate website, www.rockybrands.com, our annual report on Form 10- K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission. 10 ITEM 1A. RISK FACTORS. Business Risks Expanding our brands into new footwear and apparel markets may be difficult and expensive, and if we are unable to successfully continue such expansion, our brands may be adversely affected, and we may not achieve our planned sales growth. Our growth strategy is founded substantially on the expansion of our brands into new footwear and apparel markets. New products that we introduce may not be successful with consumers or one or more of our brands may fall out of favor with consumers. If we are unable to anticipate, identify or react appropriately to changes in consumer preferences, we may not grow as fast as we plan to grow or our sales may decline, and our brand image and operating performance may suffer. Furthermore, achieving market acceptance for new products will likely require us to exert substantial product development and marketing efforts, which could result in a material increase in our selling, general and administrative, or SG&A expenses, and there can be no assurance that we will have the resources necessary to undertake such efforts. Material increases in our SG&A expenses could adversely impact our results of operations and cash flows. We may also encounter difficulties in producing new products that we did not anticipate during the development stage. Our development schedules for new products are difficult to predict and are subject to change as a result of shifting priorities in response to consumer preferences and competing products. If we are not able to efficiently manufacture newly-developed products in quantities sufficient to support retail distribution, we may not be able to recoup our investment in the development of new products. Failure to gain market acceptance for new products that we introduce could impede our growth, reduce our profits, adversely affect the image of our brands, erode our competitive position and result in long term harm to our business. A majority of our products are produced outside the U.S. where we are subject to the risks of international commerce. A majority of our products are produced in the Dominican Republic and China. Therefore, our business is subject to the following risks of doing business offshore: • • • the imposition of additional United States legislation and regulations relating to imports, including quotas, duties, taxes or other charges or restrictions; foreign governmental regulation and taxation; fluctuations in foreign exchange rates; • changes in economic conditions; • transportation conditions and costs in the Pacific and Caribbean; • changes in the political stability of these countries; and • changes in relationships between the United States and these countries. Changes in any of these factors could materially increase our costs of products and we may not be able to recover all of our cost increases through price increases to our customers. If any of these factors were to render the conduct of business in these countries undesirable or impracticable, we would have to manufacture or source our products elsewhere. There can be no assurance that additional sources or products would be available to us or, if available, that these sources could be relied on to provide product at terms favorable to us. The occurrence of any of these developments could have a material adverse effect on our business, financial condition, results of operations and cash flows. 11 Changes to United States tax, tariff and import/export regulations may have a negative effect on global economic conditions, financial markets and our business. The results of the November 2016 U.S. elections have introduced greater uncertainty with respect to tax and trade policies, tariffs and government regulations affecting trade between the U.S. and other countries. We source products from manufacturers located outside of the U.S., primarily in China. Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported products or the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity. We conduct a portion of our business pursuant to U.S. military contracts, which are subject to unique risks. We conduct a portion of our business pursuant to U.S. military contracts which are subject to unique risks. In 2016, 14.4% of our revenues were earned pursuant to U.S. military contracts. Business conducted pursuant to such contracts is subject to extensive procurement regulations and other unique risks. The U.S. military may modify, curtail or choose not to renew one or more of our contracts. In addition, funding pursuant to our U.S. military contracts may be reduced or withheld as part of the U.S. Congressional appropriations process due to fiscal constraints and/or changes in U.S. military strategy. Our contracts with the U.S. military are fixed-price contracts. While fixed price contracts enable us to benefit from performance improvements, cost reductions and efficiencies, they also subject us to the risk of reduced margins or incurring losses if we are unable to achieve estimated costs and revenues. Our success depends on our ability to anticipate consumer trends. Demand for our products may be adversely affected by changing consumer trends. Our future success will depend upon our ability to anticipate and respond to changing consumer preferences and technical design or material developments in a timely manner. The failure to adequately anticipate or respond to these changes could have a material adverse effect on our business, financial condition, results of operations and cash flows. Loss of services of our key personnel could adversely affect our business. The development of our business has been, and will continue to be dependent on execution at all levels of our organization which requires an experienced and talented executive team. The loss of service of any of the executive officers or key employees could have an adverse effect on our business and financial condition. We have entered into employment agreements with several executive officers and key employees, and also offer compensation packages designed to attract and retain talent. We depend on a limited number of suppliers for key production materials, and any disruption in the supply of such materials could interrupt product manufacturing and increase product costs. We purchase raw materials from a number of domestic and foreign sources. We do not have any long-term supply contracts for the purchase of our raw materials, except for limited blanket orders on leather. The principal raw materials used in the production of our footwear, in terms of dollar value, are leather, Gore-Tex waterproof breathable fabric, Cordura nylon fabric and soling materials. Availability or change in the prices of our raw materials could have a material adverse effect on our business, financial condition, results of operations and cash flows. We currently have a licensing agreement for the use of Gore-Tex waterproof breathable fabric, and any termination of this licensing agreement could impact our sales of waterproof products. We are currently one of the largest customers of Gore-Tex waterproof breathable fabric for use in footwear. Our licensing agreement with W.L. Gore & Associates, Inc. may be terminated by either party upon advance written notice to the other party by October 1 for termination effective December 31 of that same year. Although other waterproofing techniques and materials are available, we place a high value on our Gore-Tex waterproof breathable fabric license because Gore-Tex has high brand name recognition with our customers. The loss of our license to use Gore-Tex waterproof breathable fabric could have a material adverse effect on our competitive position, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. 12 Our outdoor products are seasonal. We have historically experienced significant seasonal fluctuations in our business because we derive a significant portion of our revenues from sales of our outdoor products. Many of our outdoor products are used by consumers in cold or wet weather. As a result, a majority of orders for these products are placed by our retailers in January through April for delivery in July through October. In order to meet demand, we must manufacture and source outdoor footwear year round to be in a position to ship advance orders for these products during the last two quarters of each year. Accordingly, average inventory levels have been highest during the second and third quarters of each year and sales have been highest in the last two quarters of each year. There is no assurance that we will have either sufficient inventory to satisfy demand in any particular quarter or have sufficient demand to sell substantially all of our inventory without significant markdowns. Our outdoor products are sensitive to weather conditions. Historically, our outdoor products have been used primarily in cold or wet weather. Mild or dry weather has in the past and may in the future have a material adverse effect on sales of our products, particularly if mild or dry weather conditions occur in broad geographical areas during late fall or early winter. Also, due to variations in weather conditions from year to year, results for any single quarter or year may not be indicative of results for any future period. Our business could suffer if our third-party manufacturers violate labor laws or fail to conform to generally accepted ethical standards. We require our third-party manufacturers to meet our standards for working conditions and other matters before we are willing to place business with them. As a result, we may not always obtain the lowest cost production. Moreover, we do not control our third-party manufacturers or their respective labor practices. If one of our third- party manufacturers violates generally accepted labor standards by, for example, using forced or indentured labor or child labor, failing to pay compensation in accordance with local law, failing to operate its factories in compliance with local safety regulations or diverging from other labor practices generally accepted as ethical, we likely would cease dealing with that manufacturer, and we could suffer an interruption in our product supply. In addition, such a manufacturer’s actions could result in negative publicity and may damage our reputation and the value of our brand and discourage retail customers and consumers from buying our products. The growth of our business will be dependent upon the availability of adequate capital. The growth of our business will depend on the availability of adequate capital, which in turn will depend in large part on cash flow generated by our business and the availability of equity and debt financing. We cannot assure that our operations will generate positive cash flow or that we will be able to obtain equity or debt financing on acceptable terms or at all. Our revolving credit facility contains provisions that restrict our ability to incur additional indebtedness or make substantial asset sales that might otherwise be used to finance our expansion. Security interests in substantially all of our assets, which may further limit our access to certain capital markets or lending sources, secure our obligations under our revolving credit facility. Moreover, the actual availability of funds under our revolving credit facility is limited to specified percentages of our eligible inventory and accounts receivable. Accordingly, opportunities for increasing our cash on hand through sales of inventory would be partially offset by reduced availability under our revolving credit facility. As a result, we cannot assure you that we will be able to finance our current expansion plans. We must comply with the restrictive covenants contained in our revolving credit facility. Our credit facility requires us to comply with certain financial restrictive covenants that impose restrictions on our operations, including our ability to incur additional indebtedness, make investments of other restricted payments, sell or otherwise dispose of assets and engage in other activities. Any failure by us to comply with the restrictive covenants could result in an event of default under those borrowing arrangements, in which case the lenders could elect to declare all amounts outstanding thereunder to be due and payable, which could have a material adverse effect on our financial condition. Our credit facility contains a restrictive covenant which requires us to maintain a fixed charge coverage ratio. This restrictive covenant is only in effect upon a triggering event taking place (as defined in the credit facility agreement). At December 31, 2016, there was no triggering event and the covenant was not in effect. 13 We face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed. The footwear and apparel industries are intensely competitive, and we expect competition to increase in the future. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do, as well as greater brand awareness in the footwear market. Our ability to succeed depends on our ability to remain competitive with respect to the quality, design, price and timely delivery of products. Competition could materially adversely affect our business, financial condition, results of operations and cash flows. We currently manufacture a portion of our products and we may not be able to do so in the future at costs that are competitive with those of competitors who source their goods. We currently plan to retain our internal manufacturing capability in order to continue benefiting from expertise we have gained with respect to footwear manufacturing methods conducted at our manufacturing facilities. We continue to evaluate our manufacturing facilities and third-party manufacturing alternatives in order to determine the appropriate size and scope of our manufacturing facilities. There can be no assurance that the costs of products that continue to be manufactured by us can remain competitive with products sourced from third parties. We rely on distribution centers in Logan, Ohio, Sumner, Washington and Waterloo, Ontario, Canada, and if there is a natural disaster or other serious disruption at any of these facilities, we may be unable to deliver merchandise effectively to our retailers. We rely on distribution centers located in Logan, Ohio, Sumner, Washington and Waterloo, Ontario, Canada. Any natural disaster or other serious disruption at any of these facilities due to fire, tornado, flood, terrorist attack or any other cause could damage a portion of our inventory or impair our ability to use our distribution center as a docking location for merchandise. Either of these occurrences could impair our ability to adequately supply our retailers and harm our operating results. We are subject to certain environmental and other regulations. Some of our operations use substances regulated under various federal, state, local and international environmental and pollution laws, including those relating to the storage, use, discharge, disposal and labeling of, and human exposure to, hazardous and toxic materials. Compliance with current or future environmental laws and regulations could restrict our ability to expand our facilities or require us to acquire additional expensive equipment, modify our manufacturing processes or incur other significant expenses. In addition, we could incur costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under any environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. There can be no assurance that violations of environmental laws or regulations have not occurred in the past and will not occur in the future as a result of our inability to obtain permits, human error, equipment failure or other causes, and any such violations could harm our business, financial condition, results of operations and cash flows. If our efforts to establish and protect our trademarks, patents and other intellectual property are unsuccessful, the value of our brands could suffer. We regard certain of our footwear designs as proprietary and rely on patents to protect those designs. We believe that the ownership of patents is a significant factor in our business. Existing intellectual property laws afford only limited protection of our proprietary rights, and it may be possible for unauthorized third parties to copy certain of our footwear designs or to reverse engineer or otherwise obtain and use information that we regard as proprietary. If our patents are found to be invalid, however, to the extent they have served, or would in the future serve, as a barrier to entry to our competitors, such invalidity could have a material adverse effect on our business, financial condition, results of operations and cash flows. We own U.S. registrations for a number of our trademarks, trade names and designs, including such marks as Rocky, Georgia Boot, Durango, Lehigh and Creative Recreation. Additional trademarks, trade names and designs are the subject of pending federal applications for registration. We also use and have common law rights in certain trademarks. Over time, we have increased distribution of our goods in several foreign countries. Accordingly, we have applied for trademark registrations in a number of these countries. We intend to enforce our trademarks and trade names against unauthorized use by third parties. 14 Our success depends on our ability to forecast sales. Our investments in infrastructure and product inventory are based on sales forecasts and are necessarily made in advance of actual sales. The markets in which we do business are highly competitive, and our business is affected by a variety of factors, including brand awareness, changing consumer preferences, product innovations, susceptibility to fashion trends, retail market conditions, weather conditions and economic and other factors. One of our principal challenges is to improve our ability to predict these factors, in order to enable us to better match production with demand. In addition, our growth over the years has created the need to increase the investment in infrastructure and product inventory and to enhance our systems. To the extent sales forecasts are not achieved, costs associated with the infrastructure and carrying costs of product inventory would represent a higher percentage of revenue, which would adversely affect our business, financial condition, results of operations and cash flows. A privacy breach could have a material adverse effect on the Company's business and reputation. We rely heavily on digital technologies for the successful operation of our business, including electronic messaging, digital marketing efforts and the collection and retention of customer data and employee information. We also rely on third parties to process credit card transactions, perform online e-commerce and social media activities and retain data relating to the Company’s financial position and results of operations, strategic initiatives and other important information. Despite the security measures we have in place, our facilities and systems and those of our third-party service providers, may be vulnerable to cyber-security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information, whether by us or by our third-party service providers, could adversely affect our business. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our systems. Our dividend policy may change. Although we have paid dividends to our shareholders, we have no obligation to continue doing so and may change our dividend policy at any time without notice to our shareholders. Holders of our common stock are only entitled to receive such cash dividends as our board of directors may declare out of funds legally available for such payments. Risks Related to Our Industry Because the footwear market is sensitive to decreased consumer spending and slow economic cycles, if general economic conditions deteriorate, many of our customers may significantly reduce their purchases from us or may not be able to pay for our products in a timely manner. The footwear industry has been subject to cyclical variation and decline in performance when consumer spending decreases or softness appears in the retail market. Many factors affect the level of consumer spending in the footwear industry, including: • • • • • • • general business conditions; interest rates; the availability of consumer credit; weather; increases in prices of nondiscretionary goods; taxation; and consumer confidence in future economic conditions. Consumer purchases of discretionary items, including our products, may decline during recessionary periods and also may decline at other times when disposable income is lower. A downturn in regional economies where we sell products also reduces sales. 15 The continued shift in the marketplace from traditional independent retailers to large discount mass merchandisers may result in decreased margins. A continued shift in the marketplace from traditional independent retailers to large discount mass merchandisers has increased the pressure on many footwear manufacturers to sell products to these mass merchandisers at less favorable margins. Because of competition from large discount mass merchandisers, a number of our small retailing customers have gone out of business, and in the future more of these customers may go out of business, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. If we do not effectively respond to the trend of consumer shopping moving to online retailers it may negatively impact our business. The retail industry is rapidly changing and we must ensure we are evolving both our own online e-commerce websites as well as providing digital assistance to our wholesale customers to support their e-commerce websites. Failure to timely identify and effectively respond to the online trends of the retail industry could negatively impact our product reach and market share. We are making technology investments in our websites and mobile applications. If we are unable to improve or develop relevant technology in a timely manner, our ability to compete and our results of operations could be adversely affected. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. We own our 25,000 square foot executive offices that are located in Nelsonville, Ohio, which are utilized by all segments. We also own our 192,000 square foot finished goods distribution facility in Logan, Ohio, which is utilized by our wholesale and retail segments. We also own our 41,000 square foot outlet store and a 5,500 square foot executive office building located in Nelsonville, Ohio, a portion of which is utilized by our retail segment. We lease an office in California for our Creative Recreation business. This lease expires in March 2018. We lease two manufacturing facilities in Puerto Rico consisting of 44,978 square feet and 39,581 square feet which are utilized by the wholesale and military segments. These leases expire in 2019. In the Dominican Republic, we lease seven stand-alone manufacturing facilities as follows: ITEM 3. LEGAL PROCEEDINGS. We are, from time to time, a party to litigation which arises in the normal course of our business. Although the ultimate resolution of pending proceedings cannot be determined, in the opinion of management, the resolution of these proceedings in the aggregate will not have a material adverse effect on our financial position, results of operations, or liquidity. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. 16 Square FootageLease Expiration28,684 201834,373 201820,135 201893,097 201936,186 201923,476 202016,797 2021 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market Information Our common stock trades on the NASDAQ Global Select Market under the symbol “RCKY.” The following table sets forth the range of high and low sales prices for our common stock for the periods indicated, as reported by the NASDAQ Global Select Market: Quarter Ended March 31, 2015…………………………………………………………. June 30, 2015…………………………………………………………… September 30, 2015…………………………………………………….. December 31, 2015……………………………………………………... March 31, 2016…………………………………………………………. June 30, 2016…………………………………………………………… September 30, 2016…………………………………………………….. December 31, 2016……………………………………………………... High $23.11 $23.00 $19.91 $16.00 $13.55 $13.95 $12.68 $11.65 Low $12.94 $17.34 $13.34 $10.08 $ 9.67 $10.70 $10.17 $ 9.95 Dividends Per Share $0.10 $0.11 $0.11 $0.11 $0.11 $0.11 $0.11 $0.11 On February 21, 2017, the last reported sales price of our common stock on the NASDAQ Global Select Market was $11.35 per share. As of February 21, 2017, there were 83 shareholders of record of our common stock. Dividends During 2013, our board of directors adopted a dividend policy under which the Company intends to pay a cash dividend on its common stock. During 2016, 2015 and 2014, we paid dividends on our common stock totaling $3,297,066, $3,252,254, and $3,017,979, respectively. 17 PERFORMANCE GRAPH The following performance graph compares our performance of the Company with the NASDAQ Composite Index and the Standard & Poor’s Footwear Index, which is a published industry index. The comparison of the cumulative total return to shareholders for each of the periods assumes that $100 was invested on December 31, 2011, in our common stock, and in the NASDAQ Stock Market (U.S.) Index and the Standard & Poor’s Footwear Index and that all dividends were reinvested. The following table sets forth information concerning the Company’s purchases of common stock for the periods indicated: In March 2016, the Company announced a $7,500,000 share repurchase program. There was $5,549,886 remaining under the program as of the end of the fourth quarter. The repurchase program terminated on March 1, 2017. On March 2, 2017, the Board of Directors authorized a new $7,500,000 share repurchase program, which terminates on March 1, 2018. 18 PeriodTotal number of shares (or units) purchasedAverage price paid per share (or unit)Total number of shares (or units) purchased as part of publicly announced plans or programsMaximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programsOctober 1, 2016 - October 31, 201629,848 10.16$ 29,848 5,549,886$ November 1, 2016- November 30, 2016- - - 5,549,886$ December 1, 2016 - December 31, 2016- - - 5,549,886$ Total29,848 10.16$ 29,848 5,549,886$ ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. ROCKY BRANDS, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except for per share data) The 2016 financial data reflects reorganizational charges for $0.8 million and included an impairment charge of $2.0 million net of tax benefits. The 2013 financial data reflects charges of $0.8 million, net of tax benefits, for acquisition related expenses and a gain on bargain purchase of $0.4 million, net of tax. Certain amounts from prior years related to royalty income have been reclassified to conform to current presentation. In 2013, we began reporting royalty income as a component of net sales. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) describes the matters that we consider to be important to understanding the results of our operations for each of the three years in the period ended December 31, 2016, and our capital resources and liquidity as of December 31, 2016 and 2015. Use of the terms “Rocky,” the “Company,” “we,” “us” and “our” in this discussion refer to Rocky Brands, Inc. and its subsidiaries. Our fiscal year begins on January 1 and ends on December 31. We analyze the results of our operations for the last three years, including the trends in the overall business followed by a discussion of our cash flows and liquidity, our credit facility, and contractual commitments. We then provide a review of the critical accounting judgments and estimates that we have made that we believe are most important to an understanding of our MD&A and our consolidated financial statements. We conclude our MD&A with information on recent accounting pronouncements which we adopted during the year, as well as those not yet adopted that are expected to have an impact on our financial accounting practices. The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and our consolidated financial statements and the notes thereto, all included elsewhere herein. The forward-looking statements in this section and other parts of this document involve risks and uncertainties including statements regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under the caption “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” below. The Private 19 12/31/1612/31/1512/31/1412/31/1312/31/12Income Statement DataNet sales260,259$ 269,302$ 286,242$ 244,871$ 228,537$ Gross margin (% of sales)29.5%33.0%33.7%34.1%35.2%Net income (loss)(2,139)$ 6,603$ 9,845$ 7,373$ 8,855$ Dividends paid on common stock3,297 3,252 3,018 2,255 - Per ShareNet income Basic(0.29)$ 0.87$ 1.30$ 0.98$ 1.18$ Diluted(0.29)$ 0.87$ 1.30$ 0.98$ 1.18$ Weighted average number of common shares outstanding Basic7,505 7,563 7,545 7,517 7,503 Diluted7,505 7,574 7,548 7,517 7,503 Balance Sheet DataInventories69,168$ 76,991$ 85,237$ 78,172$ 67,196$ Total assets180,573$ 193,865$ 213,228$ 199,025$ 174,844$ Working capital102,693$ 114,474$ 124,773$ 118,242$ 105,435$ Long-term debt, less current maturities14,584$ 23,700$ 36,270$ 38,388$ 23,461$ Stockholders' equity135,093$ 142,121$ 138,348$ 131,213$ 125,637$ Five Year Financial Summary Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of the Company. EXECUTIVE OVERVIEW We are a leading designer, manufacturer and marketer of premium quality footwear and apparel marketed under a portfolio of well recognized brand names including Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation and the licensed brand Michelin. Our products are distributed through three distinct business segments: wholesale, retail and military. In our wholesale business, we distribute our products through a wide range of distribution channels representing over ten- thousand retail store locations in the U.S. and Canada as well as in several international markets. Our wholesale channels vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores and other specialty retailers. Our retail business includes direct sales of our products to consumers primarily through our websites. We also sell footwear under the Rocky label to the U.S. military. We are currently fulfilling several multiyear contracts for the U.S. military. Net sales for the military segment of the business increased to $37.4 million, an increase of $20.0 million over 2015 levels. Our growth strategy is founded substantially on the expansion of our brands into new footwear and apparel markets. New products that we introduce may not be successful with consumers or one or more of our brands may fall out of favor with consumers. If we are unable to anticipate, identify or react appropriately to changes in consumer preferences, we may not grow as fast as we plan to grow or our sales may decline, and our brand image and operating performance may suffer. Furthermore, achieving market acceptance for new products will likely require us to exert substantial product development and marketing efforts, which could result in a material increase in our selling, general and administrative, or SG&A, expenses, and there can be no assurance that we will have the resources necessary to undertake such efforts. Material increases in our SG&A expenses could adversely impact our results of operations and cash flows. We may also encounter difficulties in producing new products that we did not anticipate during the development stage. Our development schedules for new products are difficult to predict and are subject to change as a result of shifting priorities in response to consumer preferences and competing products. If we are not able to efficiently manufacture newly-developed products in quantities sufficient to support retail distribution, we may not be able to recoup our investment in the development of new products. Failure to gain market acceptance for new products that we introduce could impede our growth, reduce our profits, adversely affect the image of our brands, erode our competitive position and result in long term harm to our business. FINANCIAL SUMMARY Net sales of the wholesale segment decreased $29.1 million in 2016 from prior year primarily as a result of decreased sales in all of our footwear and apparel categories. The decrease in 2016 is primarily due to warmer temperatures in the fourth quarter and weak retail store traffic . Net sales of the retail segment increased $0.1 million in 2016 from the prior year primarily as a result of higher sales from our business and consumer web platforms. Net sales of the military segment increased $20.0 million in 2016 from the prior year. From time to time, we bid on military contracts when they become available. Our sales under such contracts are dependent on us winning the bids for these contracts and the purchase orders received on these contracts. We are currently fulfilling several multiyear contracts for the U.S. military. Gross margin of the wholesale segment decreased $12.5 million in 2016 from the prior year as a result of the lower sales and lower margin. Gross margin of the wholesale segment as a percent of sales for 2016 was 180 basis points less than the prior year. 20 Retail gross margin for 2016 was $21.1 million or 45.9%, compared to $20.6 million or 45.0% in 2015. The 90 basis point increase was largely due to an increase in on-line direct to consumer sales, which carry a higher margin. Gross margin of the military segment decreased $0.1 million in 2016 over the prior year due primarily to lower margin as a percentage of sales due to the significant investments made in our Puerto Rico facility to handle increased production. Selling, general and administrative expenses decreased $2.8 million in 2016 from prior year primarily as result of lower advertising and compensation expenses and lower freight expenses associated with the decrease in sales. Net interest expense decreased $0.1 million in 2016 from the prior year due to lower levels of debt. Net income decreased $8.7 million in 2016 from prior year results primarily due to lower sales in our wholesale business along with an impairment of $3.0 million of our Creative Recreation trade name and a reorganizational charge of $1.2 million in 2016. Total debt at December 31, 2016 was $14.6 million or $9.1 million lower than the prior year. Total debt minus cash and cash equivalents was $10.1 million or 6.8% of total capitalization at December 31, 2016 compared to $20.3 million or 12.2% of total capitalization at December 31, 2015. Our cash from operating activities decreased $1.9 million in 2016 over the prior year, primarily the result of a decrease in net income of $8.7 million, being offset by lower accounts receivable and lower inventory levels at the end of 2016. Net sales. Net sales and related cost of goods sold are recognized at the time products are shipped to the customer and title transfers. Net sales are recorded net of estimated sales discounts and returns based upon specific customer agreements and historical trends. Net sales include royalty income from licensing our brands. Cost of goods sold. Our 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. SG&A expenses. Our SG&A expenses consist primarily of selling, marketing, wages and related payroll and employee benefit costs, travel and insurance expenses, depreciation, amortization, professional fees, facility expenses, bank charges, and warehouse and outbound freight expenses. Percentage of Net Sales The following table sets forth consolidated statements of operations data as percentages of total net sales: Results of Operations Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Net sales. Net sales decreased 3.36% to $260.3 million for 2016 compared to $269.3 million the prior year. Wholesale sales decreased $29.1 million to $176.9 million for 2016 compared to $206.1 million for 2015. The decrease in wholesale sales was primarily the result of decreases in most of our footwear and apparel categories, 21 201620152014Net sales100.0%100.0%100.0%Cost of goods sold70.5%67.0%66.3%Gross margin29.5%33.0%33.7%SG&A expense29.1%29.1%28.2%Reorganizational charge0.4%0.0%0.0%Impairment charge1.2%0.0%0.0%Income from operations-1.2%3.9%5.5%Years Ended December 31, except for commercial military. The decreases in 2016 are primarily the result of warmer temperatures in the critical fall shipping season and weak retail store traffic that pressured demand in all of our categories. Retail sales increased to $45.9 million for 2016 compared to $45.8 million for 2015. The $0.1 million increase in retail sales resulted from increased sales in our business-to-consumer ecommerce web platforms. Military segment sales were $37.4 million for 2016 compared to $17.4 million in 2015. We bid on military contracts when they become available. Our U.S Military sales are dependent on us winning bids for contracts and the purchase orders received on these contracts. We are currently fulfilling several multiyear contracts for the U.S. military. Average list prices in 2016 for our footwear, apparel and accessories were comparable to 2015. Gross margin. Gross margin decreased to $76.7 million or 29.5% of net sales for 2016 compared to $88.9 million or 33.0% of net sales for the prior year. Wholesale gross margin for 2016 was $53.5 million, or 30.2% of net sales, compared to $66.0 million, or 32.0% of net sales in 2015. The 180 basis point decline was largely due to lower overall average selling price due to the product mix of sales. Retail gross margin for 2016 was $21.1 million or 45.9%, compared to $20.6 million or 45.0% in 2015. The 90 basis point increase was largely due to an increase in on-line direct to consumer sales, which carry a higher margin. Military gross margin in 2016 was $2.2 million, or 5.8% of net sales, compared to $2.3 million, or 13.1% of net sales in 2015. The decrease in military margin is primarily due to additional investments needed to support the increase in military production in our Puerto Rico facility. SG&A expenses. SG&A expenses were $75.6 million, or 29.1% of net sales in 2016 compared to $78.4 million, or 29.1% of net sales for 2015. The net decrease primarily reflected lower advertising expenses of $1.8 million and lower freight costs of $0.6 million, partially offset by an increase in bad debt expense of $1.4 million. Reorganizational Charge. During the quarter ended September 30, 2016, we recorded $1.2 million in a reorganizational charge consisting of severance. The purpose of this reorganization was to maximize profitability, drive long-term revenue growth and maximize shareholder value. Impairment Charge. During the quarter ended December 31, 2016, we recorded a $3.0 million non-cash impairment charge as a result of our 2016 indefinite-lived intangible test for the Creative Recreation trademark. Interest expense. Interest expense was $0.6 million in 2016, compared to $0.7 million for the prior year. The decrease in interest expense in 2016 from the prior year was due to lower overall levels of debt. Income taxes. Income tax benefit was $1.5 million in 2016, compared to an income tax expense of $3.1 million for the same period a year ago. The decrease in income tax expense for 2016 was due to a $13.3 million decrease in pretax income. The effective tax rate for 2016 was 40.9% compared to 31.8% for 2015. The effective tax rate for 2016 increased over 2015 as a result of a decrease in our permanent capital investment in the Dominican Republic which increased the amount of dividends we provide for U.S income taxes. Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 Net sales. Net sales decreased 5.9% to $269.3 million for 2015 compared to $286.2 million the prior year. Wholesale sales decreased $27.8 million to $206.1 million for 2015 compared to $233.9 million for 2014. The decrease in wholesale sales was primarily the result of decreases in most all our footwear and apparel categories. The decreases in 2015 are primarily the result of warmer temperatures in the critical fall shipping season and weak retail store traffic in the fourth quarter that pressured demand in all of our categories. Retail sales increased to $45.8 million for 2015 compared to $44.3 million for 2014. The $1.5 million increase in retail sales resulted from increased sales in our business-to-consumer ecommerce web platforms. Military segment sales, which occur from time to time, were $17.4 million for 2015 compared to $8.0 million in 2014. From time to time, we bid on military contracts when they become available. Our sales under such contracts are dependent on us winning the bids for these contracts and the purchase orders received on these contracts. We have received an order to fulfill a contract to the U.S. Military to produce “Hot Weather” combat boots. During 2015 and 2014, we shipped boots under this agreement. Average list prices in 2015 for our footwear, apparel and accessories were comparable to 2014. Gross margin. Gross margin decreased to $88.9 million or 33.0% of net sales for 2015 compared to $96.4 million or 33.7% of net sales for the prior year. Wholesale gross margin for 2015 was $66.0 million, or 32.0% of net sales, compared to $75.8 million, or 32.4% of net sales in 2014. The 40 basis point decline was largely due to lower average selling prices. Retail gross margin for 2015 was $20.6 million, or 45.0% of net sales, compared to $19.4 million, or 43.9% of net sales, in 2014. The 110 basis point increase in 2015 from the prior year was largely due to a shift in sales toward our business-to-consumer ecommerce web platforms, which carry higher margins. Military 22 gross margin in 2015 was $2.3 million, or 13.1% of net sales, compared to $1.1 million, or 13.4% of net sales in 2014. SG&A expenses. SG&A expenses were $78.4 million, or 29.1% of net sales in 2015 compared to $80.6 million, or 28.2% of net sales for 2014. The net decrease primarily reflected lower compensation expenses of $3.1 million and lower freight costs of $0.8 million, partially offset by higher spending on advertising of $1.2 million. Interest expense. Interest expense was $0.7 million in 2015, compared to $0.9 million for the prior year. The decrease in interest expense in 2015 from the prior year was due to lower overall levels of debt. Income taxes. Income tax expense was $3.1 million in 2015, compared to $4.9 million for the same period a year ago. The decrease in income tax expense for 2015 was due to a $5.1 million decrease in pretax income and a decrease in the effective tax rate. The effective tax rate for 2015 was 31.8% compared to 33.2% for 2014. The effective tax rate for 2015 is less than the federal statutory rate due principally to our permanent capital investment in the Dominican Republic which reduces the amount of dividends that we need to provide for U.S income taxes. LIQUIDITY AND CAPITAL RESOURCES Overview Our principal sources of liquidity have been our income from operations and borrowings under our credit facility and other indebtedness. Over the last several years our principal uses of cash have been for working capital and capital expenditures to support our growth. Our working capital consists primarily of trade receivables and inventory, offset by accounts payable and accrued expenses. Our working capital fluctuates throughout the year as a result of our seasonal business cycle and business expansion and is generally lowest in the months of January through March of each year and highest during the months of May through October of each year. We typically utilize our revolving credit facility to fund our seasonal working capital requirements. As a result, balances on our revolving credit facility will fluctuate significantly throughout the year. Our working capital decreased to $102.7 million at December 31, 2016, compared to $114.5 million at the end of the prior year. Our capital expenditures relate primarily to projects relating to our corporate offices, property, merchandising fixtures, molds and equipment associated with our manufacturing and distribution operations and for information technology. Capital expenditures were $6.0 million for 2016 and $8.7 million in 2015. Capital expenditures for 2017 are anticipated to be approximately $3.4 million. In October 2010, we entered into a financing agreement with PNC Bank (“PNC”) to provide a $70 million credit facility. In December 2014, we amended and restated the credit facility to increase the facility to $75 million and extend the term of the facility an additional five years to November 2019. The credit facility’s base interest rate is the current prime rate less 0.25%, however the credit facility provides us the option to borrow on up to eight fixed loans at LIBOR plus 1.25% in accordance with the 2014 amended and restated credit agreement. The LIBOR rate is determined based on the fixed loan maturities, which vary from 30, 60, 90, or 180 days. As of December 31, 2016 and December 31, 2015, we had approximately $12.0 million and $17.0 million, respectively, in fixed LIBOR borrowings under the credit facility. The total amount available under our amended and restated revolving credit facility is subject to a borrowing base calculation based on various percentages of accounts receivable and inventory. As of December 31, 2016, we had $14.6 million in total borrowings under this facility and total capacity of $57.3 million. Our amended and restated credit facility contains a restrictive covenant which requires us to maintain a fixed charge coverage ratio. This restrictive covenant is only in effect upon a triggering event taking place (as defined in the amended and restated credit facility agreement). At December 31, 2016, there was no triggering event and the covenant was not in effect. Our amended and restated credit facility places a restriction on the amount of dividends that may be paid. During 2016, 2015 and 2014, we paid dividends on our common stock totaling $3,297,066 $3,252,254, and $3,017,979 respectively. Our amended and restated revolving credit facility matures in November 2019. We have no other long-term debt maturities. 23 We believe that our credit facility coupled with cash generated from operations will provide sufficient liquidity to fund our operations for at least the next twelve months. Our continued liquidity, however, is contingent upon future operating performance, cash flows and our ability to meet financial covenants under our credit facility. Based on our expected borrowings for 2017, a hypothetical 100 basis point increase in short term interest rates would result, over the subsequent twelve-month period, in a reduction of approximately $0.1 million in income before income taxes and cash flows. The estimated reductions are based upon the current level of variable debt and assume no changes in the composition of that debt. Cash Flows Operating Activities. Net cash provided by operating activities totaled $21.3 million for 2016, compared to $23.2 million for 2015, and $13.0 million for 2014. The principal sources of net cash in 2016 included lower balances of accounts receivable and inventory, in addition to an increase in accounts payable. The principal sources of net cash in 2015 included lower balances of accounts receivable and inventory, which were partially offset by lower balances of accounts payable and other accrued liabilities. The principal sources of net cash in 2014 included higher net income and increases in accounts payable and other accrued liabilities, which were partially offset by higher balances of inventory and accounts receivable. Investing Activities. Net cash used in investing activities was $5.8 million in 2016, compared to $8.6 million in 2015, and $7.4 million in 2014. The principal use of cash in 2016, 2015 and 2014 was for the purchase of molds and equipment associated with our manufacturing and distribution operations and for information technology software and system upgrades. Financing Activities. Cash used in financing activities during 2016 was $14.4 million, compared to $15.8 million in 2015, and $5.2 million for 2014. Proceeds and repayments of the revolving credit facility reflect daily cash disbursement and deposit activity. Our financing activities during 2016 included net repayments under the revolving line of credit facility of $9.1 million. Our financing activities during 2015 included net repayments under the revolving line of credit facility of $12.6 million. Our financing activities during 2014 included net repayments under the revolving line of credit facility of $2.1 million. Borrowings and External Sources of Funds Our borrowings and external sources of funds were as follows at December 31, 2016 and 2015: We continually evaluate our external credit arrangements in light of our growth strategy and new opportunities. In December 2014, we amended and restated our financing agreement with PNC bank to provide a $75 million credit facility. The term of the amended credit facility is five years and the interest rate is currently LIBOR plus 1.25%. We lease certain machinery, shoe centers, and manufacturing facilities under operating leases that generally provide for renewal options. Future minimum lease payments under non-cancelable operating leases are $1.2 million, $0.7 million, $0.2 million, and $0.1 million for years 2017 through 2020, respectively, or approximately $2.2 million in total. 24 Cash Flow Summary201620152014($ in millions)Cash provided by (used in): Operating activities21.3$ 23.2$ 13.0$ Investing activities(5.8) (8.6) (7.4) Financing activities(14.4) (15.8) (5.2) Net change in cash and cash equivalents1.1$ (1.2)$ 0.4$ ($ in millions)20162015Revolving credit facility14.6$ 23.7$ Less current maturities- - Net long-term debt14.6$ 23.7$ December 31 Contractual Obligations and Commercial Commitments The following table summarizes our contractual obligations at December 31, 2016 resulting from financial contracts and commitments. We have not included information on our recurring purchases of materials for use in our manufacturing operations. These amounts are generally consistent from year to year, closely reflect our levels of production, and are not long-term in nature (less than three months). Contractual Obligations at December 31, 2016: From time to time, we enter into purchase commitments with our suppliers under customary purchase order terms. Any significant losses implicit in these contracts would be recognized in accordance with generally accepted accounting principles. At December 31, 2016, no such losses existed. Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as may be issued and enforced by various federal, state and local agencies. With respect to environmental matters, costs are incurred pertaining to regulatory compliance. Such costs have not been, and are not anticipated to become, material. We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the normal course of business. We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “Variable Interest Entities.” Additionally, we do not have any related party transactions that materially affect the results of operations, cash flow or financial condition. Inflation Our financial performance is influenced by factors such as higher raw material costs as well as higher salaries and employee benefits. Management attempts to minimize or offset the effects of inflation through increased selling prices, productivity improvements, and cost reductions. We were able to mitigate the effects of inflation during 2016, 2015, and 2014 due to these factors. It is anticipated that any inflationary pressures during 2017 could be offset through possible price increases. CRITICAL ACCOUNTING POLICIES AND ESTIMATES “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. A summary of our significant accounting policies is included in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Our management regularly reviews our accounting policies to make certain they are current and also provide readers of the consolidated financial statements with useful and reliable information about our operating results and financial condition. These include, but are not limited to, matters related to accounts receivable, inventories, intangibles and income taxes. Implementation of these accounting policies includes estimates and judgments by management based on historical experience and other factors believed to be reasonable. This may include 25 TotalLess Than 1 Year1-3 Years3-5 YearsOver 5 YearsLong-term debt14.6$ -$ 14.6$ -$ -$ Minimum operating lease commitments2.2 1.2 0.9 0.1 - Expected cash requirements for interest (1)1.5 0.5 1.0 - - Total contractual obligations18.3$ 1.7$ 16.5$ 0.1$ -$ Payments due by Year$ millions(1) Assumes a 3.5% interest rate, which is the highest rate possible as of December 31, 2016 on the $75 million revolving credit facility. judgments about the carrying value of assets and liabilities based on considerations that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our management believes the following critical accounting policies are most important to the portrayal of our financial condition and results of operations and require more significant judgments and estimates in the preparation of our consolidated financial statements. Revenue recognition Revenue principally consists of sales to customers, and, to a lesser extent, license fees. Revenue is recognized when goods are shipped and title passes to the customer, while license fees are recognized when earned. Customer sales are recorded net of allowances for estimated returns, trade promotions and other discounts, which are recognized as a deduction from sales at the time of sale. Accounts receivable allowances Management maintains allowances for uncollectible accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The allowance for uncollectible accounts is calculated based on the relative age and status of trade receivable balances. Sales returns and allowances We record a reduction to gross sales based on estimated customer returns and allowances. These reductions are influenced by historical experience, based on customer returns and allowances. The actual amount of sales returns and allowances realized may differ from our estimates. If we determine that sales returns or allowances should be either increased or decreased, then the adjustment would be made to net sales in the period in which such a determination is made. Sales returns and allowances for sales returns were approximately 3.8% of sales for 2016 and 3.5% of sales for 2015. Inventories Management identifies slow moving or obsolete inventories and estimates appropriate loss provisions related to these inventories. Historically, these loss provisions have not been significant as the vast majority of our inventories are considered saleable and we have been able to liquidate slow moving or obsolete inventories at amounts above cost through our factory outlet stores or through various discounts to customers. Should management encounter difficulties liquidating slow moving or obsolete inventories, additional provisions may be necessary. Management regularly reviews the adequacy of our inventory reserves and makes adjustments to them as required. Intangible assets Intangible assets, including goodwill, trademarks and patents are reviewed for impairment annually, and more frequently, if necessary. We perform such testing of goodwill and indefinite-lived intangible assets in the fourth quarter of each year or as events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. In assessing whether indefinite-lived intangible assets are impaired, we must make certain estimates and assumptions regarding future cash flows, long-term growth rates of our business, operating margins, weighted average cost of capital and other factors such as; discount rates, royalty rates, cost of capital, and market multiples to determine the fair value of our assets. These estimates and assumptions require management’s judgment, and changes to these estimates and assumptions could materially affect the determination of fair value and/or impairment for each of our other indefinite-lived intangible assets. Future events could cause us to conclude that indications of intangible asset impairment exist. Impairment may result from, among other things, deterioration in the performance of our business, adverse market conditions, adverse changes in applicable laws and regulations, competition, or the sale or disposition of a reporting segment. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. Income taxes Management has recorded a valuation allowance to reduce its deferred tax assets for a portion of state and local income tax net operating losses that it believes may not be realized. We have considered future taxable income and 26 ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, however, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. At December 31, 2016, approximately $19.2 million of undistributed earnings remains that would become taxable upon repatriation to the United States. RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718). Some share- based payment awards that require a specific performance target to be achieved before the employee can benefit from the award, also require an employee to render service until the performance target is achieved. In some cases, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be entitled to benefit from the award regardless of whether the employee is rendering service on the date the performance target is achieved. Some entities account for those performance targets as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value. Others treat them as non-vesting conditions that affect the grant-date fair value of the award. The amendments apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. The update is effective for public entities for annual reporting periods beginning after December 15, 2015. The adoption of this standard did not have a material effect on our consolidated financial statements. In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20). The objective of this update is to simplify the income statement presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. The adoption of this standard did not have an effect on our consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30). The objective of this update is to simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendments in this update are effective for fiscal years beginning after December 15, 2015. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (that is, debt issuance cost asset and the debt liability). The adoption of this standard did not have an effect on our consolidated financial statements as ASU 2015-15 permitted debt issuance costs related to a line of credit arrangement to remain as an asset and be amortized over the remaining term of the line of credit agreement. Accounting standards not yet adopted In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition—Construction- Type and Production-Type Contracts, and create new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14. The amendments in this update defer the effective date of Update 2014-09. Public business entities, certain not-for- profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier 27 application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method but plan to select a transition method no later than the fourth quarter of our fiscal 2017. We are currently assessing our contracts with customers and related financial disclosures to evaluate the impact of the amended guidance on our existing revenue recognition policies and procedures. In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40). Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this update provide that guidance. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The update is effective for public entities for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We have not yet determined the impact this ASU will have on our consolidated financial statements. In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330). The amendments in this update require an entity to measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We have not yet determined the impact this ASU will have on our consolidated financial statements. In November 2015, the FASB issued ASU No. 2015-17, Income Taxes - Balance Sheet Classification of Deferred Taxes (Topic 740). The amendments in this update will simplify the presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. We have not yet determined the impact this ASU will have on our consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update will require lessees to recognize (with the exception of short-term leases) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. For public business entities, the amendments in this update are effective for years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted for all entities upon issuance. We have not yet determined the impact this ASU will have on our consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this update were issued as part of the FASB’s initiative to reduce complexity in accounting standards. The areas for simplification in this update involve several aspects of the accounting for employee share- based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. In addition, the amendments in this update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. For public business entities, the amendments in this update are effective for years 28 beginning after December 15, 2016, including interim periods within those fiscal years. Earlier application is permitted for all entities upon issuance. We have not yet determined the impact this ASU will have on our consolidated financial statements. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). This update clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The Update includes targeted improvements based on input the Board received from the Transition Resource Group for Revenue Recognition and other stakeholders. The update seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The amendments in this update are effective at the same time as ASU 2014-09. Public business entities, certain not-for- profit entities, and certain employee benefit plans should apply the guidance in update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We have not yet determined the impact this ASU will have on our consolidated financial statements. In May 2016, the FASB issued ASU 2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope improvements and practical expedients related to ASU 2014-09: Revenue from Contracts with Customers (Topic 606). The purpose of ASU 2016-12 is to clarify certain narrow aspects of Topic 606 such as assessing the collectability criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition, and technical correction. The standard has the same effective date as ASU 2014- 09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We have not yet determined the impact this ASU will have on our consolidated financial statements. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after December 31, 2017, and for interim periods within those years. Early adoption is permitted. We have not yet determined the impact this ASU will have on our consolidated financial statements. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995 This Management’s Discussion and Analysis of Financial Conditions and Results of Operations contains forward- looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our and management’s intent, belief, expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that all forward-looking statements involve risk and uncertainties including, without limitations, dependence on sales forecasts, changes in consumer demand, seasonality, impact of weather, competition, reliance on suppliers, changing retail trends, economic changes, as well as other factors set forth under the caption “Item 1A, Risk Factors” in this Annual Report on Form 10-K and other factors detailed from time to time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We assume no obligation to update any forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our primary market risk results from fluctuations in interest rates. We are also exposed to changes in the price of commodities used in our manufacturing operations. However, commodity price risk related to the Company's current commodities is not material as price changes in commodities can generally be passed along to the customer. We do not hold any market risk sensitive instruments for trading purposes. The following item is market rate sensitive for interest rates for the Company: long-term debt consisting of a credit facility (as described below) with a balance at December 31, 2016 of $14.6 million. 29 In October 2010, we entered into a financing agreement with PNC Bank (“PNC”) to provide a $70 million credit facility. In December 2014, we amended and restated the credit facility to increase the facility to $75 million and extend the term of the facility an additional five years. The current interest rate is generally LIBOR plus 1.25%. The remainder of the terms of the original agreement did not substantially change in the amended and restated agreement. The amended and restated credit facility matures in November 2019. We have no other long-term debt maturities. We do not have any interest rate management agreements as of December 31, 2016. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for the years ended December 31, 2016, 2015 and 2014, together with the report of the independent registered public accounting firm thereon appear on pages F-1 through F-25 hereof and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, our management carried out an evaluation, with the participation of our principal executive officer/interim principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our principal executive officer/interim principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Changes in Internal Control over Financial Reporting As part of our evaluation of the effectiveness of internal controls over financial reporting described below, we made certain improvements to our internal controls. However, there were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon that evaluation under the framework in Internal Control – Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2016. Schneider Downs & Co., Inc., our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal controls over financial reporting which is included on the following page. 30 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Rocky Brands, Inc. and Subsidiaries Nelsonville, Ohio We have audited Rocky Brands, Inc. and Subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows of the Company, and our report dated March 8, 2017 expressed an unqualified opinion. /s/ Schneider Downs & Co., Inc. Columbus, Ohio March 8, 2017 31 ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this item is included under the captions “ELECTION OF DIRECTORS” and “INFORMATION CONCERNING THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE,” INFORMATION CONCERNING EXECUTIVE OFFICERS,” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Company's Proxy Statement for the 2017 Annual Meeting of Shareholders (the “Proxy Statement”) to be held on May 17, 2017, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is included under the captions “EXECUTIVE COMPENSATION” and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” in the Company's Proxy Statement, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS. The information required by this item is included under the caption “PRINCIPAL HOLDERS OF VOTING SECURITIES - OWNERSHIP OF COMMON STOCK BY MANAGEMENT,” “- OWNERSHIP OF COMMON STOCK BY PRINCIPAL SHAREHOLDERS,” and “EQUITY COMPENSATION PLAN INFORMATION,” in the Company's Proxy Statement, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. The information required by this item is included under the caption “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION COMPENSATION COMMITTEE” and INTERLOCKS AND INSIDER PARTICIPATION/RELATED PARTY TRANSACTIONS” in the Company's Proxy Statement, and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information required by this item is included under the caption “REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS” in the Company’s Proxy Statement, and is incorporated herein by reference. 32 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: PART IV (1) The following Financial Statements are included in this Annual Report on Form 10-K on the pages indicated below: Report of Independent Registered Public Accounting Firm.…………………………. F-1 Consolidated Balance Sheets as of December 31, 2016 and 2015……………………… F-2 - F-3 Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015, and 2014………………………………………….. F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2016, 2015, and 2014……………………………… F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014…………………………………………… F-6 Notes to Consolidated Financial Statements for the years ended December 31, 2016, 2015, and 2014…………………………………………… F-7 - F-25 (2) The following financial statement schedule for the years ended December 31, 2016, 2015, and 2014 is included in this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements contained in the Annual Report. Schedule II -- Consolidated Valuation and Qualifying Accounts. Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or the notes thereto. (3) Exhibits: Exhibit Number 3.1 3.2 3.3 4.1 4.2 Description Second Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006). Amendment to Company’s Second Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10- K for the fiscal year ended December 31, 2006). Amended and Restated Code of Regulations of the Company (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1, registration number 33-56118 (the “Registration Statement”)). Form of Stock Certificate for the Company (incorporated by reference to Exhibit 4.1 to the Registration Statement). Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh, Twelfth, and Thirteenth of the Company's Amended and Restated Articles of Incorporation (see Exhibit 3.1). 4.3 Articles I and II of the Company's Code of Regulations (see Exhibit 3.3). 33 4.4 4.5 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 Amended and Restated Rights Agreement dated as of June 7, 2012, by and between the Company and the Computershare Trust Company, N.A., as Rights Agent (incorporated by reference to the Company’s Current Report on Form 8-K filed on June 12, 2012). Amendment No. 1 to the Amended and Restated Rights Agreement, dated as of June 7, 2012, by and between the Company and Computershare Trust Company, N.A., as Rights Agent (incorporated by reference to the Company’s Current Report on Form 8-K filed on August 19, 2015). Indemnification Agreement, dated December 12, 1992, between the Company and Mike Brooks (incorporated by reference to Exhibit 10.10 to the Registration Statement). Information concerning Indemnification Agreements substantially similar to Exhibit 10.3 (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005). Amended and Restated Lease Agreement, dated March 1, 2002, between Rocky Shoes & Boots Co. and William Brooks Real Estate Company regarding Nelsonville factory (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002). Lease Contract dated December 16, 1999, between Lifestyle Footwear, Inc. and The Puerto Rico Industrial Development Company (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004). Company’s 2014 Omnibus Incentive Plan (incorporated by reference to the Company’s Definitive Proxy Statement for the 2015 Annual Meeting of Shareholders, held on May 7, 2015, filed on April 7, 2014). Renewal of Lease Contract, dated June 24, 2004, between Five Star Enterprises Ltd. and the Dominican Republic Corporation for Industrial Development (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004). Second Amendment to Lease Agreement, dated as of July 26, 2004, between Rocky Shoes & Boots, Inc. and the William Brooks Real Estate Company (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004). Form of Option Award Agreement under the Company’s 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K dated January 3, 2005, filed with the Securities and Exchange Commission on January 7, 2005). Form of Restricted Stock Award Agreement relating to the Retainer Shares issued under the Company’s 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K dated January 3, 2005, filed with the Securities and Exchange Commission on January 7, 2005). Amended and Restated Revolving Credit, Term Loan, Guaranty, and Security Agreement dated as of December 19, 2014 among Rocky Brands, Inc., Lehigh Outfitters, LLC, Lifestyle Footwear, Inc., Rocky Brands Wholesale LLC, Rocky Brands International, LLC, Rocky Brands Canada, Inc., Creative Recreation, LLC, Creative Recreation Retail, LLC, Creative Recreation International, LLC, the lenders party thereto, and PNC Bank, National Association, as agent for lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 19, 2014, filed with the Securities and Exchange Commission on December 23, 2014). 10.11 Company’s Incentive Compensation Plan (incorporated by reference to the Company’s Definitive Proxy Statement for the 2012 Annual Meeting of Shareholders). 34 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 21 23* 24* 31* Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). Form of Performance Stock Unit Award Agreement (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). Employment Agreement, effective as of January 2, 2014, between the Company and Mike Brooks (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). Employment Agreement, effective as of January 2, 2014, between the Company and David Sharp (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). Employment Agreement, effective as of January 2, 2014, between the Company and James E. McDonald (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). Employment Agreement, effective as of January 2, 2014, between the Company and Gary Adam (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). Employment Agreement, effective as of January 2, 2014, between the Company and Jason Brooks (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). Employment Agreement, effective as of January 2, 2014, between the Company and Richard Simms (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10- K for the fiscal year ended December 31, 2013). Form of Option Award Agreement under the Company’s 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014). Form of Restricted Stock Unit Award Agreement under the Company’s 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014). Form of Performance Stock Unit Award Agreement under the Company’s 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014). Amendment No. 1 to Amended and Restated Revolving Credit, Term Loan, Guaranty, and Security Agreement dated as of December 19, 2014 among Rocky Brands, Inc., Lehigh Outfitters, LLC, Lifestyle Footwear, Inc., Rocky Brands Wholesale LLC, Rocky Brands International, LLC, Rocky Brands Canada, Inc., Creative Recreation, LLC, Creative Recreation Retail, LLC, Creative Recreation International, LLC, the lenders party thereto, and PNC Bank, National Association, as agent for lenders (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015). Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015). Independent Registered Public Accounting Firm’s Consent of Schneider Downs & Co., Inc. Powers of Attorney. Rule 13a-14(a) Certification of Principal Executive Officer/Principal Financial Officer. 32** Section 1350 Certification of Principal Executive Officer/Principal Financial Officer. 35 99* 101* Financial Statement Schedule. Attached as Exhibits 101 to this report are the following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 formatted in XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, and (vi) related notes to these financial statements. * Filed with this Annual Report on Form 10-K. ** Furnished with this Annual Report on Form 10-K. 36 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: March 8, 2017 ROCKY BRANDS, INC. By: /s/Mike Brooks_________ Mike Brooks, Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the dates indicated. Signature /s/ Mike Brooks Mike Brooks * CURTIS A. LOVELAND Curtis A. Loveland * GLENN E. CORLETT Glenn E. Corlett * MICHAEL L. FINN Michael L. Finn * G. COURTNEY HANING G. Courtney Haning * HARLEY E. ROUDA Harley E. Rouda * JAMES L. STEWART James L. Stewart By: /s/ Mike Brooks Mike Brooks, Attorney-in-Fact Title Chief Executive Officer, Chairman Director (Principal Executive Officer and Principal Financial Officer) Date March 8, 2017 Secretary and Director March 8, 2017 Director March 8, 2017 Director March 8, 2017 Director March 8, 2017 Director March 8, 2017 Director March 8, 2017 37 CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a) OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER I, Mike Brooks, certify that: Exhibit 31 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Rocky Brands, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) (b) (c) (d) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): (a) (b) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 8, 2017 /s/ Mike Brooks Mike Brooks Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) 38 Exhibit 32 CERTIFICATION PURSUANT TO RULE 13a - 14(b) AND SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Rocky Brands, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Mike Brooks Mike Brooks Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) March 8, 2017 This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing. 39 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Exhibit 23 We hereby consent to the incorporation by reference in this Annual Report on Form 10-K of Rocky Brands, Inc. and Subsidiaries for the year ended December 31, 2016 of our reports dated March 8, 2017 included in its Registration Statements Form S-3 (No. 333-188983) and on Form S-8 (No. 333-121756, No. 333- 198167) relating to the consolidated financial statements and internal controls for the three years ended December 31, 2016, 2015 and 2014 listed in the accompanying index. /s/ Schneider Downs & Co., Inc. Columbus, Ohio March 8, 2017 40 POWER OF ATTORNEY Exhibit 24 Each director and officer of Rocky Brands, Inc., an Ohio corporation (the “Company”), whose signature appears below hereby appoints Mike Brooks and Curtis A. Loveland, or either of them, as his attorney-in-fact, to sign, in his name and behalf and in any and all capacities stated below, and to cause to be filed with the Securities and Exchange Commission, the Company's Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2016, and likewise to sign and file any amendments, including post-effective amendments, to the Annual Report, and the Company hereby also appoints such persons as its attorneys-in-fact and each of them as its attorney-in-fact with like authority to sign and file the Annual Report and any amendments thereto in its name and behalf, each such person and the Company hereby granting to such attorney-in-fact full power of substitution and revocation, and hereby ratifying all that such attorney-in-fact or his substitute may do by virtue hereof. IN WITNESS WHEREOF, we have executed this Power of Attorney, in counterparts if necessary, effective as of March 2, 2017. DIRECTORS/OFFICERS: Signature Title /s/ Mike Brooks Mike Brooks /s/ Curtis A. Loveland Curtis A. Loveland /s/ Glenn E. Corlett Glenn E. Corlett /s/ Michael L. Finn Michael L. Finn /s/ G. Courtney Haning G. Courtney Haning /s/ Harley E. Rouda, Jr. Harley E. Rouda, Jr. Chief Executive Officer, Chairman, and Director (Principal Executive Officer and Principal Financial Officer) Secretary and Director Director Director Director Director /s/ James L. Stewart Director James L. Stewart 41 Exhibit 99 ROCKY BRANDS, INC. AND SUBSIDIARIES SCHEDULE II CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 42 DESCRIPTIONBalance at Beginning of PeriodAdditions Charged to Costs and ExpensesDeductionsBalance at End of PeriodALLOWANCE FOR DOUBTFUL ACCOUNTSYear ended December 31, 2016820,000$ 1,210,659$ (989,659)$ (1)1,041,000$ Year ended December 31, 20151,002,257$ 713,190$ (895,447)$ (1)820,000$ Year ended December 31, 2014781,163$ 650,836$ (429,742)$ (1)1,002,257$ VALUATION ALLOWANCE FOR DEFERRRED TAX ASSETSYear ended December 31, 2016569,459$ -$ (98,300)$ 471,159$ Year ended December 31, 2015569,881$ -$ (422)$ 569,459$ Year ended December 31, 2014562,776$ 7,105$ -$ 569,881$ ALLOWANCE FOR DISCOUNTS AND RETURNSYear ended December 31, 20162,054,606$ 18,076,416$ $ (18,196,989)1,934,033$ Year ended December 31, 20152,917,199$ 20,632,422$ $ (21,495,015)2,054,606$ Year ended December 31, 20142,391,205$ 25,041,677$ $ (24,515,683)2,917,199$ (1)Amount charged off, net of recoveries ROCKY BRANDS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2016 and 2015 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014 Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 F-1 F-2 - F-3 F-4 F-5 F-6 Notes to Consolidated Financial Statements F-7 - F-25 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Rocky Brands, Inc. and Subsidiaries Nelsonville, Ohio We have audited the accompanying consolidated balance sheets of Rocky Brands, Inc. and Subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, 2015 and 2014. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2). The Company’s management is responsible for these consolidated financial statements and financial statement schedule. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2016, and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements, as a whole, presents fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 8, 2017 expressed an unqualified opinion /s/ Schneider Downs & Co., Inc. Columbus, Ohio March 8, 2017 F - 1 ROCKY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS CURRENT ASSETS: Cash and cash equivalents Trade receivables – net Other receivables Inventories Income tax receivable Deferred income taxes Prepaid expenses Total current assets FIXED ASSETS – net IDENTIFIED INTANGIBLES OTHER ASSETS TOTAL ASSETS See notes to consolidated financial statements December 31, 2016 2015 $ 4,480,505 40,844,583 688,251 69,168,442 1,243,678 1,633,353 2,354,107 $ 3,407,140 44,549,207 583,479 76,991,059 128,699 1,031,818 2,530,517 120,412,919 129,221,919 26,511,493 27,836,527 33,415,694 36,547,873 232,509 258,812 $ 180,572,615 $ 193,865,131 F - 2 ROCKY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS CURRENT LIABILITIES: Accounts payable Accrued expenses: Salaries and wages Taxes - other Accrued freight Commissions Accrued duty Other Total current liabilities LONG TERM DEBT DEFERRED LIABILITIES: Deferred income taxes Other deferred liabilities TOTAL LIABILITIES December 31, 2016 2015 $ 11,589,040 $ 9,118,555 949,894 842,325 534,070 446,703 1,980,598 1,377,281 17,719,911 14,584,008 12,999,153 176,219 45,479,291 442,259 533,220 427,412 378,191 2,301,449 1,547,130 14,748,216 23,700,089 13,000,609 295,676 51,744,590 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, Series A, no par value, $.06 stated value; none outstanding Common stock, no par value; 25,000,000 shares authorized; outstanding; 2016 - 7,421,455 and 2015 - 7,567,271; and additional paid-in capital Retained earnings Total shareholders' equity - - 69,291,637 65,801,687 70,882,392 71,238,149 135,093,324 142,120,541 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 180,572,615 $ 193,865,131 See notes to consolidated financial statements. F - 3 ROCKY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME NET SALES COST OF GOODS SOLD GROSS MARGIN OPERATING EXPENSES 2016 Years Ended December 31, 2015 2014 $ 260,258,584 $ 269,302,023 $ 286,242,169 183,528,494 180,410,184 189,881,444 76,730,090 88,891,839 96,360,725 Selling, general and administrative expenses Reorganizational charge Impairment charge Total operating expenses 75,631,490 1,159,527 3,000,000 79,791,017 - - 78,402,079 78,402,079 80,597,934 INCOME (LOSS) FROM OPERATIONS (3,060,927) 10,489,760 OTHER INCOME AND (EXPENSES): Interest expense Other - net Total other - net (616,567) 59,020 (557,547) (696,827) (105,433) (802,260) - - 80,597,934 15,762,791 (943,154) (78,455) (1,021,609) INCOME (LOSS) BEFORE INCOME TAXES (3,618,474) 9,687,500 14,741,182 INCOME TAX EXPENSE (BENEFIT) (1,479,078) 3,084,343 4,895,884 COMPREHENSIVE INCOME (LOSS) $ (2,139,396) $ 6,603,157 $ 9,845,298 NET INCOME (LOSS) PER SHARE Basic Diluted WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic Diluted See notes to consolidated financial statements ($0.29) ($0.29) $0.87 $0.87 $1.30 $1.30 7,505,219 7,505,219 7,563,205 7,574,172 7,544,936 7,547,781 F - 4 ROCKY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock and Accumulated Additional Paid-in Capital Other Shares Comprehensive Outstanding Amount Loss Retained Earnings Total Shareholders' Equity BALANCE - December 31, 2013 7,536,448 $ 70,153,570 $ - $ 61,059,927 $ 131,213,497 YEAR ENDED DECEMBER 31, 2014 Comprehensive income Dividends paid on common stock Stock compensation expense 13,678 307,102 9,845,298 (3,017,979) 9,845,298 (3,017,979) 307,102 BALANCE - December 31, 2014 7,550,126 $ 70,460,672 $ - $ 67,887,246 $ 138,347,918 YEAR ENDED DECEMBER 31, 2015 Comprehensive loss Dividends paid on common stock Stock issued and options exercised including related tax benefits Stock compensation expense 6,603,157 6,603,157 (3,252,254) (3,252,254) 600 16,545 8,742 412,978 8,742 412,978 BALANCE - December 31, 2015 7,567,271 $ 70,882,392 $ - $ 71,238,149 $ 142,120,541 YEAR ENDED DECEMBER 31, 2016 Comprehensive income Dividends paid on common stock Repurchase of common stock Stock compensation expense (175,632) 29,816 (1,950,114) 359,359 (2,139,396) (3,297,066) (2,139,396) (3,297,066) (1,950,114) 359,359 BALANCE - December 31, 2016 7,421,455 $ 69,291,637 $ - $ 65,801,687 $ 135,093,324 See notes to consolidated financial statements. F - 5 ROCKY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES: Net income (Loss) Adjustments to reconcile net income (Loss) to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Loss on disposal of fixed assets Reorganizational charge Impairment charge Stock compensation expense Change in assets and liabilities: Receivables Inventories Income tax receivable Other current assets Other assets Accounts payable Accrued and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets Proceeds from sales of fixed assets Investment in trademarks and patents Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facility Repayments on revolving credit facility Debt financing costs Proceeds from stock options Repurchase of common stock Dividends paid on common stock Years Ended December 31, 2016 2015 2014 $ (2,139,396) $ 6,603,157 $ 9,845,298 7,720,836 (602,991) 47,712 486,496 3,000,000 359,359 3,273,852 7,822,617 (1,114,979) 176,410 26,303 2,346,865 (104,743) 21,298,341 (5,906,479) 44,764 - (5,861,715) 7,188,123 332,650 19,500 - - 412,978 11,150,897 8,245,983 (128,699) 22,925 40,678 (6,004,991) (4,640,636) 23,242,565 (8,654,642) 17,495 (1,176) (8,638,323) 71,255,424 (80,371,505) 68,423,672 (80,993,956) - - (1,950,114) (3,297,066) - 8,742 - (3,252,254) 6,941,905 989,473 138,056 - - 307,102 (6,888,027) (7,065,372) 242,228 (24,035) 109,208 4,004,111 4,380,101 12,980,048 (7,442,086) 63,012 (9,446) (7,388,520) 75,190,968 (77,308,793) (54,647) - - (3,017,979) Net cash used in financing activities (14,363,261) (15,813,796) (5,190,451) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,073,365 (1,209,554) 401,077 CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD 3,407,140 4,616,694 4,215,617 END OF PERIOD $ 4,480,505 $ 3,407,140 $ 4,616,694 See notes to consolidated financial statements F - 6 ROCKY BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Rocky Brands, Inc. (“Rocky”) and its wholly-owned subsidiaries, Lifestyle Footwear, Inc. (“Lifestyle”), Five Star Enterprises Ltd. (“Five Star”), Rocky Brands Canada, Inc. (“Rocky Canada”), Rocky Brands US, LLC, Rocky Brands International, LLC, Lehigh Outfitters, LLC, 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 Outdoor Gear, Georgia Boot, Durango, Lehigh and Creative Recreation. 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 lifestyle. In addition, as part of our strategy of outfitting consumers from head-to-toe, we market complementary branded apparel and accessories that we believe leverage the strength and positioning of each of our brands. Our products are distributed through three distinct business segments: wholesale, retail and military. In our wholesale business, we distribute our products through a wide range of distribution channels representing over ten thousand retail store locations in the U.S. and Canada. Our wholesale channels vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores and other specialty retailers. Our retail business includes direct sales of our products to consumers through our e-commerce websites and our Rocky outlet store. We also sell footwear under the Rocky label to the U.S. military. Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Our cash and cash equivalents are primarily held in five banks. Balances may exceed federally insured limits. Trade Receivables - Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $1,041,000 and $820,000 at December 31, 2016 and 2015, respectively. The allowance for uncollectible accounts is calculated based on the relative age and status of trade receivable balances. 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. F - 7 Concentration of Credit Risk - We have significant transactions with a large number of customers. No customer represented 10% of trade receivables - net as of December 31, 2016 and 2015. 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 and maintain reserves for potential uncollectible accounts. Supplier and Labor Concentrations - We purchase raw materials from a number of domestic and foreign sources. We produce a portion of our shoes and boots in our Dominican Republic operation and in our Puerto Rico operation. We are not aware of any governmental or economic restrictions that would alter these current operations. We source a significant portion of our footwear, apparel and gloves from manufacturers in the Far East, primarily China. 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 market. Reserves are established for inventories when the net realizable value (NRV) is deemed to be less than its cost based on our periodic estimates of NRV. Fixed Assets - The Company records fixed assets at historical cost and generally utilizes the straight-line method of computing depreciation for financial reporting purposes over the estimated useful lives of the assets as follows: Buildings and improvements Machinery and equipment Furniture and fixtures Lasts, dies, and patterns Years 5-40 3-8 3-8 3 For income tax purposes, the Company generally computes depreciation utilizing accelerated methods. Identified intangible assets - Identified intangible assets consist of indefinite lived trademarks and definite lived trademarks, patents and customer lists. Indefinite lived intangible assets are not amortized. If events or circumstances change, a determination is made by management, in accordance with the accounting standard for “Property, Plant and Equipment” to ascertain whether property, equipment and certain finite-lived intangibles have been impaired based on the sum of expected future undiscounted cash flows from operating activities. If the estimated net cash flows are less than the carrying amount of such assets, we will recognize an impairment loss in an amount necessary to write down the assets to fair value as determined from expected future discounted cash flows. In accordance with the accounting standard for “Intangibles – Goodwill and Other”, we test intangible assets with indefinite lives for impairment annually or when conditions indicate impairment may have occurred. We perform such testing of our indefinite-lived intangible assets in the fourth quarter of each year or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Advertising - We expense advertising costs as incurred. Advertising expense was approximately $8,079,000, $9,869,000, and $8,623,000 for 2016, 2015 and 2014, respectively. F - 8 Revenue Recognition - Revenue and related cost of goods sold are recognized at the time products are shipped to the customer and title transfers. Revenue is recorded net of estimated sales discounts and returns based upon specific customer agreements and historical trends. Net sales include royalty income from licensing our brands. Shipping Costs - In accordance with the accounting standard for revenue recognition, all shipping costs billed to customers have been included in net sales. All outbound shipping costs to customers has been included in selling, general and administrative costs and totaled approximately $7,851,000 $8,500,000, and $9,254,000 in 2016, 2015 and 2014, respectively. Per Share Information - Basic net income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed similarly but includes the dilutive effect of stock options. A reconciliation of the shares used in the basic and diluted income per share computations is as follows: Years Ended December 31, 2015 2014 2016 Basic - weighted average shares outstanding 7,505,219 7,563,205 7,544,936 Dilutive restricted share units Dilutive stock options - - 9,987 980 2,845 - Diluted - weighted average shares outstanding 7,505,219 7,574,172 7,547,781 Anti-Dilutive securities 97,894 84,210 43,029 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. 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. F - 9 The fair values of cash, accounts receivable, other receivables and accounts payable approximated their carrying values because of the short-term nature of these instruments. Accounts receivable consists primarily of amounts due from our customers, net of allowances. Other receivables consist primarily of amounts due from employees (sales persons’ advances in excess of commissions earned and employee travel advances); other customer receivables, net of allowances; and expected insurance recoveries. The carrying amounts of our revolving line of credit and other short-term financing obligations also approximate fair value, as they are comparable to the available financing in the marketplace during the year. Recently Adopted Accounting Pronouncements In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718). Some share-based payment awards that require a specific performance target to be achieved before the employee can benefit from the award, also require an employee to render service until the performance target is achieved. In some cases, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be entitled to benefit from the award regardless of whether the employee is rendering service on the date the performance target is achieved. Some entities account for those performance targets as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value. Others treat them as non-vesting conditions that affect the grant-date fair value of the award. The amendments apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. The update is effective for public entities for annual reporting periods beginning after December 15, 2015. The adoption of this standard did not have a material effect on our consolidated financial statements. In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20). The objective of this update is to simplify the income statement presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. The adoption of this standard did not have an effect on our consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30). The objective of this update is to simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendments in this update are effective for fiscal years beginning after December 15, 2015. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (that is, debt issuance cost asset and the debt liability). The adoption of this standard did not have an effect on our consolidated financial statements as ASU 2015-15 permitted debt issuance costs related to a line of credit arrangement to remain as an asset and be amortized over the remaining term of the line of credit agreement. F - 10 Accounting standards not yet adopted In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and create new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14. The amendments in this update defer the effective date of Update 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method but plan to select a transition method no later than the fourth quarter of 2017. We are currently assessing our contracts with customers and related financial disclosures to evaluate the impact of the amended guidance on our existing revenue recognition policies and procedures. In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40). Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this update provide that guidance. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The update is effective for public entities for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We have not yet determined the impact this ASU will have on our consolidated financial statements. In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330). The amendments in this update require an entity to measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We have not yet determined the impact this ASU will have on our consolidated financial statements. F - 11 In November 2015, the FASB issued ASU No. 2015-17, Income Taxes - Balance Sheet Classification of Deferred Taxes (Topic 740). The amendments in this update will simplify the presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. We have not yet determined the impact this ASU will have on our consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update will require lessees to recognize (with the exception of short-term leases) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. For public business entities, the amendments in this update are effective for years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted for all entities upon issuance. We have not yet determined the impact this ASU will have on our consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this update were issued as part of the FASB’s initiative to reduce complexity in accounting standards. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. In addition, the amendments in this update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. For public business entities, the amendments in this update are effective for years beginning after December 15, 2016, including interim periods within those fiscal years. Earlier application is permitted for all entities upon issuance. We have not yet determined the impact this ASU will have on our consolidated financial statements. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). This update clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The Update includes targeted improvements based on input the Board received from the Transition Resource Group for Revenue Recognition and other stakeholders. The update seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The amendments in this update are effective at the same time as ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We have not yet determined the impact this ASU will have on our consolidated financial statements. F - 12 In May 2016, the FASB issued ASU 2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope improvements and practical expedients related to ASU 2014-09: Revenue from Contracts with Customers (Topic 606). The purpose of ASU 2016-12 is to clarify certain narrow aspects of Topic 606 such as assessing the collectability criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition, and technical correction. The standard has the same effective date as ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We have not yet determined the impact this ASU will have on our consolidated financial statements. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after December 31, 2017, and for interim periods within those years. Early adoption is permitted. We have not yet determined the impact this ASU will have on our consolidated financial statements. 2. INVENTORIES Inventories are comprised of the following: Raw materials Work-in-process Finished goods Total December 31, 2016 2015 $ 14,260,416 751,519 54,156,507 $ 12,494,980 1,155,837 63,340,242 $ 69,168,442 $ 76,991,059 F - 13 3. FIXED ASSETS Fixed assets are comprised of the following: Land Buildings Machinery and equipment Furniture and fixtures Lasts, dies and patterns Construction work-in-progress Total December 31, 2016 2015 $ 671,035 20,606,826 45,124,554 2,849,091 15,593,484 464,345 $ 671,035 19,247,770 40,611,815 2,722,751 13,811,676 3,161,533 85,309,335 80,226,580 Less - accumulated depreciation (58,797,842) (52,390,053) Net Fixed Assets $ 26,511,493 $ 27,836,527 We incurred approximately $7,589,000, $7,053,000, and $6,807,000 in depreciation expense for 2016, 2015 and 2014, respectively. 4. IDENTIFIED INTANGIBLE ASSETS A schedule of identified intangible assets is as follows: December 31, 2016 Trademarks Wholesale Retail Patents Customer Relationships Total Intangibles December 31, 2015 Trademarks Wholesale Retail Patents Customer Relationships Total Intangibles Gross Amount Accumulated Amortization Carrying Amount $ $ 29,343,578 2,900,000 2,595,477 2,200,000 37,039,055 - $ - 2,376,694 1,246,667 3,623,361 $ $ $ 29,343,578 2,900,000 218,783 953,333 33,415,694 Gross Amount Accumulated Amortization Carrying Amount $ $ 32,343,578 2,900,000 2,595,477 2,200,000 40,039,055 - $ - 2,324,515 1,166,667 3,491,182 $ $ $ 32,343,578 2,900,000 270,962 1,033,333 36,547,873 Amortization expense related to finite-lived intangible assets was approximately $132,000, $135,000, and $135,000 in 2016, 2015 and 2014, respectively. Such amortization expense will be approximately $116,000 per year for 2017 through 2021. The weighted average lives of patents and customer relationships are 6 years. Intangible assets, including trademarks and patents are reviewed for impairment annually, and more frequently, if necessary. We perform such testing of indefinite-lived intangible assets in the fourth quarter of each year or as events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. Fair value of other indefinite-lived intangible assets is determined using the relief from royalty method. F - 14 In assessing whether indefinite-lived intangible assets are impaired, we must make certain estimates and assumptions regarding future cash flows, long-term growth rates of our business, operating margins, weighted average cost of capital and other factors such as; discount rates, royalty rates, cost of capital, and market multiples to determine the fair value of our assets. These estimates and assumptions require management’s judgment, and changes to these estimates and assumptions could materially affect the determination of fair value and/or impairment for each of our indefinite-lived intangible assets. Future events could cause us to conclude that indications of intangible asset impairment exist. Impairment may result from, among other things, deterioration in the performance of our business, adverse market conditions, adverse changes in applicable laws and regulations, competition, or the sale or disposition of a reporting segment. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. We evaluate our finite and indefinite lived trademarks under the terms and provisions of the accounting standards for “Intangibles - Goodwill and Other”; and “Property, Plant and Equipment.” These pronouncements require that we compare the fair value of an intangible asset with its carrying amount. The results of our 2016 indefinite-lived intangible impairment test for the Creative Recreation trademark indicated a carrying value in excess of the fair value based on the Company’s outlook for future operating results. Accordingly, we recorded a $3,000,000 non-cash impairment charge for the Creative Recreation trademark in the fourth quarter of 2016. The carrying value of the Creative Recreation trademark indefinite- lived intangible assets was $2.1 million, as of December 31, 2016. We did not recognize any impairment charges during 2015 or 2014 for intangible assets, as the annual impairment testing indicated that all reporting unit intangible asset fair values exceeded their respective carrying values. 5. OTHER ASSETS Other assets consist of the following: Deferred financing costs, net Other Total December 31, 2016 2015 $ 89,662 142,847 $ 120,403 138,409 $ 232,509 $ 258,812 6. LONG-TERM DEBT In October 2010, we entered into a financing agreement with PNC Bank (“PNC”) to provide a $70 million credit facility. In December 2014, we amended and restated the credit facility to increase the facility to $75 million and extend the term of the facility an additional five years. The credit facility’s base interest rate is the current prime rate less 0.25%, however the credit facility provides us the option to borrow on up to eight fixed loans at LIBOR plus 1.25% in accordance with the 2014 amended and restated credit agreement. The LIBOR rate is determined based on the fixed loan maturities, which vary from 30, 60, 90, or 180 days. As of December 31, 2016 and December 31, 2015, we had approximately $12.0 million and $17.0 million, respectively, in fixed LIBOR borrowings under the credit facility. The total amount available under our amended and restated revolving credit facility is subject to a borrowing base calculation based on various percentages of accounts receivable and inventory. As of December 31, 2016, we had $14.6 million in borrowings under this facility and total capacity of $57.3 million. F - 15 Our amended and restated credit facility contains a restrictive covenant which requires us to maintain a fixed charge coverage ratio. This restrictive covenant is only in effect upon a triggering event taking place (as defined in the amended and restated credit facility agreement). At December 31, 2016, there was no triggering event and the covenant was not in effect. Our amended and restated credit facility places a restriction on the amount of dividends that may be paid. During 2016, 2015 and 2014, we paid dividends on our common stock totaling $3,297,066, $3,252,254, and $3,017,979, respectively. Our amended and restated revolving credit facility matures in November 2019. We have no other long-term debt maturities. 7. OPERATING LEASES We lease certain machinery, trucks, and facilities under operating leases that generally provide for renewal options. We incurred approximately $1,279,000, $1,335,000, and $1,324,000 in rent expense under operating lease arrangements for 2016, 2015 and 2014, respectively. Future minimum lease payments under non-cancelable operating leases are approximately as follows for the years ended December 31: 2017 2018 2019 2020 2021 Total $ 1,208,051 712,690 200,963 78,383 9,100 $ 2,209,187 8. RETIREMENT PLANS We sponsor a 401(k) savings plan for substantially all of our 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 contributions to the 401(k) plan were approximately $0.9 million in 2016, $1.0 million in 2015 and $1.0 million in 2014. 9. INCOME TAXES The Company accounts for income taxes in accordance with the accounting standard for “Income Taxes”, which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred income taxes have been provided for the temporary differences between the financial reporting and the income tax basis of the Company’s assets and liabilities by applying enacted statutory tax rates applicable to future years to the basis differences. F - 16 A breakdown of our income tax expense is as follows: Federal: Current Deferred Total Federal State & local: Current Deferred Total State & local Foreign Current Deferred Total Foreign Years Ended December 31, 2015 2014 2016 $ (1,192,764) (296,045) (1,488,809) $ 2,656,870 287,755 2,944,625 $ 3,656,356 848,666 4,505,022 151,728 (349,284) (197,556) 164,950 42,337 207,287 81,433 86,863 168,296 13,391 (41,969) (28,578) 203,144 140,552 343,696 46,911 255 47,166 Total $ (1,479,078) $ 3,084,343 $ 4,895,884 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: Expected expense at statutory rate Increase (decrease) in income taxes resulting from: Exempt income from Dominican Republic operations due to tax holiday Tax on repatriated earnings from Dominican Republic operations Impact of Canadian deemed dividend State and local income taxes Section 199 manufacturing deduction Meals and entertainment Nondeductible penalties Provision to return filing adjustments and other 2016 $ (1,270,003) Years Ended December 31, 2015 3,404,159 $ $ 2014 5,147,234 (2,367,810) (2,816,963) (3,477,301) 2,050,314 7,353 (99,699) - 100,288 3,847 96,632 2,556,940 - 67,886 (194,498) 98,082 5,998 (37,261) 3,090,036 12,703 284,838 (135,690) 91,475 1,563 (118,974) Total $ (1,479,078) $ 3,084,343 $ 4,895,884 F - 17 Deferred income taxes recorded in the consolidated balance sheets at December 31, 2016 and 2015 consist of the following: Deferred tax assets: Asset valuation allowances and accrued expenses Inventories State and local income taxes Pension and deferred compensation Net operating losses Total deferred tax assets Valuation allowances December 31, 2016 2015 $ 242,916 491,371 302,929 63,214 736,519 1,836,949 (471,159) $ 510,798 563,815 425,179 72,004 650,620 2,222,416 (569,459) Total deferred tax assets 1,365,790 1,652,957 Deferred tax liabilities: Fixed assets Intangible assets Other assets Tollgate tax on Lifestyle earnings Total deferred tax liabilities (1,676,813) (10,337,533) (337,972) (379,271) (12,731,589) (1,655,838) (11,185,988) (400,651) (379,271) (13,621,748) Net deferred tax liability $ (11,365,800) $ (11,968,791) Deferred income taxes - current Deferred income taxes - non-current $ 1,633,353 (12,999,153) (11,365,800) $ $ 1,031,818 (13,000,609) (11,968,791) $ The valuation allowance is related to certain state and local income tax net operating loss carry forwards. We have provided Puerto Rico tollgate taxes on approximately $3,684,000 of accumulated undistributed earnings of Lifestyle prior to the fiscal year ended June 30, 1994, that would be payable if such earnings were repatriated to the United States. In 2001, we received abatement for Puerto Rico tollgate taxes on all earnings subsequent to June 30, 1994, thus no other provision for tollgate tax has been made on earnings after that date. If we repatriate the earnings from Lifestyle, approximately $379,000 of tollgate tax would be due. As of December 31, 2016, we had approximately $19,205,000 of undistributed earnings from non-U.S. subsidiaries that are intended to be permanently reinvested in non-U.S. operations. Because these earnings are considered permanently reinvested, no U.S. tax provision has been accrued related to the repatriation of these earnings. If the Five Star undistributed earnings were distributed to the Company in the form of dividends, the related taxes on such distributions would be approximately $6,722,000. We file income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. We are no longer subject to U.S. Federal tax examinations for years before 2013. State jurisdictions that remain subject to examination range from 2012 to 2016. Foreign jurisdiction (Canada and Puerto Rico) tax returns that remain subject to examination range from 2011 to 2016. F - 18 Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. As of December 31, 2016 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. The Company did not have any unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing this standard. 10. REORGANIZATIONAL CHARGE During the third quarter of 2016, we implemented initiatives to reorganize the company to maximize profitability, drive long-term revenue growth and maximize shareholder value. The costs related to this reorganization are recorded to “Reorganizational Charge” in our consolidated statements of comprehensive income. During the year ended December 31, 2016, costs of approximately $1,160,000 were recognized related to these initiatives, which consisted of severance costs. As of December 31, 2016, we had approximately $486,000 in accrued reorganization charges recorded to “Accrued expenses – Salaries and wages” in our condensed consolidated balance sheet relating to future severance payments. We do not expect to incur additional costs related to our reorganization efforts. 11. CAPITAL STOCK AND STOCK BASED COMPENSATION On May 7, 2014, our shareholders approved the 2014 Omnibus Incentive Plan (the “2014 Plan”). The 2014 Plan includes 500,000 of our common shares that may be granted under various types of awards as described in the 2014 Plan. As of December 31, 2016, we were authorized to issue 272,723 shares under this plan. Service Based Restricted Stock In the first quarter of 2016, we issued 30,000 restricted stock units to certain members of our management that will be settled in one share of common stock of the company per unit. These restricted stock units vest in increments of 25% per year over the next four years. We valued the units at an average fair value of $11.56 per unit, which was the closing price of our stock on the last trading date prior to the grant date. Also in the first quarter of 2016, we issued an additional 2,000 restricted stock units to a member of management. These units vest the same as the first issuance. We valued the units at an average fair value of $10.29 per unit, which was the closing price of our stock on the last trading date prior to the grant date. In the first quarter of 2015, we issued 28,000 restricted stock units to certain members of our management that will be settled in one share of common stock of the company per unit. These restricted stock units vest in increments of 25% per year over the next four years. We valued the units at a fair value of $13.42 per unit, which was the closing price of our stock on the last trading date prior to the grant date. In August 2015, we issued 2,000 restricted stock units to a member of our management that will be settled in one share of common stock of the company per unit. These restricted stock units vest on the same basis as the restricted stock units issued in the first quarter of 2015. We valued the units at a fair value of $18.15 per unit, which was the closing price of our stock on the last trading date prior to the grant date. For the years ended December 31, 2016 and 2015, we recorded expense of $127,349 and $183,150, respectively, related to these restricted stock units. F - 19 Performance Based Restricted Stock In the first quarter of 2016, we made available up to 43,000 performance based restricted stock units to certain members of our management. Shares underlying the performance based restricted stock units will be issued upon achieving certain established EPS goals at the end of fiscal year 2017. For the year ended 2016, we did not record any expense related to these performance units as it is uncertain if we will reach the performance goals. In 2015, we made available up to 34,000 performance based restricted stock units to certain members of our management. Shares underlying the performance based restricted stock units were to be issued upon achieving certain established EPS goals at the end of fiscal year 2016. For the years ended 2016 and 2015, we did not record any expense related to these restricted stock units as the performance goals were not achieved. Stock Options In the first quarter of 2016, we issued 30,000 stock options to certain members of our management. These stock options vest in increments of 20% per year over the next five years. The options are exercisable at $11.56 per option, which was the closing price of our stock on the last trading date prior to the grant date. We have determined the fair value of the options to be $3.41 per option using the Black Scholes calculation. The significant assumptions utilized for the Black Scholes calculations consist of an expected life of 6.5 years, historical volatility of 42.32%, a risk free interest rate of 2.06%, a dividend yield of 3.81% and an initial employee forfeiture rate of 7.7%. Our expected life estimate is based on the sum of the vesting terms divided by the number of vesting tranches. Also in the first quarter of 2016, we issued an additional 2,000 stock options to a member of our management. These units vest the same as the first issuance. The options are exercisable at $10.29 per option, which was the closing price of our stock on the last trading date prior to the grant date. We have determined the fair value of the options to be $2.84 per option using the Black Scholes calculation. The significant assumptions utilized for the Black Scholes calculations consist of an expected life of 6.5 years, historical volatility of 42.32%, a risk free interest rate of 1.88%, a dividend yield of 4.30% and an initial employee forfeiture rate of 7.7%. In the first quarter of 2015, we issued 28,000 stock options to certain members of our management. These stock options vest in increments of 20% per year from the grant date. The options are exercisable at $13.42 per option, which was the closing price of our stock on the last trading date prior to the grant date. We have determined the fair value of the options to be $4.70 per option using the Black Scholes calculation. The significant assumptions utilized for the Black Scholes calculations consist of an expected life of 6.5 years, historical volatility of 46.20%, a risk free interest rate of 1.92%, a dividend yield of 2.99% and an initial employee forfeiture rate of 3.8%. Our expected life estimate is based on the sum of the vesting terms divided by the number of vesting tranches. For the years ended 2016 and 2015, we recorded expense of $35,100 and $54,828, respectively, related to these stock options. F - 20 For the above issuances under the plan, we expect to recognize expense in the years 2017 through 2020 as follows: 2017 2018 2019 2020 Total $ 142,336 106,068 58,474 8,918 $ 315,796 The following summarizes stock option transactions from January 1, 2015 through December 31, 2016: Options outstanding at January 1, 2015 Issued Exercised Forfeited Options outstanding at December 31, 2015 Options exercisable at: January 1, 2015 December 31, 2015 Unvested options at December 31, 2015 Options outstanding at January 1, 2016 Issued Exercised Forfeited Options outstanding at December 31, 2016 Options exercisable at: January 1, 2016 December 31, 2016 Unvested options at December 31, 2016 Weighted Average Exercise Price $ $ $ $ $ 14.57 13.74 14.57 14.57 14.57 Shares 23,000 30,000 (600) (800) 51,600 - $ - 4,000 $ 14.57 47,600 $ 14.04 51,600 32,000 - (41,350) 42,250 14.57 $ $ 11.48 $ - $ 13.33 $ 12.85 4,000 6,900 35,350 $ $ $ 14.57 14.10 12.60 Weighted Average Remaining Actual Term Aggregate Intrinsic Value 8.6 $ - $ - $ - 8.0 8.6 8.8 $ - $ - $ - $ - 8.4 8.8 During the years ended December 31, 2016 and 2015, a total of 32,000 and 30,000, respectively, were issued with an intrinsic value of zero for all years. During the year ended December 31, 2016, no options were exercised. During the year ended December 31, 2016, a total of 41,350 options were forfeited with a fair value of $192,218. A total of 4,850 options vested during the year ended December 31, 2016 with a fair value of $25,337. At December 31, 2016 and 2015, a total of 35,350 and 47,600 options were unvested with a fair value of $149,411 and $248,004. F - 21 During the year ended December 31, 2016, we issued 14,568 shares of common stock to members of our Board of Directors. We recorded compensation expense of $168,000, which was the fair market value of the shares on the grant dates. The shares are fully vested. The Company has authorized 250,000 shares of voting preferred stock without par value. No shares are issued or outstanding. Also, the Company has authorized 250,000 shares of non-voting preferred stock without par value. Of these, 125,000 shares have been designated Series A non-voting convertible preferred stock with a stated value of $.06 per share, of which no shares are issued or outstanding at December 31, 2016 and 2015, respectively. The plans generally provided for grants with the exercise price equal to fair value on the date of grant, graduated vesting periods of up to 5 years, and lives not exceeding 10 years. In June 2009, our Board of Directors adopted a Rights Agreement, which provides for one preferred share purchase right to be associated with each share of our outstanding common stock. Shareholders exercising these rights would become entitled to purchase shares of Series B Junior Participating Cumulative Preferred Stock. The rights are exercisable after the time when a person or group of persons without the approval of the Board of Directors acquire beneficial ownership of 20 percent or more of our common stock or announce the initiation of a tender or exchange offer which if successful would cause such person or group to beneficially own 20 percent or more of the common stock. Such exercise would ultimately entitle the holders of the rights to purchase at the exercise price, shares of common stock of the surviving corporation or purchaser, respectively, with an aggregate market value equal to two times the exercise price. The person or groups effecting such 20 percent acquisition or undertaking such tender offer would not be entitled to exercise any rights. The Rights Agreement was renewed in June 2012 and expired in August 2015. Repurchase of Common Stock In February 2016, our Board of Directors authorized the repurchase of up to $7,500,000 of common shares outstanding in open market or privately negotiated transactions over the next 12 months. Purchases of stock under this program were funded with borrowings from our amended and restated revolving credit facility. For the year ended December 31, 2016, there were 175,632 shares repurchased and retired, for $1,950,114. As of December 31, 2016, we have $5,549,886 of availability remaining under the February 2016 authorization. Subsequent to year end, our Board of Directors authorized the repurchase of up to $7,500,000 of common shares outstanding in open market or privately negotiated transactions over a 12 month period beginning in March of 2017. F - 22 12. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information including other cash paid for interest and Federal, state and local income taxes was as follows: Years Ended December 31, 2015 2014 2016 Interest paid $ 606,697 $ 724,651 $ 856,578 Federal, state and local income taxes paid - net of refunds $ 339,625 $ 5,568,581 $ 972,645 Fixed asset purchases in accounts payable $ 216,523 $ 92,903 $ 85,488 13. SEGMENT INFORMATION Operating Segments - We operate our business through three business segments: wholesale, retail and military. Wholesale. In our wholesale segment, our products are offered in over ten thousand retail locations representing a wide range of distribution channels in the U.S. and Canada. These distribution channels vary by product line and target market and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores and other specialty retailers. Retail. In our retail segment, we primarily sell our products directly to consumers through our consumer and business direct websites and our Rocky outlet store. We also operate four mobile trucks to service the New York Transit Authority’s employees. Through our outlet store, we generally sell first quality or discontinued products in addition to a limited amount of factory damaged goods, which typically carry lower gross margins. Military. While we are focused on continuing to build our wholesale and retail business, we also actively bid, from time to time, on footwear contracts with the U.S. military. Our sales under such contracts are dependent on us winning the bids for these contracts. We are currently fulfilling several multiyear contracts for the U.S. military. Total sales to the U.S. military represented 14.4%, 6.5% and 2.8% of total net sales for the years ending December 31, 2016, 2015 and 2014, respectively. F - 23 The following is a summary of segment results for the Wholesale, Retail, and Military segments. Certain amounts from prior year have been reclassified to conform to current year presentation. 2016 Years Ended December 31, 2015 2014 NET SALES: Wholesale Retail Military Total Net Sales GROSS MARGIN: Wholesale Retail Military Total Gross Margin $ $ 176,937,595 45,933,811 37,387,178 260,258,584 $ $ 206,072,657 45,808,705 17,420,661 269,302,023 $ $ 53,497,843 21,077,597 2,154,650 76,730,090 $ $ 65,979,792 20,621,884 2,290,163 88,891,839 $ $ 233,898,250 44,347,775 7,996,144 286,242,169 $ $ 75,840,977 19,449,609 1,070,139 96,360,725 Segment asset information is not prepared or used to assess segment performance. Product Group Information - The following is supplemental information on net sales by product group: Work footwear Western footwear Duty and commercial military footwear Lifestyle footwear Outdoor footwear Military footwear Apparel Other Royalty income 2016 $ 111,156,688 38,970,631 37,081,857 15,571,965 13,318,525 37,387,178 2,861,071 3,464,667 446,002 % of Sales 42.7% 15.0% 14.2% 6.0% 5.1% 14.4% 1.1% 1.3% 0.2% 2015 $ 120,422,188 43,435,734 33,341,424 23,370,822 20,688,005 17,420,661 5,662,277 4,155,137 805,775 % of Sales 44.7% 16.1% 12.4% 8.7% 7.7% 6.5% 2.1% 1.5% 0.3% 2014 $ 131,510,217 45,475,880 38,174,738 25,823,220 24,606,151 7,996,144 7,471,005 4,100,128 1,084,686 $ 260,258,584 100% $ 269,302,023 100% $ 286,242,169 % of Sales 45.9% 15.9% 13.3% 9.0% 8.6% 2.8% 2.6% 1.4% 0.4% 100% Net sales to foreign countries, primarily Canada, represented approximately 2.8% of net sales in 2016, 4.8% of net sales in 2015 and 6.3% of net sales in 2014. F - 24 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2016 and 2015: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year 2016 Net sales Gross margin Net (loss) income Dividends paid $ 57,529,945 18,910,892 (191,450) 834,228 $ 62,560,094 16,263,260 (1,759,329) 822,913 $ 73,218,247 19,765,760 445,629 823,564 $ 66,950,298 21,790,178 (634,246) 816,361 $ 260,258,584 76,730,090 (2,139,396) 3,297,066 Net (loss) income per common share: Basic Diluted $ $ (0.03) (0.03) $ $ (0.23) (0.23) $ $ 0.06 0.06 $ $ (0.09) (0.09) $ $ (0.29) (0.29) 2015 Net sales Gross margin Net income Dividends paid 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year $ 65,451,303 21,971,310 1,413,947 755,953 $ 68,583,196 22,648,633 2,002,673 831,827 $ 70,001,496 22,117,477 1,803,667 832,073 $ 65,266,028 22,154,419 1,382,870 832,401 $ 269,302,023 88,891,839 6,603,157 3,252,254 Net income per common share: Basic Diluted $ $ 0.19 0.19 $ $ 0.26 0.26 $ $ 0.24 0.24 $ $ 0.18 0.18 $ $ 0.87 0.87 15. 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. F - 25 Corporate Information Board of Directors Mike Brooks CEO Chairman of the Board Independent Registered Public Accounting Firm Schneider Downs & Co., Inc. Columbus, Ohio Glenn E. Corlett Retired Dean and Philip J. Gardner, Jr. Leadership Professor, College of Business at Ohio University Legal Counsel Porter, Wright, Morris & Arthur LLP Columbus, Ohio Michael L. Finn Chairman, Power Distributors, LLC President, Chesapeake Realty Company G. Courtney Haning Chairman and Chief Executive Officer Peoples National Bancshares, Inc. Curtis A. Loveland Secretary Partner, Porter, Wright, Morris & Arthur LLP Harley E. Rouda, Jr. Chief Executive Officer, Trident Holdings, Inc. James L. Stewart Proprietor Rising Wolf Ranch, Inc. Officers Mike Brooks CEO Chairman of the Board Tom Robertson Chief Financial Officer and Treasurer Jason S. Brooks President, Core Brands Rocky Brands US, LLC Richard Simms President, Digital Resources Brand General Manager, Georgia Boot Transfer Agent and Registrar Communications regarding changes of address, transfer of shares, and lost certificates should be directed to the company’s stock transfer and registrar: Computershare Investor Services Attn: Shareholder Services P.O. Box 30170 College Station, TX 77842-3170 (800) 962-4284 www-us.computershare.com/investor/Contact Stock Listing NASDAQ Stock Market Symbol: RCKY Form 10-K Copies of the signatures, exhibit index and exhibits contained therein as filed with the Securities and Exchange Commission are available without charge upon written request to: Tom Robertson Chief Financial Officer and Treasurer Rocky Brands, Inc. 39 East Canal Street Nelsonville, Ohio 45764 Corporate Offices 39 East Canal Street, Nelsonville, Ohio 45764 (740) 753-1951 Investor Information Corporate and investor information is available on the company’s website at www.rockybrands.com
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