Rocky Brands
Annual Report 2018

Plain-text annual report

2018 ANNUAL REPORTROCKY BRANDSIT IS NOT IN NUMBERS, BUT IN UNITY, THAT OUR GREAT STRENGTH LIES. Thomas Paine As I reflect on the past year, I am very pleased with the success we achieved. We delivered outstanding financial results while investing in our brands and channels to build an even stronger business for the future. When I stepped into the role of Chief Executive Officer two years ago, there was a solid foundation for growth put in place by the hundreds of dedicated employees throughout Rocky Brands’ 87 year history. We have been fortunate to attract passionate and talented people to our organization, many of whom have spent decades working at the Company. In 2018, I witnessed firsthand the incredible efforts put forth by our teams as they continued to execute the growth and profit improvement strategies we have implemented over the past 24 months aimed at generating increased shareholder value. With the personnel we have in place, combined with our portfolio of authentic brands and diversified distribution platform, I am confident that we are well positioned to build on our recent accomplishments and drive improved results in the years ahead. When our leadership team constructed the current plan for unlocking increased earnings power from our business model, we honed in on a few key areas of focus. These included product innovation, marketing effectiveness, retailer support, and manufacturing MIKE BROOKS BUILDING Built in 1901 as the Nelsonville City Building, it once housed the Fire Department, Water Office and jail. It was Purchased by Rocky in 2005 and completely renovated. capabilities. By stepping up our game on each on these fronts, we believed we could expand our top- line, and more importantly, enhance our margins to grow profitability at a faster pace than sales. Our performance in 2018 highlights the progress we made across the board. Building on the momentum from the previous year, we introduced several innovative new products in 2018 across our major wholesale categories - work, western, hunting, and commercial military - and the response was very positive. To help drive increased awareness and demand for our brands and products, and strengthen our connection with consumers, we revamped our marketing and shifted a greater portion of our investment to social and digital campaigns. In addition, as part of our increased retailer support program, we upgraded our point-of-sale materials to better educate our target audience on the features and benefits of our footwear collections. The result of all these efforts was one of the strongest years for our wholesale segment in some time highlighted by strong full price selling which led to solid gains for our Rocky, Georgia Boot, and Durango brands. Our retail segment also enjoyed a fantastic year in 2018 with successes in both channels. First, our Lehigh CustomFit business-to-business model, which provides companies with a superior way to manage their safety shoe program, experienced a double-digit revenue gain driven by key account growth and improved retention and participation rates with existing accounts. The investments we made in personnel and marketing are allowing us to reach more potential customers, while upgrades to the CustomFit digital interface and the addition of new brands to Lehigh’s offering, have helped improve user engagement and demand. At the same time, our direct-to-consumer channel grew at an even faster pace this past year. We have made a big push recently to evolve our branded e-commerce website into larger growth vehicles for the Company. This is being done through additional digital advertising aimed at increasing traffic trends as well as upgrades to the look, feel and functionality of our sites to improve the user experience and fuel higher conversion. As we expected, military segment sales took a step backwards in 2018 following a record year in 2017 as we confronted headwinds from changes in the competitive landscape and some expiring contracts. Despite these challenges, our teams did a remarkable job taking advantage of the freed up capacity at our company-operated manufacturing facilities to expand our commercial military business in the U.S. and overseas. The increased utilization of our factories led to greater efficiencies that drove a significant gain in segment margins and an improvement in gross profit dollars even with the decline in sales. important to our future growth plans. As such, we are implementing new technologies like automated cutting machines in Puerto Rico to further increase efficiencies, while in the Dominican Republic we increased capacity to accommodate the shift in some production from our Far East partners. In closing, thanks to the numerous accomplishments from the past year we finished 2018 in a strong financial position highlighted by over $10 million in cash and cash equivalents and no long-term debt, even as we paid out $3.5 million in quarterly dividends and spent $1.3 million repurchasing our common stock. With a team of great people who are passionate about our business, we are moving forward, excited about the opportunities that exist in front of us. I sincerely thank everyone for their support, and I believe 2019 will be another year filled with important progress as we execute on our plan to generate profitable growth and increased shareholder value over the long-term. Sincerely, We have now been operating in Puerto Rico and the Dominican Republic for 30 and 31 years, respectively. We view both locations as strategic assets and Jason Brooks Chief Executive Officer ROCKY OUTDOOR GEAR STORE The original factory in 1932, it now houses Customer Service, Inside Sales, Lehigh, Credit and the Outlet Store. CORPORATE OFFICES Built in 1994 as a retail store it was converted to offices in 2005 and is now where all products are designed, developed and marketed. THE PURPOSE OF COMPUTING IS INSIGHT, NOT NUMBERS. Richard Hamming The Rocky Brands Values statement hangs prominently in each of our buildings as a reminder of how and why we do what we do. INCOME STATEMENT DATA ($000, except per share data) 2018 2017 2016 2015 2014 Net sales Gross margin Income from Operations Net income $252,694 $253,197 $ 260,259 $ 269,302 $ 286,242 34.4% 7.1% 31.9% 29.5% 33.0% 33.7% 4.7% -1.2% 3.9% 5.5% $14,553 $9,586 $ (2,139) $ 6,603 $ 9,845 Net income per diluted share $1.95 $1.29 $ (0.29) $ 0.87 $ 1.30 BALANCE SHEET Inventories Total assets Total debt $72,822 $65,622 $ 69,168 $ 76,991 $ 85,237 184,663 173,479 178,939 192,833 213,228 - 2,199 14,584 23,700 36,270 Shareholders’ equity 151,575 141,093 135,093 142,121 138,348 $286.2 $269.3 10.1% INCREASE IN RETAIL 3.9% INCREASE IN WHSL Offset by decline in Military as expected $260.3 $1.30 $1.29 $1.95 $253.2 $252.7 $0.87 $(0.29) Rob Hine 19 YRS Amy Fickel 22 YRS 2014 2015 2016 2017 2018 2014 2015 2017 2018 2016 Net Sales ($millions) Net Income Per Diluted Share 5.5% 3.9% 2014 2015 -1.2% 2016 $36.3 7.1% 4.7% $23.7 $14.6 $2.2 2017 2018 2014 2015 2016 2017 $- 2018 Income from operations as a % of net sales Total Debt ($millions) Theresa Ragosta 18 YRS Steve Price 40 YRS Bobby Jones 29 YRS Matt Bush 19 YRS Richard Simms 24 YRS David Dixon 25 YRS Karen Quinlivan 45 YRS Byron Wortham 15 YRS Dave Degenhardt 45 YRS Joe Nudo 33 YRS Amy McCulloch 25 YRS LOYAL EMPLOYEES IN ANY COMPANY CREATE LOYAL CUSTOMERS, WHO IN TURN CREATE HAPPY SHAREHOLDERS. Steve Jobs We have 200+ employees with at least 15 years with us. This is only a small group of our dedicated family members. ROCKY XO-TOE is the industry’s first ASTM certified externally attached safety toe. Performance of a safety toe with the comfort of a soft toe. GEORGIA BOOT CARBO-TEC LT allows you to let it all hang out with its easy on easy off back zipper. GEORGIA BOOT MARSHLAND capitalizes on our Farm & Ranch heritage with this AMPed up version of a classic silhouette. S2V PREDATOR continues the S2V legacy by targeting trench foot. The advanced S2V Sieve circulates air while pushing water out. ROCKY SPORT PRO SNAKE features 16” of Vapor Pass waterproof vulcanized rubber snake protection for lightweight comfort with the protection you can trust. GEORGIA BOOT RUMBLER is ready for a fight with its external heel stabilizer that completely encapsulates the midsole protecting it from chemicals and abrasion, and its kick ready abrasion-resistant toe cap. ROCKYGEORGIA BOOTDURANGO MAVERICK XP breaks new ground with this work-driven collection featuring a 5 density 3 layer outsole, X-treme Comfort footbed and hidden gore X-Pand System. CUSTOMFITTING FOOTWEAR FROM THE INSIDE OUT. In 2018, Lehigh CustomFit introduced Albert, a cutting- edge 3D Foot Scanner powered by Aetrex Technology. With Albert we can provide account employees their precise foot length, width, arch height, degree of pronation, pressure points and more. With this we can accurately recommend the best fitting footwear style and orthotic to help them prevent, treat and correct various foot and body ailments – keeping them healthy, happy and productive. DO GOOD, FEEL GOOD with Shoe Angel, an online program benefitting medical professionals and their communities. Each Shoe Angel partner is provided a free, customized, state-of-the-art website for their associates to purchase top footwear that is comfortable, safe and a great value. A portion of every purchase is donated to the facility’s charity of choice. DURANGO REBEL PRO is cowboy tested and endorsed by Professional Team Roper Luke Brown. “I am very hard on boots and the Rebel Pro has held up outstanding. The stability in the stirrup is unlike any other I’ve seen. I found my new boot!” Boots at the swipe of a screen couldn’t be easier. The updated LEHIGH CUSTOM FIT KIOSK is on site for quick, easy, safe ordering. DURANGOLEHIGH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 For the fiscal year ended December 31, 2018 OR  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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) Registrant's telephone number, including area code (740) 753-1951 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(b) of the Act: 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 (or for such shorter period that the registrant was required to file such reports), 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 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 such files). Yes  No  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer  Accelerated filer  Non-accelerated filer  Smaller reporting company  Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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 $205,480,710 on June 30, 2018. There were 7,381,760 shares of the registrant's Common Stock outstanding on February 28, 2019. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the 2019 Annual Meeting of Shareholders are incorporated by reference in Part III. TABLE OF CONTENTS Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART I 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. SIGNATURES Exhibits, Financial Statement Schedules Appendix A: Financial Statement Schedule PART IV Page 2 9 14 15 15 15 16 17 18 24 26 49 49 49 51 51 51 51 51 52 55 56 1 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, 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 seven target markets: outdoor, work, duty, commercial military, military, western, and lifestyle. Our footwear products incorporate varying features and are positioned across a range of suggested retail price points from $34.99 for our value priced products to $309.99 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, specialty retailers and online retailers. Our retail business includes direct sales of our products to consumers through our business to business web platform, e-commerce websites, third party marketplaces and our Rocky outlet store. We also sell footwear under the Rocky label to the U.S. military. Competitive Strengths Our competitive strengths include: • Strong portfolio of brands. We believe the Rocky, Georgia Boot, Durango, Lehigh, 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 own 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. 2 • 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 customers. • 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. • Increases in our Lehigh business. We believe that our business to business CustomFit platform has ample opportunity to grow as we continue to pursue large manufacturers, distributors, and other companies who are reliant on safety footwear programs. We feel that diversifying our product lines and continuing to provide an easy, no hassle approach to purchasing, will allow us to expand within the market. • 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 and 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 outdoor enthusiasts 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 industrial and construction workers and non-slip footwear for hospitality 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. 3 • 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 four well-recognized, proprietary brands, Rocky, Georgia Boot, Durango, 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 seven target markets and offer our products at a range of suggested retail price points: $49.99 to $309.99 for our footwear products, $19.99 to $239.99 for tops and bottoms in our apparel lines and $5.99 to $59.99 for our basic and technical outerwear. The Rocky brand originally targeted outdoor enthusiasts, particularly hunters, and has since become a 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, forestry, and oil & gas 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 have also introduced 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 $65.99 to $269.99. 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. 4 Durango Durango is our moderately priced, high quality line of western footwear. 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 $54.99 to $219.99, 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. 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 $78.99 to $243.99. 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 hospitality environments where floors are often tiled and greasy. Price points for this kind of footwear range from $39.99 to $105.99. 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, 2020, with the option to renew. Sales and Distribution Our products are distributed through three distinct business segments: wholesale, retail and military. See Note 16 of our consolidated financial statement for more information regarding our three business segments. Wholesale In the U.S., we distribute Rocky, Georgia Boot, Durango, and Michelin products through a wide range of wholesale distribution channels. As of December 31, 2018, 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 is organized around major accounts, including Bass Pro Shops, Cabela’s, Dick’s Sporting Goods, Tractor Supply Company, Amazon and Kohl’s, and around our target markets: outdoor, work, duty, commercial military, lifestyle and western. For our Rocky, 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, online retailers, 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, hardware stores and online retailers. • Our duty products are sold primarily through uniform stores, catalog specialists and online retailers. 5 • 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, online retailers and more recently, 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 third-party marketplaces, and our stores, which include our outlet store 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, and 4eursole.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, Whirlpool, 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. 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 2018, we stopped serving the New York Transit Authority with mobile stores. As of December 31, 2018, our only remaining retail store is located at The Puget Sound Naval Base. 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. 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 both digital advertising and consumer advertising in support of our retail partners. Digital advertising includes online brand level marketing, search engine pay-per-click, retargeting and social media targeting. A key component to supporting our retail partners 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 through event sponsorships which provide significant national exposure for all of our brands as well as a direct connection to our target consumer. Our print advertisements and television commercials emphasize the technical features of our products as well as their high quality, comfort, functionality and durability. 6 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. 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 as well as reduce our lead times. 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 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, Australia 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. In early 2018, the Washington and Canada logistics operations were wound down and closed. 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 represented approximately 1.9% of net sales in 2018 and 3.0% of net sales in 2017. As previously mentioned, we maintain manufacturing facilities that we operate in the Dominican Republic and Puerto Rico. In addition, we utilize an office in China to support our contract manufacturers. The net book value of fixed assets located outside of the U.S. totaled $2.5 million at December 31, 2018 and $3.2 million at December 31, 2017. Suppliers We purchase raw materials from sources worldwide. We do not have any long-term supply contracts for the purchase of our raw materials, except for limited blanket purchase orders on leather to protect wholesale selling prices for an extended period of time. The principal raw materials used in the production of our products, in terms of dollar value, are leather, Gore-Tex waterproof breathable fabric, Cordura nylon fabric and soling materials. We believe these materials will continue to be available from our current suppliers. However, in the event these materials are not available from our current suppliers, we believe these products, or similar products, would be available from alternative sources. 7 Seasonality and Weather Historically, we have experienced significant seasonal fluctuations in our business as many of our footwear products are used by consumers in adverse weather conditions. In order to meet these demands, we must manufacture and source footwear year-round to be in a position to ship advance and at once orders for these products during the last two quarters of each year. Accordingly, average inventory levels have been highest during the second and third quarters of each year and sales have been highest in the last two quarters of the year. In addition, mild or dry weather conditions historically have had a material adverse effect on sales of our outdoor products, particularly if they occurred in broad geographical areas during late fall or early winter. Backlog ($ in millions) Wholesale Backlog Military Backlog Total Backlog Years Ended December 31, 2018 2017 15.5 13.0 28.5 $ $ 16.3 26.2 42.5 $ $ Our backlog consists of all open orders as of December 31st of the corresponding year to be shipped at any point in the future. Additionally, 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. 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, and Lehigh. 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 brand and related marks on our products. Our license agreement with Michelin Lifestyle Limited to use the Michelin name expires on December 31, 2020, with the option to renew. In the U.S., our patents are generally in effect for up to 15 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 material 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. 8 Employees At December 31, 2018, we had approximately 2,087 employees of which approximately 2,070 are full time employees. Approximately 1,728 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 in good standing. 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. 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. 9 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. 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 current political climate has introduced greater uncertainty with respect to 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 2018, 10.4% 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. The U.S. military provides preference on contract bids to small businesses and our current company structure classifies us as a large business which could have an effect on our ability to be awarded new contracts in the future. 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. 10 Our outdoor and insulated products are seasonal and are sensitive to weather conditions. 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. 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. 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 may not 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, 2018, there was no triggering event and the covenant was not in effect. 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. 11 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 our distribution center in Logan, Ohio and manufacturing facilities in the Dominican Republic and Puerto Rico 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 and consumers. We rely on our distribution center located in Logan, Ohio and our manufacturing facilities in the Dominican Republic and Puerto Rico. 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 our ability to manufacture our products, a portion of our inventory, or impair our ability to use our distribution center as a docking location for merchandise. Any of these occurrences could impair our ability to adequately supply our retailers and consumers 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 many our trademarks, trade names and designs, including such marks as Rocky, Georgia Boot, Durango, and Lehigh. 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. 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 conditions, 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. 12 A cyber-security breach could have a material adverse effect on our 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 our 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 damage our reputation and our customers’ willingness to purchase our products, which may adversely affect our business. In addition, we could incur liabilities and remediation costs, including regulatory fines, reimbursement or other compensatory costs, additional compliance costs, and costs for providing credit monitoring or other benefits to customers or employees affected. 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. In addition, as data privacy and marketing laws change, we may incur additional costs to ensure it remains in compliance. If applicable data privacy and marketing laws become more restrictive at the federal or state level, our compliance costs may increase, our ability to effectively engage customers via personalized marketing may decrease, its opportunities for growth may be curtailed by its compliance capabilities or reputational harm and its potential liability for security breaches may increase. We are also subject to U.S. and international data privacy and cybersecurity laws and regulations, which may impose fines and penalties for noncompliance and may have an adverse effect on our operations. For example, the European Union’s General Data Protection Regulation (the “GDPR”), which became effective in May 2018, extends the scope of the EU data protection law to all companies processing data of EU residents, regardless of our location, and imposes significant new requirements on how we collect, processes and transfer personal data. GDPR introduces new data protection requirements in the European Union and substantial fines for breaches of the data protection rules. GDPR increases our responsibility and potential liability in relation to personal data that we process, and we may be required to put in place additional mechanisms to ensure compliance with the new data protection rules. Any failure to comply with these rules and related national laws of European Union member states, could lead to government enforcement actions and significant penalties against us, and could adversely affect our business, financial condition, cash flows and results of operations. Compliance with any of the foregoing laws and regulations can be costly. A violation of any laws or regulations relating to the collection or use of personal information could result in the imposition of fines against us. Disruption of our information technology systems could adversely affect our business Our information technology systems are critical to our business operations. Any interruption, unauthorized access, impairment or loss of data integrity or malfunction of these systems could severely impact our business, including delays in product fulfillment and reduced efficiency in operations. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems, or with maintenance or adequate support of existing systems, could disrupt or reduce the efficiency of our operations. Disruption to our information technology systems may be caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, denial-of-service attacks, computer viruses, physical or electronic break-ins, or similar events or disruptions. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could prevent access to our online services and preclude retail transactions. System failures and disruptions could also impede the manufacturing and shipping of products, transactions processing and financial reporting. Additionally, we may be adversely affected if we are unable to improve, upgrade, maintain, and expand our technology 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. There are risks, including stock market volatility, inherent in owning our common stock. The market price and volume of our common stock have been, and may continue to be, subject to significant fluctuations. These fluctuations may arise from general stock market conditions, the impact of risk factors described in this Item 1A on our results of operations and financial position, or a change in opinion in the market regarding our business prospects or other factors, many of which may be outside our immediate control. Changes in the amounts and frequency of share repurchases or dividends also could adversely affect the value of our common stock. 13 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. 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. 14 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 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, which are utilized by all segments, as follows: Square Footage 28,684 34,373 20,135 93,097 36,186 23,476 16,797 Lease Expiration 2018 2018 2018 2019 2019 2020 2021 We are currently negotiating our leases that expired at the end of 2018 and are occupying them on a month-to-month basis until a new agreement is reached. 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. 15 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. PART II Market Information Our common stock trades on the NASDAQ Global Select Market under the symbol “RCKY.” As of February 28, 2019, there were 70 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. The following table sets forth information concerning the Company’s purchases of common stock for the periods indicated: Period October 1, 2018 - October 31, 2018 November 1, 2018 - November 30, 2018 December 1, 2018 - December 31, 2018 Total Total number of shares (or units) purchased (1) Average price paid per share (or units) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (2) - - 55,223 $ 55,223 $ - - $ 23.73 23.73 $ 7,500,000 7,500,000 6,189,713 6,189,713 (1) The reported shares were repurchased pursuant to the Company’s publicly announced stock repurchase authorizations. (2) The number shown represents, as of the end of each period, the maximum number of shares (approximate dollar value) of Common Stock that may yet be purchased under publicly announced stock repurchase authorizations. The shares may be purchased, from time-to-time, depending on market conditions. On March 4, 2019, the Company announced a new $7,500,000 share repurchase program that will terminate on February 28, 2020. This program is replacing the $7,500,000 share repurchase program that was announced on March 1, 2018 that expired on March 1, 2019. 16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. ROCKY BRANDS, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA ($ in thousands, except for per share data) 2018 For the years ended December 31, 2016 2017 2015 2014 Income statement data Net sales Gross margin (% of sales) Net income (loss) Dividends paid on common stock Earnings per share Net income (loss) Basic Diluted Weighted average common shares outstanding Basic Diluted Balance sheet data Inventory Total assets Working capital Long-term debt, less current maturities Shareholders' equity $ 252,694 $ 253,197 $ 260,259 $ 269,302 $ 286,242 34.4 % 31.9 % 29.5 % $ 14,553 3,484 $ 9,586 3,269 $ (2,139) 3,297 $ 1.96 1.95 $ 1.29 1.29 $ (0.29) (0.29) $ $ 33.0 % 6,603 3,252 0.87 0.87 $ $ 33.7 % 9,845 3,018 1.30 1.30 7,412 7,462 7,428 7,450 7,505 7,505 7,563 7,574 7,545 7,548 72,822 $ $ 184,663 $ 106,167 $ - $ 151,575 65,622 $ $ 173,479 99,159 $ $ 2,199 $ 141,093 69,168 $ $ 178,939 $ 101,060 $ 14,584 $ 135,093 76,991 $ $ 192,833 $ 113,442 $ 23,700 $ 142,121 85,237 $ $ 213,228 $ 124,773 $ 36,270 $ 138,348 17 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 two years in the period ended December 31, 2018, and our capital resources and liquidity as of December 31, 2018 and 2017. 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 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, 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 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 primarily through our websites. We also sell footwear under the Rocky label to the U.S. military. 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. 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 center. 18 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, 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: Net sales Cost of goods sold Gross margin Operating expenses Income from operations Results of Operations Twelve Months Ended December 31, 2018 2017 100.0 % 65.6 34.4 27.3 7.1 % 100.0 % 68.1 31.9 27.2 4.7 % December 31, 2018 Compared to Year Ended December 31, 2017 Twelve Months Ended December 31, ($ in thousands) NET SALES: Wholesale Retail Military Total Net Sales 2018 2017 Inc./ (Dec.) Inc./ (Dec.) $ $ 173,124 53,216 26,354 252,694 $ $ 166,682 48,352 38,163 253,197 $ $ 6,442 4,864 (11,809) (503) 3.9 % 10.1 (30.9) (0.2) % Wholesale sales increased as consumers continued to respond favorably to several recent product introductions across our brand portfolio, which we believe is being fueled by new innovations and enhanced marketing programs that are generating increased awareness and demand in our work, western, outdoor and commercial military categories. This was partially offset by the loss of the Creative Recreation brand which was sold in the fourth quarter of 2017. Not including the Creative Recreation brand, wholesale sales increased 6.6% in 2018. Retail sales increased primarily due to both a strong growth in our Lehigh business, which was primarily attributed to an expansion in our CustomFit model that allowed us to attain growth in our key account business as well as increase participation and retention rates, and a mid-teen increase in our direct to consumer e-commerce business which we believe is attributable to recent investments aimed at increasing traffic and conversion on our websites. Not including the Creative Recreation brand, retail sales increased 11.8% in 2018. 19 Military sales decreased, as expected, due to some contracts expiring in late 2017. ($ in thousands) GROSS MARGIN: Wholesale Margin $'s Margin % Retail Margin $'s Margin % Military Margin $'s Margin % Total Margin $'s Margin % Twelve Months Ended December 31, 2018 2017 Inc./ (Dec.) $ $ $ $ 57,792 33.4 % 23,650 44.4 % 5,587 21.2 % 87,029 34.4 % $ $ $ $ 54,188 32.5 % 21,168 43.8 % 5,413 14.2 % 80,769 31.9 % $ $ $ $ 3,604 0.9 % 2,481 0.6 % 174 7.0 % 6,260 2.5 % Wholesale gross margin increased primarily due to our dedicated focus to increasing full price selling by offering less discounts while maintaining stronger initial margins on some of our newer products. In 2017, we also had sales from the Creative Recreation brand which carried lower margins, additional expenses incurred due to the disruption from hurricanes Maria and Irma, and we were selling through some discontinued products. Retail gross margins increased primarily due to an increase in direct to consumer sales which carry a higher margin and a decrease in certain Lehigh sales that carry lower margins. Military gross margin increased significantly due to a number of lower margin contracts expiring in 2017 as well as increased efficiencies at our Puerto Rico facility. Twelve Months Ended December 31, ($ in thousands) OPERATING EXPENSES: Operating Expenses % of Net Sales 2018 2017 Inc./ (Dec.) Inc./ (Dec.) $ 68,968 $ 27.3 % 68,943 $ 27.2 % 25 0.1 % 0.0 % Operating expenses remained flat year over year. In 2018, we increased investments in our core brands to help initiate growth and expand within our respective markets as well as an increase in bad debt expense, incentive compensation, and variable expenses tied to sales increases. These increased investments and variable costs were offset by a decrease in selling, general and administrative expenses associated with the Creative Recreation brand which was sold in the fourth quarter of 2017. ($ in thousands) OTHER EXPENSES: Other Expenses Twelve Months Ended December 31, 2018 2017 Inc./ (Dec.) Inc./ (Dec.) $ (162) $ (2,465) $ 2,303 (93.4) % 20 Other expenses decreased due to lower interest expense and the $2.1 million dollar loss on the disposition of the Creative Recreation brand in the fourth quarter of 2017. ($ in thousands) INCOME TAXES: Income Tax Expense (Benefit) Effective Tax Rate Twelve Months Ended December 31, 2018 2017 Inc./ (Dec.) Inc./ (Dec.) $ $ 3,346 18.7 % $ (225) (2.4) % 3,571 21.1 % (1,587.1) % Income taxes increased as our income tax benefit for 2017 was a result of the Tax Cuts and Jobs Act (TCJA), more specifically the reduction in the statutory rate, which applied to our 2018 income tax expense and deferred tax liabilities, from 35% to 21%. This benefit was reduced by transition taxes on previously unremitted earnings of non-U.S. subsidiaries and taxes due on $9.4 million of pretax income. 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 historically 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 increased to $106.2 million at December 31, 2018, compared to $99.2 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 $4.7 million for 2018 and $4.3 million in 2017. Capital expenditures for 2019 are anticipated to be approximately $7.3 million. We lease certain machinery, equipment, and manufacturing facilities under operating leases that generally provide for renewal options. Future minimum lease payments under non-cancelable operating leases are outlined in further detail in Note 8. We believe that our credit facility coupled with cash generated from operations will provide sufficient liquidity to fund our operations for at least the next twelve months. Our continued liquidity, however, is contingent upon future operating performance, cash flows and our ability to meet financial covenants under our credit facility. For more information regarding our credit facility please see Note 7. Cash Flows ($ in millions) Operating activities Investing activities Financing activities Net change in cash and cash equivalents Twelve Months Ended December 31, 2018 2017 $ $ 17.6 (4.2) (6.9) 6.5 $ $ 17.1 (1.6) (16.3) (0.8) 21 Operating Activities. The principal sources of net cash in 2018 included decreases in trade receivables and income tax receivable as well as increases to accounts payable and accrued liabilities. These sources of net cash were partially offset by an increase in inventories and a decrease in long-term taxes payable. The principal sources of net cash in 2017 included lower inventories and increases to accounts payable and long-term taxes payable. These sources of net cash were partially offset by an increase in accounts receivable. Investing Activities. The principal use of cash in 2018 and 2017 was for the purchase of molds and equipment associated with our manufacturing and distribution operations and for information technology software and system upgrades. An offsetting impact to the use of cash in 2017 was cash collected for the sale of the Creative Recreation brand in the fourth quarter of 2017. Financing Activities. Proceeds and repayments of the revolving credit facility reflect daily cash disbursement and deposit activity. Our financing activities during 2018 and 2017 principally were net repayments under the revolving line of credit facility, payments of dividends, and repurchases of our common stock. On March 4, 2019, the Company announced a new $7,500,000 share repurchase program that will replace the 2018 plan and will expire on February 28, 2020. Management could decide to repurchase additional shares under either program up through the date of expiration of the program. For additional information regarding this share repurchase program see Note 11. Contractual Obligations and Commercial Commitments The following table summarizes our contractual obligations at December 31, 2018 resulting from financial contracts and commitments. We have not included information on our recurring purchases of materials for use in our manufacturing operations. These amounts are generally consistent from year to year, closely reflect our levels of production, and are not long-term in nature (less than three months). Contractual Obligations at December 31, 2018: ($ in millions) Long-term debt Taxes payable (1) Minimum operating lease commitments Expected cash requirements for credit facility (2) Contract Liabilities (3) Consulting commitments Total Less than 1 Year 1-3 Years 3-5 Years Over 5 Years $ - 0.2 1.0 0.7 2.6 0.5 - - - 0.7 $ 0.3 - - $ - 0.1 2.6 0.5 0.3 $ 0.3 - - - - - 0.2 - - - - Total contractual obligations $ 5.0 $ 3.9 $ 0.6 $ 0.3 $ 0.2 (1) Represents one-time transition tax payable related to known amounts of cash taxes payable in future years as a result of the TCJA. For further information, refer to Note 10. (2) Expected payments are approximately $0.1 million per year for the foreseeable future and are a fee on the unused portion of our credit facility. (3) Represents our contract minimums with the U.S. Military. For further information please see Note 14. 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, 2018, 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, 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. 22 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 2018 and 2017 due to these factors. It is anticipated that any inflationary pressures during 2019 could be offset through possible price increases. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our Consolidated Financial Statements are prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to establish accounting policies and make estimates that affect amounts reported in our Consolidated Financial Statements. Note 1 of the Notes to Consolidated Financial Statements, which is incorporated by reference into this MD&A, describes the significant accounting policies we use in our Consolidated Financial Statements. An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on the Consolidated Financial Statements. Estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results substantially different from those estimates. The most significant accounting policies and estimates and their related application are discussed below. Revenue recognition Revenue principally consists of sales to customers, and, to a lesser extent, license fees. See Note 14 for additional information regarding revenues. 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 as a percentage of sales for the years below were as follows: Sales, returns, and allowances Inventories 2018 2017 4.9 % 3.9 % 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 and e-commerce channels. 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 as required. See Note 3 for additional information regarding inventories. Intangible assets 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. See Note 5 for additional information regarding intangible assets and the annual impairment analysis. 23 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 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. For additional information see Note 10. RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS Note 2 to Consolidated Financial Statements discusses new accounting pronouncements adopted during 2018 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to Consolidated Financial Statements. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report, including 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,” “would,” “could” 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, risks inherent to international trade, changing retail trends, the loss or disruption of our manufacturing and distribution operations, cyber security breaches or disruption of our digital systems, fluctuations in foreign currency exchange rates, 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. In the normal course of business, the Company's financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and currency rate movements on non-U.S. dollar denominated assets, liabilities and cash flows. The Company is also subject to commodity pricing risk via changes in the price of materials used in our manufacturing process. The Company regularly assesses these risks and has established policies and business practices that should mitigate a portion of the adverse effect of these and other potential exposures. Interest Rate Risk Our primary market risk results from fluctuations in interest rates. The following item is market rate sensitive for interest rates for the Company: long-term debt consisting of a credit facility with no balance at December 31, 2018. For additional information about our credit facility see Note 7. We have no other long-term debt maturities. We do not hold any market risk sensitive instruments for trading purposes. We do not have any interest rate management agreements as of December 31, 2018. Commodity Risk 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. 24 Foreign Exchange Risk The Company faces market risk to the extent that changes in foreign currency exchange rates affect the Company’s foreign assets, liabilities and inventory purchase commitments. The Company manages these risks by attempting to denominate contractual and other foreign arrangements in U.S. dollars. 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ROCKY BRANDS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Description Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2018 and 2017 Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2018 and 2017 Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Note 2. ACCOUNTING STANDARDS UPDATES Note 3. INVENTORIES Note 4. PROPERTY, PLANT, AND EQUIPMENT Note 5. IDENTIFIED INTANGIBLE ASSETS Note 6. OTHER ASSETS Note 7. LONG-TERM DEBT Note 8. OPERATING LEASES Note 9. BENEFIT PLAN Note 10. TAXES Note 11. SHAREHOLDERS' EQUITY Note 12. SHARE-BASED COMPENSATION Note 13. EARNINGS PER SHARE Note 14. REVENUE Note 15. SUPPLEMENTAL CASH FLOW INFORMATION Note 16. SEGMENT INFORMATION Note 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Note 18. COMMITMENTS AND CONTINGENCIES Note 19. SALE OF CREATIVE RECREATION Page 27 28 29 30 31 32 34 35 36 36 37 37 38 39 39 42 42 44 44 46 46 48 48 48 26 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Rocky Brands, Inc. and Subsidiaries Nelsonville, Ohio Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Rocky Brands, Inc. and Subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes and the financial statement schedule listed in the index at Item 15(a)(2), (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based upon criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2019 expressed an unqualified opinion. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2007. /s/ Schneider Downs & Co., Inc. Columbus, Ohio March 13, 2019 27 Rocky Brands, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share amounts) December 31, 2018 December 31, 2017 $ $ $ $ $ $ 10,173 43,337 2,602 331 72,822 30 1,890 131,185 23,057 30,273 148 184,663 13,543 2,602 3,339 556 668 560 2,334 - 1,416 25,018 - 169 7,780 121 33,088 3,681 45,027 - 806 65,622 1,849 2,200 119,185 23,781 30,315 198 173,479 12,983 - 1,755 600 770 456 2,161 - 1,301 20,026 2,199 2,287 7,726 148 32,386 68,387 83,188 151,575 184,663 $ 68,974 72,119 141,093 173,479 $ ASSETS: CURRENT ASSETS: Cash and cash equivalents Trade receivables, net Contract receivables Other receivables Inventories – net Income tax receivable Prepaid expenses Total current assets PROPERTY, PLANT & EQUIPMENT – net IDENTIFIED INTANGIBLES – net OTHER ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable Contract liabilities Accrued expenses: Salaries and wages Taxes - other Accrued freight Commissions Accrued duty Income tax payable Other Total current liabilities LONG TERM DEBT LONG TERM TAXES PAYABLE DEFERRED INCOME TAXES DEFERRED LIABILITIES TOTAL LIABILITIES SHAREHOLDERS' EQUITY: Common stock, no par value; 25,000,000 shares authorized; issued and outstanding December 31, 2018 - 7,368,494 and December 31, 2017 - 7,398,654 Retained earnings Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY See notes to consolidated financial statements 28 Rocky Brands, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands, except per share amounts) NET SALES COST OF GOODS SOLD GROSS MARGIN OPERATING EXPENSES INCOME FROM OPERATIONS OTHER INCOME (EXPENSES) INCOME BEFORE INCOME TAXES INCOME TAX EXPENSE (BENEFIT) NET INCOME INCOME PER SHARE Basic Diluted WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic Diluted See notes to consolidated financial statements $ $ $ $ Twelve Months Ended December 31, 2018 2017 252,694 $ 165,665 87,029 68,968 18,061 (162) 17,899 3,346 14,553 $ 1.96 $ 1.95 $ 7,412 7,462 253,197 172,428 80,769 68,943 11,826 (2,465) 9,361 (225) 9,586 1.29 1.29 7,428 7,450 29 Rocky Brands, Inc. and Subsidiaries Consolidated Statement of Shareholders’ Equity (In thousands, except per share amounts) Common Stock and Additional Paid-in Capital Shares Outstanding Amount Accumulated Other Comprehensive Income Retained Earnings Total Shareholders' Equity BALANCE - December 31, 2016 7,421 $ 69,292 $ - $ 65,802 $ 135,093 YEAR ENDED DECEMBER 31, 2017 Net income Dividends paid on common stock ($0.11 per share) Repurchase of common stock Stock issued for options exercised, including tax benefits Stock compensation expense BALANCE - December 31, 2017 YEAR ENDED DECEMBER 31, 2018 Net income Dividends paid on common stock ($0.12 per share) (1) Repurchase of common stock Stock issued for options exercised, including tax benefits Stock compensation expense BALANCE - December 31, 2018 (52) $ (688) 2 28 7,399 $ 14 356 68,974 $ (55) $ (1,310) 10 14 7,368 $ 135 588 68,387 $ $ 9,586 $ (3,269) - $ 72,119 $ $ 14,553 $ (3,484) - $ 83,188 $ 9,586 (3,269) (688) 14 356 141,093 14,553 (3,484) (1,310) 135 588 151,575 (1) Dividend was increased from $0.11 per share to $0.12 per share in the second quarter of 2018 See notes to consolidated financial statements 30 Rocky Brands, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Twelve Months Ended December 31, 2018 2017 $ 14,553 $ 9,586 5,375 617 109 - 588 2,165 (7,199) - 310 50 61 1,803 (862) 17,570 (4,238) 19 - (4,219) 7,771 (9,971) 135 (1,310) (3,484) (6,858) 6,492 6,507 (3,640) 120 2,090 356 (6,075) 4,047 (606) 155 35 1,360 885 2,287 17,107 (4,308) 330 2,399 (1,579) 61,779 (74,164) 14 (688) (3,269) (16,328) (800) $ 3,681 10,173 $ 4,481 3,681 Depreciation and amortization Deferred income taxes (Gain) loss on disposal of fixed assets Loss on disposition of Creative Recreation Stock compensation expense Change in assets and liabilities: Receivables Inventories Income tax receivable Other current assets Other assets Accounts payable Accrued and other liabilities Income taxes payable Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets Proceeds from sales of fixed assets Proceeds from the sale of Creative Recreation Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facility Repayments on revolving credit facility Proceeds from stock options Repurchase of common stock Dividends paid on common stock Net cash used in financing activities INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD END OF PERIOD See notes to consolidated financial statements 31 Notes to the Consolidated Financial Statements For the Years Ended December 31, 2018 and 2017 ROCKY BRANDS, INC. AND SUBSIDIARIES 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Rocky Brands, Inc. (“Rocky”) and its wholly-owned subsidiaries, Lifestyle Footwear, Inc. (“Lifestyle”), Five Star Enterprises Ltd. (“Five Star”), Rocky Brands Canada, Inc. (“Rocky Canada”), Rocky Brands US, LLC, Rocky Brands International, LLC, Lehigh Outfitters, LLC, and Rocky Outdoor Gear Store, LLC (collectively referred to as the “Company”). All inter-company transactions have been eliminated. Business Activity - We are a leading designer, manufacturer and marketer of premium quality footwear marketed under a portfolio of well recognized brand names including Rocky, Georgia Boot, Durango, and Lehigh. Our brands have a long history of representing high quality, comfortable, functional and durable footwear and our products are organized around seven target markets: outdoor, work, duty, commercial military, western, lifestyle and military. In addition, as part of our strategy of outfitting consumers from head-to-toe, we market complementary branded apparel and accessories that we believe leverage the strength and positioning of each of our brands. Our products are distributed through three distinct business segments: wholesale, retail and military. In our wholesale business, we distribute our products through a wide range of distribution channels representing over 10,000 retail store locations in the U.S. and Canada. Our wholesale channels vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores, specialty retailers and online retailers. Our retail business includes direct sales of our products to consumers through our business to business web-platform, e-commerce websites, third-party marketplaces, and our Rocky outlet store. We also sell footwear under the Rocky label to the U.S. military. Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Balances may exceed federally insured limits. Trade Receivables - Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $1,268,000 and $177,000 at December 31, 2018 and 2017, respectively. The Company records the allowance based on historical experience, the age of the receivables, and identification of customer accounts that are likely to prove difficult to collect due to various criteria including pending bankruptcy. However, estimates of the allowance in any future period are inherently uncertain and actual allowances may differ from these estimates. If actual or expected future allowances were significantly greater or less than established reserves, a reduction or increase to bad debt expense would be recorded in the period this determination was made. Our credit policy generally provides that trade receivables will be deemed uncollectible and written-off once we have pursued all reasonable efforts to collect on the account. In accordance with ASC 606, the return reserve liability netted against trade receivables was $1,154,000 at December 31, 2018. The return reserve was $981,000 as of December 31, 2017 under ASC 605. 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, 2018 and 2017. 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 Asia, primarily China. We are not aware of any governmental or economic restrictions that would alter our current sourcing operations. 32 Inventories - Inventories are valued at the lower of cost, determined on a first-in, first-out (FIFO) basis, or net realizable value. Reserves are established for inventories when the net realizable value (NRV) is deemed to be less than its cost based on our periodic estimates of NRV. Property, Plant and Equipment - The Company records fixed assets at historical cost and generally utilizes the straight-line method of computing depreciation for financial reporting purposes over the estimated useful lives of the assets as follows: 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, and patents. Indefinite lived intangible assets are not amortized. If events or circumstances change, a determination is made by management, in accordance with the accounting standard for “Property, Plant and Equipment” to ascertain whether property, equipment and certain finite-lived intangibles have been impaired based on the sum of expected future undiscounted cash flows from operating activities. If the estimated net cash flows are less than the carrying amount of such assets, we will recognize an impairment loss in an amount necessary to write down the assets to fair value as determined from expected future discounted cash flows. In accordance with the accounting standard for “Intangibles – Goodwill and Other”, we test intangible assets with indefinite lives for impairment annually or when conditions indicate impairment may have occurred. We perform such testing of our indefinite- lived intangible assets in the fourth quarter of each year or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. See Note 5 for more information. Comprehensive Income - Comprehensive income includes changes in equity that result from transactions and economic events from non-core operations. Comprehensive income is composed of two subsets – net income and other comprehensive income. There were no material other comprehensive income items therefore no Statements of Comprehensive Income were presented. Advertising - We expense advertising costs as incurred. Advertising expense was approximately $7,583,000 and $7,095,000 for 2018 and 2017, respectively. Revenue Recognition – Effective January 1, 2018 we adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective method. The adoption of this standard did not have a material impact on our consolidated financial statements. For additional information see Note 14. Shipping Costs - All shipping costs billed to customers have been included in net sales. All outbound shipping costs to customers have been included in selling, general and administrative costs and totaled approximately $8,932,000 and $8,133,000 in 2018 and 2017, respectively. Fair Value Measurements – The fair value accounting standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard clarifies how to measure fair value as permitted under other accounting pronouncements. The fair value accounting standard defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This standard also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: • Level 1 – Quoted prices in active markets for identical assets or liabilities. • Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. 33 • Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. The fair values of cash and cash equivalents, receivables, and payables approximated their carrying values because of the short- term nature of these instruments. Receivables consist primarily of amounts due from our customers, net of allowances, amounts due from employees (sales persons’ advances in excess of commissions earned and employee travel advances); other customer receivables, net of allowances; and expected insurance recoveries. The carrying amounts of our long-term credit facility and other short-term financing obligations also approximate fair value, as they are comparable to the available financing in the marketplace during the year. The fair value of our revolving line of credit is categorized as Level 2. 2. ACCOUNTING STANDARDS UPDATES Recently Issued Accounting Pronouncements Rocky Brands, Inc. is currently evaluating the impact of certain ASUs on its Consolidated Financial Statements or Notes to the Consolidated Financial Statements: Standard Description Anticipated Adoption Period ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share- based Payment Accounting ASU 2016- 13, Measurement of Credit Losses on Financial Instruments ASU 2016-02, Leases (Topic 842) Effect on the financial statements or other significant matters The Company is evaluating the impact of the new standard on its Consolidated Financial Statements, but does not anticipate the standard will have a significant impact. The Company is evaluating the impact of the new standard on its Consolidated Financial Statements, but does not anticipate the standard will have a significant impact. the impacts of the new standard on its existing financial instruments, including trade receivables. Q1 2020 The Company is evaluating Q1 2019 This standard was adopted on its effective date, January 1, 2019 using the modified retrospective approach. For additional information see Note 8. This pronouncement changes the fair value measurement disclosure requirements of ASC 820. The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements. Q1 2020 The pronouncement simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. Q1 2019 The pronouncement seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The pronouncement introduces a lessee model that brings most leases on the balance sheet. The standard requires that lessees recognize the following for all leases (with the exception of short-term leases, as that term is defined in the standard) at the lease commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) 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. 34 Accounting Standards Adopted in the Current Year Standard Description The pronouncement provides specific guidance on eight cash flow classification issues to reduce the diversity in practice. Effect on the financial statements or other significant matters The Company adopted this ASU in the first quarter of 2018, which did not have a material effect on the Consolidated Financial Statements. ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ASU 2018-15 Internal-use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (A Consensus of the FASB EITF) The pronouncement outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The core principle of the new standard is that an entity should recognize revenue to depict the transfer of 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. This pronouncement aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). It also provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The guidance also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The Company adopted this ASU in the first quarter of 2018, which did not have a material effect on the Consolidated Financial Statements. The Company elected to adopt this standard using the modified retrospective method. For additional information please see Note 14. We elected to early adopt the ASU on a prospective basis, effective October 1, 2018. As a result of adopting this ASU, we will defer onto the Consolidated Balance Sheets up-front implementation costs of cloud computing arrangements if they would have been capitalized in a similar on- premise software solution. 3. INVENTORIES Inventories are comprised of the following: Raw materials Work-in-process Finished goods Total ($ in thousands) December 31, 2018 December 31, 2017 $ $ 12,986 715 59,121 72,822 $ $ 11,395 709 53,518 65,622 In accordance with ASC 606, the return reserve asset included within inventories is approximately $694,000 at December 31, 2018. The returns reserve was $587,000 as of December 31, 2017 under ASC 605. 35 4. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment is comprised of the following: Land Buildings Machinery and equipment Furniture and fixtures Lasts, dies and patterns Construction work-in-progress Total Less - accumulated depreciation ($ in thousands) $ December 31, 2018 December 31, 2017 $ 957 20,656 44,080 2,444 9,517 1,062 78,717 (55,660) 671 20,220 44,523 2,444 16,350 1,624 85,832 (62,051) Net Fixed Assets $ 23,057 $ 23,781 We incurred approximately $5.3 million and $6.4 million in depreciation expense for 2018 and 2017, respectively. During the fourth quarter of 2017 the Creative Recreation brand was sold. As part of this sale, approximately $236,000 of molds and lasts was sold. See Note 19 for additional information regarding the sale of Creative Recreation. 5. IDENTIFIED INTANGIBLE ASSETS A schedule of identified intangible assets is as follows: ($ in thousands) Gross Amount Accumulated Amortization Carrying Amount December 31, 2018 Trademarks Wholesale Retail Patents Customer Relationships Total Intangibles December 31, 2017 Trademarks Wholesale Retail Patents Customer Relationships Total Intangibles $ $ $ $ 27,192 2,900 895 - 30,987 $ $ - - 714 - 714 Gross Amount Accumulated Amortization 27,192 2,900 895 - 30,987 $ $ - - 672 - 672 $ $ $ $ 27,192 2,900 181 - 30,273 Carrying Amount 27,192 2,900 223 - 30,315 The weighted average remaining life for our patents is 5.0 years. 36 A schedule of approximate actual and expected amortization expense related to finite-lived intangible assets is as follows: Amortization Expense $ ($ in thousands) 2017 2018 2019 2020 2021 2022 2023 121 41 33 31 26 22 20 During the fourth quarter of 2017 the Creative Recreation brand was sold. Included in the sale were $2.1 million of trademarks and $880,000 of customer relationships. See Note 19 for more information regarding the sale of Creative Recreation. Intangible assets, including trademarks and patents are reviewed for impairment annually, and more frequently, if necessary. We perform such testing of indefinite-lived intangible assets in the fourth quarter of each year or as events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. Fair value of other indefinite- lived intangible assets is determined using the relief from royalty method. In assessing whether indefinite-lived intangible assets are impaired, we must make certain estimates and assumptions regarding future cash flows, long-term growth rates of our business, operating margins, weighted average cost of capital and other factors such as; discount rates, royalty rates, cost of capital, and market multiples to determine the fair value of our assets. These estimates and assumptions require management’s judgment, and changes to these estimates and assumptions could materially affect the determination of fair value and/or impairment for each of our indefinite-lived intangible assets. Future events could cause us to conclude that indications of intangible asset impairment exist. Impairment may result from, among other things, deterioration in the performance of our business, adverse market conditions, adverse changes in applicable laws and regulations, competition, or the sale or disposition of a reporting segment. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. 2018 and 2017 Impairment Testing We evaluate our finite and indefinite lived trademarks under the terms and provisions of the accounting standards for “Intangibles - Goodwill and Other”; and “Property, Plant and Equipment.” These pronouncements require that we compare the fair value of an intangible asset with its carrying amount. The results of our 2018 and 2017 indefinite-lived intangible impairment testing indicated that all reporting unit intangible asset fair values exceed their respective carrying values. 6. OTHER ASSETS Other assets consist of the following: Deferred financing costs, net Other Total 7. LONG-TERM DEBT ($ in thousands) December 31, 2018 December 31, 2017 $ $ 51 97 148 $ $ 59 139 198 In December 2014, we amended and restated our financing agreement with PNC Bank (“PNC”) to increase the credit facility to $75.0 million and extend the term of the facility an additional five years to November 2019. The credit facility’s base interest rate is the current prime rate less 0.25%, however the credit facility provides us the option to borrow on up to eight fixed loans at LIBOR plus 1.25% in accordance with the 2014 amended and restated credit agreement. The LIBOR rate is determined based on the fixed loan maturities, which vary from 30, 60, 90, or 180 days. 37 The Company’s credit facility borrowings consist of the following: LIBOR borrowings Prime borrowings Total credit facility borrowings ($ in thousands) December 31, 2018 December 31, 2017 - - - $ $ - 2,199 2,199 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, 2018, we had total capacity of $65.4 million. On February 13, 2019 we entered into a Revolving Credit, Guaranty, and Security Agreement (“Credit Agreement”) with the Huntington National Bank (“Huntington”) as administrative agent. The Credit Agreement provides for a new senior secured asset-based revolving credit facility up to a principal amount of $75 million, which includes a sublimit for the issuance of letters of credit up to $7.5 million (the “Credit Facility”). The Credit Facility may be increased up to an additional $25 million at the Borrowers’ request and the Lenders’ option, subject to customary conditions. The Credit Agreement matures on February 13, 2024. Revolver Pricing Level Average Excess Revolver Availability for Previous Quarter Applicable Spread Rates for Eurodollar Rate Revolving Advances Applicable Spread Rates for Domestic Rate Revolving Advances I II III IV $ $ $ $ 25,000,000+ 17,500,000 to < 25,000,000 10,000,000 to < 17,500,000 < 10,000,000 1.00 % 1.25 % 1.50 % 1.75 % (0.50) % (0.50) % (0.25) % 0.00 % Credit Facility Covenants 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, 2018, 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. 8. LEASES We lease certain machinery, trucks, and facilities under operating leases that generally provide for renewal options. We incurred approximately $893,000 and $1,371,000 in rent expense under operating lease arrangements for 2018 and 2017, respectively. Future minimum lease payments under non-cancelable operating leases are approximately as follows for the years ended December 31: Years ended December 31, 663,718 203,983 88,440 3,060 - 959,201 2019 2020 2021 2022 2023 Total ($ in thousands) $ $ 38 Impact of ASU 2016-02 In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which requires lessees to recognize leases on- balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements (please see additional detail regarding these updates to Topic 842 below). The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the Statements of Operations. The new standard is effective for us on January 1, 2019, with early adoption permitted. We adopted the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides several optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us not to reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight with respect to determining the lease term (i.e., considering the actual outcome and updated expectations of lease renewals, termination option and purchase options). We also will not elect the use of the practical expedient pertaining to land easements because we do not have any such easements. This standard will have a material effect on our financial statements. While we continue to assess the effects of adoption, we currently believe the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our factories in the Dominican Republic and Puerto Rico and various equipment leases, all currently accounted for as operating leases; and (2) providing significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities. On adoption, we will recognize additional operating liabilities ranging from $0.5 million to $1.0 million, with corresponding ROU assets of approximately the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for our leases. 9. BENEFIT PLAN We sponsor a 401(k) savings plan for eligible employees. We provide a contribution of 3% of applicable salary to the plan for all employees with greater than six months of service. Additionally, we match eligible employee contributions at a rate of 0.25%, per one percent of applicable salary contributed to the plan by the employee. This matching contribution will be made by us up to a maximum of 1% of the employee’s applicable salary for all qualified employees. Our approximate contributions to the 401(k) Plan were as follows: 401k plan sponsor contributions $ 800 $ 800 ($ in thousands) 2018 2017 10. TAXES On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (TCJA,) a comprehensive tax legislation which, among other things, reduced the federal income tax rate for C corporations from 35% to 21% and created a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries, effective on January 1, 2018. The TCJA makes broad and complex changes to the Internal Revenue Code which will impact the Company, including reduction of the U.S. corporate income tax rate as well as introduction of business-related exclusions, deductions and credits. As a result of the reduction in the corporate income tax rate, the Company revalued its deferred tax liabilities at December 31, 2017 and recognized a provisional tax benefit of approximately $4.5 million for the year ended December 31, 2017. 39 In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that, subject to an accounting policy election, taxes on GILTI inclusions can either be accounted for in deferred taxes or treated as period costs. The Company has elected to treat taxes on GILTI inclusions as period costs. In the fourth quarter of fiscal 2018, the Company completed the analysis and computations necessary to finalize the provisional amounts reported in fiscal 2017 prior to the expiration of the December 22, 2018 applicable measurement period under SAB 118. In the third quarter of 2018 the Company recorded a $0.6 million tax benefit that resulted in a reduction of the transition tax of $2.8 million recorded as of December 31, 2017. The transition tax was originally recognized as part of the TCJA, due to previously undistributed earnings of $23.6 million from non-U.S. subsidiaries. The Company accounts for income taxes in accordance with the accounting standard for “Income Taxes”, which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred income taxes have been provided for the temporary differences between the financial reporting and the income tax basis of the Company’s assets and liabilities by applying enacted statutory tax rates applicable to future years to the basis differences. A breakdown of our income tax expense (benefit) for the years ended December 31 is as follows: Federal: Current Deferred Total Federal State & local: Current Deferred Total State & local Foreign Current Deferred Total Foreign Total ($ in thousands) 2018 2017 $ $ 2,449 475 2,924 205 142 347 75 - 75 $ 3,346 $ 3,387 (3,765) (378) 65 125 190 (37) - (37) (225) 40 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 (21% in 2018, 35% in 2017) $ 3,766 $ 3,272 ($ in thousands) Years Ended December 31, 2017 2018 Increase (decrease) in income taxes resulting from: Change in Statutory Tax Rate Toll tax on CFC accumulated earnings and profits Exempt income from Dominican Republic operations due to tax holiday GILTI tax 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 Total - (561) (1,005) 515 - 313 - 43 1 274 3,346 $ (4,491) 2,793 (1,802) - - 138 (260) 80 - 45 (225) $ Deferred income taxes recorded in the Consolidated Balance Sheets at December 31, 2018 and 2017 consist of the following: ($ in thousands) 2018 2017 Deferred tax assets: Asset reserves and accrued expenses Inventories State and local income taxes Pension and deferred compensation Net operating losses Total deferred tax assets Valuation allowances Total deferred tax assets Deferred tax liabilities: Asset reserves and accrued expenses Fixed assets Intangible assets Other assets Tollgate tax on Lifestyle earnings State and local income taxes Total deferred tax liabilities $ $ 805 508 238 37 424 2,012 (421) 1,591 - 1,509 6,883 213 228 538 9,371 Net deferred tax liability $ 7,780 $ The valuation allowance is related to certain state and local income tax net operating loss carry forwards. 125 333 208 32 581 1,279 (480) 799 - 1,148 6,917 232 228 - 8,525 7,726 We have provided Puerto Rico tollgate taxes on approximately $3,684,000 of accumulated undistributed earnings of Lifestyle prior to the fiscal year ended June 30, 1994, that would be payable if such earnings were repatriated to the United States. In 2001, we received abatement for Puerto Rico tollgate taxes on all earnings subsequent to June 30, 1994, thus no other provision for tollgate tax has been made on earnings after that date. If we repatriate the earnings from Lifestyle, $227,563 of tollgate tax would be due. 41 We are subject to tax examinations in various taxing jurisdictions. The earliest exam years open for examination are as follows: Taxing Authority Jurisdiction: U.S. Federal Various U.S. States Puerto Rico (U.S. Territory) Canada Earliest Exam Year 2015 2014 2013 2013 Our policy is to accrue interest and penalties on any uncertain tax position as a component of income tax expense. As of December 31, 2018 no such expenses were recognized during the year. We do not believe there will be any material changes in our uncertain tax positions over the next 12 months. Accounting for uncertainty in income taxes requires financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. Under this guidance, income tax positions must meet a more- likely-than-not recognition threshold at the effective date to be recognized upon the adoption of the standard. The Company did not have any unrecognized tax benefits and there was no effect on its financial condition or results of operations. 11. SHAREHOLDERS' EQUITY Repurchase of Common Stock A summary of our authorized share repurchase plans is as follows: ($ in thousands, except share and per share amounts) Maximum authorized share repurchase amount (1) Date of plan's authorization by the Board Funding source Number of shares repurchased under the plan (shares) Amount paid for shares repurchased Weighted average price paid per share Remaining amount of shares authorized to be purchased under the plan (in dollars) 2018 2017 $ 7,500 $ 7,500 March 2018 March 2017 Working capital Credit facility 55,223 1,310 $ 23.73 $ 6,190 $ 51,533 688 13.36 6,812 $ $ $ (1) Common shares can be purchased in the open market or privately negotiated transactions over the next twelve months from the date of plan authorization. On March 4, 2019, the Company announced a new $7,500,000 share repurchase program that will terminate on February 28, 2020. This program is replacing the 2018 share repurchase program that expired on March 1, 2019. Preferred Shares The Company has authorized 250,000 shares of voting preferred stock with no par value. No shares are issued or outstanding. Also, the Company has authorized 250,000 shares of non-voting preferred stock with no par value. Of these, 125,000 shares have been designated Series A non-voting convertible preferred stock with a stated value of $.06 per share, of which no shares are issued or outstanding at December 31, 2018 and 2017, respectively. 12. SHARE-BASED COMPENSATION On May 7, 2014, our shareholders approved the 2014 Omnibus Incentive Plan (the “2014 Plan”). The 2014 Plan includes 500,000 of our common shares that may be granted under various types of awards as described in the 2014 Plan. As of December 31, 2018, we were authorized to issue 257,941 shares under this plan. 42 Stock options The following table presents the weighted average assumptions used in the option-pricing model at the grant date for options granted in the years ended December 31: Assumptions: Risk-free interest rate Expected dividend yield Expected volatility of Rocky's common stock Expected option term (years) Weighted-average grant date fair value per share $ 2018 2017 1.94 % 2.22 % 41.69 % 6.5 6.94 $ 2.25 % 3.74 % 35.33 % 6.5 2.94 For the years ended 2018 and 2017, we recognized share-based compensation expense and the corresponding tax benefit as follows: Share-based compensation expense Tax benefit ($ in thousands) 2018 2017 $ $ 588 102 146 22 The following summarizes stock option activity for the year ended December 31, 2018: ($ amounts are per share) Options outstanding at January 1, 2018 Issued Exercised Forfeited or expired Options outstanding at December 31, 2018 Expected to vest Exercisable at December 31, 2018 Weighted Average Exercise Price $12.09 18.88 12.88 13.05 15.50 15.15 16.01 Shares 89,300 $ 76,500 (10,500) (5,550) 149,750 $ 88,050 $ 61,700 $ Weighted Average Remaining Actual Term Aggregate Intrinsic Value 6.7 $ 8.3 $ 4.4 $ - - - In the first quarter of 2018, officers and certain employees of the Company were granted 40,500 options. The plans generally provided for grants with the exercise price equal to fair value on the date of grant, graduated vesting periods of up to 5 years, and lives not exceeding 10 years. For the years ended 2018 and 2017 cash received for the exercise of stock options was $135,232 and $14,236, respectively. In the first quarter of 2018, Board of Director members were granted 36,000 stock options that immediately vest and will expire in 5 years. Restricted stock units and performance share units The following table summarizes the status of the Company’s restricted stock units and performance share units and activity as of December 31, 2018: ($ amounts are per share) Nonvested at January 1, 2018 Granted Vested Forfeited Nonvested at December 31, 2018 Restricted Stock Units Performance Share Units Weighted-Average Grant Date Fair Value Per Share - 12.47 12.98 - 11.93 Quantity 11,937 $ - (5,187) - 6,750 $ Weighted-Average Grant Date Fair Value Per Share 11.30 - - 11.30 - Quantity 24,000 $ - - (24,000) - $ 43 As of December 31, 2018, the total unrecognized compensation cost related to non-vested stock options and restricted stock units was $388,340 with a weighted-average expense recognition period of 4.1 years. During the years ended December 31, 2018 and 2017, we issued 9,376 and 16,806 shares of common stock to members of our Board of Directors, respectively. 13. EARNINGS PER SHARE Basic earnings per share (“EPS”) is computed by dividing net income applicable to common shareholders by the weighted average number of common shares outstanding during each period. The diluted earnings per share computation includes common share equivalents, when dilutive. A reconciliation of the shares used in the basic and diluted income per common share computation for the years ended December 31, as follows: (shares in thousands) 2018 2017 Basic - weighted average shares outstanding Dilutive restricted share units Dilutive stock options Diluted - weighted average shares outstanding Anti-dilutive securities 14. REVENUE 7,412 9 41 7,462 40 7,428 19 3 7,450 72 On January 1, 2018, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“New Revenue Standard”) for all contracts not yet completed as of January 1, 2018 using the modified retrospective method. This method requires a cumulative effect adjustment to reflect the impact of initially applying the New Revenue Standard as an adjustment to the opening balance of retained earnings. The New Revenue Standard did not result in a material impact to the opening balance of retained earnings, and therefore no adjustment was made. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the New Revenue Standard to be immaterial to our net income on an ongoing basis. Nature of Performance Obligations Our products are distributed through three distinct channels, which represent our business segments: Wholesale, Retail, and Military. In our Wholesale business, we distribute our products through a wide range of distribution channels representing over ten thousand retail store locations in the U.S., Canada, and internationally. Our Wholesale channels vary by product line and include sporting goods stores, outdoor specialty stores, online retailers, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Our Retail business includes direct sales of our products to consumers through our e- commerce websites, our Rocky outlet store, and Lehigh business. We also sell footwear under the Rocky label to the U.S. Military. Significant Accounting Policies and Judgements Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; this generally occurs upon shipment of our product to our customer, which is when the transfer of control of our products passes to the customer. The duration of our arrangements with our customers are typically one year or less. Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of our products at a point in time and consists of either fixed or variable consideration or a combination of both. Revenues from sales are recorded at the net sales price, which includes estimates of variable consideration for which reserves are established. Components of variable consideration include prompt payment discounts, volume rebates, and product returns. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). 44 The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Our analyses also contemplated application of the constraint in accordance with the guidance, under which it determined a material reversal of revenue would not occur in a future period for the estimates detailed below as of December 31, 2018. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net revenue and earnings in the period such variances become known. When a customer has a right to a prompt payment discount, we estimate the likelihood that the customer will earn the discount using historical data and adjust our estimate when the estimate of the likelihood that a customer will earn the discount changes or the consideration becomes fixed, whichever occurs earlier. The estimated amount of variable consideration is recognized as a credit to trade receivables and a reduction in revenue until the uncertainty of the variable consideration is alleviated. Because most of our customers have payment terms less than six months there is not a significant financing component in our contracts with customers. When a customer is offered a rebate on purchases retroactively this is accounted for as variable consideration because the consideration for the current and past purchases is not fixed until it is known if the discount is earned. We estimate the expected discount the customer will earn at contract inception using historical data and projections and update our estimates when projections materially change or consideration becomes fixed. The estimated rebate is recognized as a credit to trade receivables and offset against revenue until the rebate is earned or the earning period has lapsed. When a right of return is part of the arrangement with the customer, we estimate the expected returns based on an analysis using historical data. We adjust our estimate either when the most likely amount of consideration we expect to receive changes or when the consideration becomes fixed, whichever occurs earlier. Previously, we recorded the return reserve liability as a contra balance within accounts receivable, and we will continue to do so under ASC 606. Previously, the related return reserve asset for the right to recover cost of goods sold was recognized within the inventory balance, and we will continue to do so under ASC 606. Please see Notes 5 and 6 for additional information. Trade receivables represent our right to unconditional payment that only relies on the passage of time. Contract receivables represent contractual minimum payments required under non-cancellable contracts with the U.S. Military with a duration of one year or less. Contract liabilities are performance obligations that we expect to satisfy or relieve within the next twelve months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancellable contracts before the transfer of goods or services to the customer has occurred. Our contract liability represents unconditional obligations to provide goods under non-cancellable contracts with the U.S. Military. Items considered immaterial within the context of the contract are recognized as an expense. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue producing transaction, that are collected from customers, are excluded from revenue. Costs associated with our manufacturer’s warranty continue to be recognized as expense when the products are sold in accordance with guidance surrounding product warranties. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are in included in operating expenses. This treatment is consistent with how we accounted for these costs in prior periods. Costs associated with obtaining a contract are expensed as incurred in accordance with the practical expedient in ASC 340-40 in instances where the amortization period is one year or less. We anticipate substantially all of our costs incurred to obtain a contract would be subject to this practical expedient. 45 Contract Balances The following table provides information about contract liabilities from contracts with our customers. Contract liabilities ($ in thousands) December 31, 2018 December 31, 2017 $ 2,602 $ - Significant changes in the contract liabilities balance during the period are as follows: Balance, December 31, 2017 Non-cancelable contracts with customers recognized as a result of ASC 606 adoption Non-cancelable contracts with customers entered into during the period Revenue recognized related to non-cancelable contracts with customers during the period Balance, December 31, 2018 $ $ - 9,394 10,177 (16,969) 2,602 ($ in thousands) Contract liabilities Disaggregation of Revenue All revenues are recognized at a point in time when control of our products pass to the customer at point of shipment. Because all revenues are recognized at a point in time and are disaggregated by channel, our segment disclosures are consistent with ASC 606 disaggregation requirements. See Note 16 for segment disclosures. 15. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow for the years ended December 31, as follows: Interest paid Federal, state, and local income taxes paid, net Income tax receivable applied to long-term taxes payable Change in contract receivables, net Change in contract liabilities, net Property, plant, and equipment purchases in accounts payable 16. SEGMENT INFORMATION ($ in thousands) 2018 2017 $ $ $ $ $ $ 191 $ 416 3,588 $ 1,727 1,819 (2,602) $ 2,602 $ - - - 682 $ 183 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 10,000 retail locations representing a wide range of distribution channels in the U.S. and Canada. These distribution channels vary by product line and target market and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores, specialty retailers and online retailers. Retail. In our retail segment, we market directly to consumers through our Lehigh business-to-business including direct sales and through our CustomFit websites, consumer e-commerce websites, third-party marketplaces, and our Rocky outlet store. In 2017, we also operated four mobile trucks to service the New York Transit Authority’s employees, but that contract ended in the fourth quarter of 2017. 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. 46 Military. While we are focused on continuing to build our wholesale and retail business, we also actively bid, from time to time, on footwear contracts with the U.S. military. Our sales under such contracts are dependent on us winning the bids for these contracts. We are currently fulfilling several multiyear contracts for the U.S. military. The following is a summary of segment results for the Wholesale, Retail, and Military segments for the years ended December 31,. Certain amounts from prior year have been reclassified to conform to current year presentation. ($ in thousands) 2018 2017 NET SALES: Wholesale Retail Military Total Net Sales GROSS MARGIN: Wholesale Retail Military Total Gross Margin $ $ $ $ 173,124 53,216 26,354 252,694 57,792 23,650 5,587 87,029 $ $ $ $ 166,682 48,352 38,163 253,197 54,188 21,168 5,413 80,769 Segment asset information is not prepared or used to assess segment performance. Product Group Information - The following is supplemental information on net sales by product group for the years ended December 31: ($ in thousands) 2018 % of Sales 2017 % of Sales Work footwear Western footwear Duty and commercial military footwear Lifestyle footwear Outdoor footwear Military footwear Apparel Other Royalty income $ $ 116,022 47,313 40,580 596 15,811 26,354 2,424 3,594 - 252,694 45.9 % 18.7 $ 16.1 0.2 6.3 10.4 1.0 1.4 - 100.0 % $ 109,872 38,646 33,712 12,910 13,003 38,163 3,324 3,337 230 253,197 43.4 % 15.3 13.3 5.1 5.1 15.1 1.3 1.3 0.1 100.0 % Net sales to foreign countries represented approximately 1.9% of net sales in 2018 and 3.0% of net sales in 2017. 47 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2018 and 2017: Net sales Gross margin Net income Dividends paid Net income per common share: Basic Diluted Net sales Gross margin Net income Dividends paid Net income per common share: Basic Diluted $ $ $ $ $ $ $ $ $ $ $ $ 1st Quarter 2nd Quarter 2018 3rd Quarter 4th Quarter Total Year 61,387 $ 20,965 $ 3,251 $ 815 $ 58,206 $ 19,532 $ 2,649 $ 889 $ 65,916 $ 22,400 $ 5,045 $ 889 $ 67,185 $ 24,132 $ 3,608 $ 891 $ 252,694 87,029 14,553 3,484 0.44 $ 0.44 $ 0.36 $ 0.36 $ 0.68 $ 0.67 $ 0.48 $ 0.48 $ 1.96 1.95 1st Quarter 2nd Quarter 2017 3rd Quarter 4th Quarter Total Year 63,073 $ 19,748 $ 1,496 $ 818 $ 58,455 $ 18,164 $ 1,459 $ 819 $ 64,675 $ 19,512 $ 2,235 $ 819 $ 66,994 $ 23,346 $ 4,396 $ 814 $ 253,197 80,769 9,586 3,269 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.30 $ 0.30 $ 0.59 $ 0.59 $ 1.29 1.29 18. COMMITMENTS AND CONTINGENCIES We are, from time to time, a party to litigation which arises in the normal course of business. Although the ultimate resolution of pending proceedings cannot be determined, in the opinion of management, the resolution of such proceedings in the aggregate will not have a material adverse effect on our financial position, results of operations, or liquidity. 19. SALE OF CREATIVE RECREATION In November 2017, the Creative Recreation brand was sold to a private investment group for approximately $4.4 million. The sale included the inventory, product designs and molds, trademarks and related intangible assets of Creative Recreation along with certain licensing and other contracts. The brand was sold to allow the Company to better focus on our more profitable core brands and allocate resources toward growth and development of additional opportunities with those brands moving forward. All of the assets included in the sale were transferred to the buyer during the fourth quarter of 2017. The Company will earn a fee for managing the Creative Recreation website during the transition of operations to the buyer. The fee is meant to offset the transaction costs of managing the site. We expect the site and its operations to fully transition to the buyer in the second quarter of 2018. As of December 31, 2017 there is a receivable for approximately $1.9 million due from the buyer related to assets acquired through the sale of Creative Recreation. There is also approximately $569,000 in accrued liabilities at December 31, 2017 related to future inventory that the Company is obligated to purchase from our manufacturing partners and provide to the private investment group. The Company incurred a $2.1 million loss on the sale of the Creative Recreation brand. Sales of the Creative Recreation brand were reported under the wholesale reporting segment, except for Creative Recreation e- commerce sales, which were reflected in the retail reporting segment. 48 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 and 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 and our 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, 2018. 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 within this report. ITEM 9B. OTHER INFORMATION. None. 49 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Rocky Brands, Inc. and Subsidiaries Nelsonville, Ohio Opinion on Internal Control over Financial Reporting We have audited Rocky Brands, Inc. and Subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity, and cash flows of the Company, and our report dated March 13, 2019 expressed an unqualified opinion. Basis for Opinion 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. Definition and Limitations of Internal Control over Financial Reporting 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. /s/ Schneider Downs & Co., Inc. Columbus, Ohio March 13, 2019 50 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this item is included under the captions “ELECTION OF DIRECTORS”, “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 2019 Annual Meeting of Shareholders (the “Proxy Statement”) to be held on May 20, 2019, 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 “REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS” 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. information required by The 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. included under item this is 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”, “INFORMATION CONCERNING THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE” and “TRANSACTIONS WITH RELATED PERSONS” 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 “FEES OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” in the Company’s Proxy Statement, and is incorporated herein by reference. 51 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 in Item 8: • Report of Independent Registered Public Accounting Firm • Consolidated Balance Sheets as of December 31, 2018 and 2017 • Consolidated Statements of Operations for the years ended December 31, 2018 and 2017 • Consolidated Statements of Shareholders' Equity for the years ended December 31, 2018 and 2017 • Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017 • Notes to Consolidated Financial Statements for the years ended December 31, 2018 and 2017 (2) The following financial statement schedule for the years ended December 31, 2018 and 2017 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. See Appendix A. • 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: 0 Exhibit Number Description 3.1 3.2 3.3 (P) 4.1 (P) 4.2 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 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 Second Amended and Restated Articles of Incorporation (see Exhibit 3.1). 4.3 (P) Articles I and II of the Company's Code of Regulations (see Exhibit 3.3). 10.01* Form of Indemnification Agreement entered into between the Company and its directors and executive officers. 10.02* Schedule of directors and executive officers who have entered into the form of Indemnification Agreement. 10.03 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). 52 10.04 10.05 10.06 10.07 10.08 10.09 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 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). 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). Company’s Incentive Compensation Plan (incorporated by reference to the Company’s Definitive Proxy Statement for the 2012 Annual Meeting of Shareholders). 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). Amendment No. 2 to Amended and Restated Revolving Credit, Term Loan, Guaranty, and Security Agreement dated as of December 21, 2017 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. Employment Agreement, dated January 1, 2019, by and between the Company and Jason Brooks (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 31, 2018, filed January 7, 2019). Employment Agreement, dated January 1, 2019, by and between the Company and Thomas Robertson (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated December 31, 2018, filed January 7, 2019). Employment Agreement, dated January 1, 2019, by and between the Company and David Dixon (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated December 31, 2018, filed January 7, 2019). 53 10.18 10.19 10.20 21* 23* 24* Employment Agreement, dated January 1, 2019, by and between the Company and Richard Simms (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated December 31, 2018, filed January 7, 2019). Employment Agreement, dated January 1, 2019, by and between the Company and Byron Wortham (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated December 31, 2018, filed January 7, 2019). Revolving Credit, Guaranty, and Security Agreement, dated February 13, 2019, among Rocky Brands, Inc., Lehigh Outfitters, LLC, Lifestyle Footwear, Inc., Rocky Brands US, LLC, Rocky Brands International, LLC, and Rocky Outdoor Gear Store, LLC, as borrowers, the financial institutions party thereto as lenders, and The Huntington National Bank, as agent for the lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 13, 2019, filed February 19, 2019). Subsidiaries of the Company. Independent Registered Public Accounting Firm’s Consent of Schneider Downs & Co., Inc. Powers of Attorney. 31.1* Rule 13a-14(a) Certification of Principal Executive Officer. 31.2* Rule 13a-14(a) Certification of Principal Financial Officer. 32** 101* Section 1350 Certification of Principal Executive Officer/Principal Financial Officer. 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, 2018 formatted in XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (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. 54 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 13, 2019 ROCKY BRANDS, INC. By: /s/JASON BROOKS Jason Brooks, Chief Executive Officer (Principal Executive 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 Title /s/ JASON BROOKS Jason Brooks Chief Executive Officer (Principal Executive Officer) /s/ THOMAS D. ROBERTSON Thomas D. Robertson Chief Financial Officer (Principal Financial and Accounting Officer) Date March 13, 2019 March 13, 2019 * 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 * JAMES L. STEWART James L. Stewart * WILLIAM L. JORDAN William L. Jordan * ROBERT B. MOORE, JR. Robert B. Moore, Jr. By: /s/ JASON BROOKS Jason Brooks, Attorney-in-Fact Chairman and Director March 13, 2019 Secretary and Director March 13, 2019 March 13, 2019 March 13, 2019 March 13, 2019 March 13, 2019 March 13, 2019 March 13, 2019 Director Director Director Director Director Director 55 Appendix A ROCKY BRANDS, INC. AND SUBSIDIARIES Schedule II Consolidated Valuation and Qualifying Accounts for the Years Ended December 31, 2018 and 2017 Description ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended December 31, 2018 Year ended December 31, 2017 VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS Year ended December 31, 2018 Year ended December 31, 2017 ALLOWANCE FOR DISCOUNTS AND RETURNS Year ended December 31, 2018 Year ended December 31, 2017 $ $ $ $ $ $ (1) Amount charged off, net of recoveries Balance at Beginning of Period Additions Charged to Costs and Expenses Deductions Balance at End of Period 177 $ 1,041 $ 1,216 $ 1,490 $ (125) (1) (2,354) (1) 480 $ 471 $ (25) $ 46 $ (34) (37) 1,425 $ 1,934 $ 21,435 $ 17,979 $ (21,260) (18,488) $ $ $ $ $ $ 1,268 177 421 480 1,600 1,425 56 BOARD OF DIRECTORS Mike Brooks Chairman of the Board Glenn E. Corlett Retired Dean and Philip J. Gardner, Jr. Leadership Professor, College of Business at Ohio University Michael L. Finn Chairman, Power Distributors, LLC President, Chesapeake Realty Company G. Courtney Haning Former Chairman and Chief Executive Officer Peoples National Bancshares, Inc. Curtis A. Loveland Secretary Partner, Porter, Wright, Morris & Arthur LLP James L. Stewart Proprietor, Rising Wolf Ranch, Inc. William L. Jordan President, DSW Inc. Robert B. Moore, Jr. Former CEO, Bhartiya International, Ltd. OFFICERS Jason Brooks President and Chief Executive Officer Tom Robertson EVP, Chief Financial Officer and Treasurer Richard Simms President, Operations Byron Wortham President, Core Brands Sales, Marketing, and Product Development David Dixon President, Manufacturing/Sourcing Operations Corporate Offices 39 East Canal Street, Nelsonville, Ohio 45764 (740) 753-1951 Independent Registered Public Accounting Firm Schneider Downs & Co., Inc. Columbus, Ohio Legal Counsel Porter, Wright, Morris & Arthur LLP Columbus, Ohio 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 EVP, Chief Financial Officer and Treasurer Rocky Brands, Inc. 39 East Canal Street Nelsonville, Ohio 45764 Investor Information Corporate and investor information is available on the company’s website at www.rockybrands.com FROM LEFT: Richard Simms President, Operations / Jeff Stern Senior Vice President, Sales & Operations Lehigh / Jason Brooks President, Chief Executive Officer / Tom Robertson EVP, Chief Financial Officer and Treasurer / Byron Wortham President, Core Brands Sales, Marketing, and Product Development / not in photo David Dixon President, Manufacturing/Sourcing Operations Top photo taken in 1933 in front of the original factory, seen in the lower photo with the painted mural. Lower photo taken November, 2018 in front of our Nelsonivlle, Ohio campus. Not pictured are employees from our Distribution Center, factories, FEO and Outside Sales teams. 

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