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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
 
For the quarterly period ended March 31, 2012
 
or
 
¨
Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
   
 
For the transition period from              to               .
 
Commission file number 0-51536
 

IRONCLAD PERFORMANCE WEAR CORPORATION
(Exact name of registrant as specified in its charter)

 
Nevada
 
98-0434104
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

2201 Park Place, Suite 101
El Segundo, CA 90245
(Address of principal executive offices, zip code)
 
(310) 643 -7800
(Registrant’s telephone number, including area code)
 

Indicate by check mark 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 such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one);
 
Large accelerated filer  ¨
Accelerated filer    
¨
Non-accelerated filer  ¨ (Do not check if smaller reporting company)
Smaller reporting company   
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of May 10, 2012, the registrant had 76,354,001 shares of common stock issued and outstanding.
 
 
 

 
 
TABLE OF CONTENTS

   
 
   
Page
PART I  
Financial Information  
   
     
 
Item 1.  
Financial Statements  
 
   
 
     
 
   
a.
Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011  
1
   
 
     
 
   
b.
Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2012 and March 31, 2011
2
   
 
     
 
   
c.
Condensed Consolidated Statements of Cash Flows (Unaudited) for the  three months ended March 31, 2012 and March 31, 2011  
3
   
 
     
 
   
d.
Notes to Condensed Consolidated Financial Statements  
4 – 17
   
 
     
 
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations  
18
   
     
 
Item 3.  
Quantitative and Qualitative Disclosures About Market Risk  
32
   
     
 
Item 4.  
Controls and Procedures  
32
   
     
 
PART II  
Other Information  
33
     
Item 6.  
Exhibits  
33
 
 
 

 
 
PART I
 
ITEM 1. FINANCIAL STATEMENTS

IRONCLAD PERFORMANCE WEAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2012 (unaudited) AND DECEMBER 31, 2011
 
   
March 31,
2012
   
December 31,
2011
 
   
(unaudited)
       
ASSETS  
           
CURRENT ASSETS  
           
Cash and cash equivalents  
  $ 853,935     $ 1,060,125  
Accounts receivable net of allowance for doubtful accounts of $37,000
    2,183,789       798,004  
Due from factor
    662,920       2,462,973  
Inventory, net of reserve of $460,000 
    3,900,716       4,449,315  
Deposits on inventory
    584,848       467,063  
Prepaid and other  
    259,233       265,652  
Total current assets  
    8,445,441       9,503,132  
   
               
PROPERTY, PLANT AND EQUIPMENT  
               
Computer equipment and software    
    510,529       486,066  
Vehicles    
    43,680       43,680  
Office equipment and furniture    
    165,547       162,871  
Leasehold improvements    
    43,589       43,589  
Less: accumulated depreciation  
    (453,405 )     (416,672 )
Total property, plant and equipment, net  
    309,940       319,534  
   
               
Trademarks and patents, net of $33,966 and $31,915 of accumulated amortization  
    131,261       131,412  
Deposits and other  
    11,354       11,354  
Total other assets   
    142,615       142,766  
                 
Total Assets   
  $ 8,897,996     $ 9,965,432  
   
               
LIABILITIES AND STOCKHOLDERS’ EQUITY  
               
CURRENT LIABILITIES  
               
Accounts payable and accrued expenses  
  $ 2,278,187     $ 2,560,504  
Line of credit    
    443,853       1,661,220  
Total current liabilities  
    2,722,040       4,221,724  
   
               
Total Liabilities  
    2,722,040       4,221,724  
   
               
STOCKHOLDERS’ EQUITY  
               
Common stock, $.001 par value; 172,744,750 shares authorized; 76,354,001 and 74,550,754 shares  issued and outstanding at March 31, 2012 and December 31, 2011, respectively
    76,317       74,551  
Additional paid-in capital    
    18,722,058       18,538,563  
Accumulated deficit    
    (12,622,419 )     (12,869,406 )
Total Stockholders’ Equity  
    6,175,956       5,743,708  
Total Liabilities and Stockholders’ Equity  
  $ 8,897,996     $ 9,965,432  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
1

 

IRONCLAD PERFORMANCE WEAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
Three  Months 
Ended
March 31,
   
Three Months 
Ended
March 31,
 
   
2012
   
2011
 
REVENUES
               
Net sales
 
$
5,347,865
   
 $
3,397,128
 
                 
COST OF SALES
               
Cost of sales  
   
3,394,516
     
2,020,959
 
                 
GROSS PROFIT
   
1,953,349
     
1,376,169
 
                 
OPERATING EXPENSES
               
General and administrative  
   
622,008
     
593,588
 
Sales and marketing  
   
684,571
     
612,223
 
Research and development  
   
129,707
     
83,864
 
Purchasing, warehousing and distribution
   
249,783
     
213,695
 
Depreciation and amortization  
   
38,784
     
29,278
 
                 
Total operating expenses
   
1,724,853
     
1,532,648
 
                 
INCOME (LOSS) FROM OPERATIONS
   
228,496
     
(156,479
)
                 
OTHER INCOME (EXPENSE)
               
                 
Interest expense
   
(9,077
)
   
(24,621
)
Interest income  
   
11,892
     
13
 
Other income (expense), net  
   
54,675
     
-
 
Total other income (expense)
   
57,490
     
(24,608
)
                 
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
   
285,986
     
(181,087
)
                 
PROVISION FOR INCOME TAXES
   
39,000
     
76,950
 
                 
NET INCOME (LOSS)
 
$
246,986
   
$
(258,037
)
                 
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
               
Basic
 
$
0.00
   
$
(0.00
Diluted
 
$
0.00
   
$
(0.00
)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
               
Basic
   
74,986,329
     
72,951,185
 
Diluted
   
83,539,450
     
81,207,361
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
2

 
 
IRONCLAD PERFORMANCE WEAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
Three Months
Ended
March 31, 2012
   
Three Months 
Ended 
March 31, 2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)
  $ 246,986     $ (258,037 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation  
    36,733       27,672  
Amortization  
    2,051       1,606  
Non-cash compensation:
               
Common stock issued for services
    518       62,164  
Stock option expense
    27,421       32,974  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,385,785     917,448  
Due from factor
    1,800,054       -  
Inventory
    548,599       (222,537 )
Deposits on inventory  
    (117,785 )     (184,438 )
Prepaid and other
    6,419       (125,466 )
Accounts payable and accrued expenses
    (282,317 )     (151,933 )
Net cash flows provided  by operating activities
    882,894       99,453  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Property, plant and equipment purchased
    (27,139 )     (88,634 )
Investment in trademarks  
    (1,900 )     (199 )
Net cash flows used in investing activities  
    (29,039 )     (88,833 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from issuance of common stock
    157,322       -  
Proceeds from bank line of credit  
    6,235,387       4,296,489  
Payments to bank line of credit  
    (7,452,754 )     (4,481,095 )
Net cash flows used by financing activities  
    (1,060,045 )     (184,606
                 
NET DECREASE IN CASH
    (206,190 )     (173,986 )
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD
    1,060,125       1,067,437  
CASH AND CASH EQUIVALENTS END OF PERIOD
  $ 853,935     $ 893,451  
                 
SUPPLEMENTAL DISCLOSURES
               
Interest paid in cash  
  $ 9,077     $ 24,621  
Income taxes  
  $ 35,000     $ 76,950  

See Notes to Condensed Consolidated Financial Statements.
 
 
3

 
 
IRONCLAD PERFORMANCE WEAR CORPORATION
Notes to Condensed Consolidated Financial Statements
 
 
1. Description of Business
 
The Company was incorporated in Nevada on May 26, 2004 and engages in the business of design and manufacture of branded performance work wear including task-specific gloves and performance apparel designed to significantly improve the wearer’s ability to safely, efficiently and comfortably perform general to highly specific job functions. Its customers are primarily industrial distributors, hardware, lumber and automotive retailers, “Big Box” home centers and sporting goods retailers. The Company has received six patents and two patents pending for design and technological innovations incorporated in its performance work gloves. The Company has 54 registered U.S. trademarks, 15 common law U.S. trademarks, 13 registered international trademarks and 7 copyright marks. The Company introduced its line of specialty work apparel in 2005. The apparel is engineered to keep the wearer dry and cool under extreme work conditions.
 
2. Accounting Policies
 
Basis of Presentation
 
The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) including those for interim financial information and with the instructions for Form 10-Q and Article 8 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. These financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2012.
 
Basis of Consolidation
 
The condensed consolidated financial statements include the accounts of Ironclad Performance Corporation, an inactive parent company, and its wholly owned subsidiary Ironclad California. All significant inter-company transactions have been eliminated in consolidation.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company places its cash with high credit quality institutions. The Federal Deposit Insurance Company (FDIC) insures cash amounts at each institution for up to $250,000 and the Securities Investor Protection Corporation (SIPC) also insures cash amounts at each institution up to $250,000.  In addition, supplemental insurance is in place to cover balances in excess of these limits. The Company maintains cash in excess of the FDIC and SIPC limits.
 
Accounts Receivable
 
The Company factors designated trade receivables pursuant to a factoring agreement with an unrelated Factor.  On December 7, 2009 the Company entered into a factoring agreement whereby it assigns certain of its trade receivables with recourse and other trade receivables without recourse.  The Company incurs a one-time servicing fee (discount) of 0.75% as a percentage of the face value of each invoice assigned to the Factor.  This servicing fee is recorded on the condensed consolidated statement of operations in the period of sale.  Servicing fees incurred for the periods ended March 31, 2012 and 2011 were $19,636 and $30,186, respectively.  The financing of accounts receivable without recourse is accounted for as a sale of receivables in accordance with the guidance under ASC 860-20, “Sales of Financial Assets.”  The Factor, based on its internal credit policies, determines which customer trade receivables it will accept without recourse and assigns a credit limit for that customer.  The Company then assigns (sells) the face value of certain trade receivable invoices to the Factor, excludes them from accounts receivable, and records a current asset entitled “Due from factor without recourse” on the condensed consolidated balance sheet and they are reflected as cash provided by operating activities on the condensed consolidated statement of cash flows. Thereafter, the Company is entitled to borrow up to 70% of the value of such invoices through its line of credit with the Factor.  The Factor retains the remaining 30% of the outstanding factored accounts receivable as a reserve.  The Factor handles all collection activities and receives payment from the customer into its own bank lockbox account.  The Factor has no recourse to the Company for failure of debtors of these designated accounts receivable.  The Factor reimburses the Company for its purchased invoices by applying the funds collected from the customer as payments against the Company’s line of credit.
 
 
4

 
 
Trade receivables with recourse may also be assigned to the Factor as an additional source of financing, and are carried at the original invoice amount less an estimate made for doubtful accounts.  Under the terms of the recourse provision, the Company is required to reimburse the Factor, upon demand, for factored receivables that are not paid on time.  Accordingly, these receivables are accounted for as a secured borrowing arrangement and not as a sale of financial assets.  The allowance for doubtful accounts is based on management’s regular evaluation of individual customer’s receivables and consideration of a customer’s financial condition and credit history.  Trade receivables are written off when deemed uncollectible.  Recoveries of trade receivables previously written off are recorded when received.  Interest is not charged on past due accounts.
 
Accounts Receivable and Due From Factor Without Recourse
   
March 31,
   
December 31,
 
   
2012
   
2011
 
Accounts receivable – non factored
  $ 1,540,542     $ 519,010  
Accounts receivable – factored with recourse
    680,247       315,994  
Less – Allowance for doubtful accounts
    (37,000 )     (37,000 )
Net accounts receivable
  $ 2,183,789     $ 798,004  
                 
Due from factor without recourse
  $ 662,920     $ 2,462,973  

Inventory
 
Inventory is stated at the lower of average cost (which approximates first in, first out) or market and consists primarily of finished goods. The Company regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on management’s estimated forecast of product demand and production requirements.
   
Property and Equipment
 
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are depreciated over fifteen years or the lease term, whichever is shorter. Maintenance and repairs are charged to expense as incurred.
 
Trademarks
 
The costs incurred to acquire trademarks, which are active and relate to products with a definite life cycle, are amortized over the estimated useful life of fifteen years. Trademarks, which are active and relate to corporate identification, such as logos, are not amortized. Pending trademarks are capitalized and reviewed monthly for active status.
 
 
5

 
 
Long-Lived Asset Impairment
 
The Company periodically evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that the asset should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flows over the remaining life of the asset in measuring whether the asset is recoverable. Based upon the anticipated future income and cash flow from operations and other factors, relevant in the opinion of the Company’s management, there has been no impairment.

Operating Segment Reporting
 
As previously discussed, the Company has two product lines, “gloves” and “apparel,” both of which have similar characteristics.  They each provide functional protection and comfort to workers in the form of workwear for various parts of the body; their production processes are similar; they are both sold to the same type of class of customers, typically on the same purchase order; and they are warehoused and distributed from the same warehouse facility.  In addition, the “apparel” segment currently comprises less than 10% of the Company’s revenues.  The Company believes that the aggregation criteria of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, paragraph 17 applies and will accordingly aggregate these two segments.
 
Revenue Recognition
 
A customer is obligated to pay for products sold to it within a specified number of days from the date that title to the products is transferred to the customer. The Company’s standard terms are typically net 30 days from the transfer of title to the products to the customer. The Company typically collects payment from a customer within 30 to 45 days from the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership generally passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale price of the Company’s products is substantially fixed or determinable at the date of sale based on purchase orders generated by a customer and accepted by the Company. A customer’s obligation to pay the Company for products sold to it is not contingent upon the resale of those products. The Company recognizes revenues when products are delivered to customers.

Revenue Disclosures
 
The Company’s revenues are derived from the sale of our core line of task specific work gloves plus our line of workwear apparel products, available to all of our customers, both domestically and internationally.  Below is a table outlining this breakdown for the comparative periods:
 
   
Three Months Ended March 31, 2012
   
Three Months Ended March 31, 2011
Net Sales
 
Gloves
   
Apparel
   
Total
   
Gloves
   
Apparel
   
Total
Domestic
  $ 4,368,520     $ 22,465     $ 4,390,985     $ 2,732,928     $ 26,521     $ 2,759,449
International
    956,830       50       956,880       637,679       -       637,679
Total
  $ 5,325,350     $ 22,515     $ 5,347,865     $ 3,370,607     $ 26,521     $ 3,397,128

Cost of Goods Sold

Cost of goods sold includes all of the costs associated with producing the product by independent, third party factories (FOB costs), plus the costs of transporting, inspecting and delivering the product to our distribution warehouse in California (landed costs). Landed costs consist primarily of ocean/air freight, transport insurance, import duties, administrative charges and local trucking charges from the port to our warehouse. Cost of goods sold for the three months ended March 31, 2012 and 2011 were $3,394,516 and $2,020,959, respectively.

Purchasing, warehousing and distribution costs are reported in operating expenses on the line item entitled “Purchasing, warehousing and distribution” and, for the three months ending March 31, 2012 and 2011 were $249,783 and $213,695, respectively. These costs were comprised of salaries and benefits of approximately $112,300 and $104,800; office expenses of approximately $13,300 and $11,700; travel and lodging of approximately $2,700 and $9,500; and warehouse operations of approximately $121,500 and $87,700, respectively.
 
 
6

 
 
Product Returns, Allowances and Adjustments

Product returns, allowances and adjustments is a broad term that encompasses a number of offsets to gross sales. Included herein are warranty returns of defective products, returns of saleable products and accounting adjustments.

Warranty Returns - the Company has a warranty policy that covers defects in workmanship. It allows customers to return damaged or defective products to us following a customary return merchandise authorization process. Warranty returns for the three months ending March 31, 2012 and 2011 were approximately $11,300 or 0.2% and $18,400 or 0.5%, respectively.

Saleable Product Returns - the Company may allow from time to time, depending on the customer and existing circumstances, stock adjustment returns, whereby the customer is given the opportunity to ‘trade out’ of a style of product that does not sell well in their territory, usually in exchange for another product, again following the customary return merchandise authorization process. In addition the Company may allow from time to time other saleable product returns from customers for other business reasons, for example, in settlement of an outstanding accounts receivable, from a discontinued distributor customer or other customer service purpose. Saleable product returns for the three months ending March 31, 2012 and 2011 were approximately $15,800 or 0.3% and $2,800 or 0.1%, respectively.

Accounting Adjustments - these adjustments include pricing and shipping corrections and periodic adjustments to the product returns reserve. Pricing and shipping corrections for the three months ending March 31, 2012 and 2011 were approximately $30,200 or 0.6% and $5,900 or 0.2%, respectively. Adjustments to the product returns reserve for the three months ending March 31, 2012 and 2011 were approximately $25,000 or 0.5% and ($400) or (0.0%), respectively.

For warranty returns the Company utilizes actual historical return rates to determine the allowance for returns in each period. For saleable product returns the Company also utilizes actual historical return rates, adjusted for large, non-recurring occurrences. The Company does not accrue for pricing and shipping corrections as they are unpredictable and generally de minimis. Gross sales are reduced by estimated returns. We record a corresponding accrual for the estimated liability associated with the estimated returns which is based on the historical gross sales of the products corresponding to the estimated returns. This accrual is offset each period by actual product returns.
 
Reserve for Product Returns, Allowances and Adjustments
 
 
 
   
 
 
 
Reserve Balance 12/31/11
  $ 62,000  
Payments Recorded During the Period  
    (57,302 )
   
    4,698  
Accrual for New Liabilities During the Reporting Period
    82,302  
Reserve Balance 3/31/12
  $ 87,000  
 
Advertising and Marketing
 
Advertising and marketing costs are expensed as incurred. Advertising expenses for the three months ended March 31, 2012 and 2011 were $110,933 and $80,067, respectively.
 
Shipping and Handling Costs
 
Freight billed to customers is recorded as sales revenue and the related freight costs as cost of sales.
 
 
7

 
 
Customer Concentrations
 
Two customers accounted for approximately $2,508,000 or 47% of net sales for the quarter ended March 31, 2012.  Three customers accounted for approximately $1,635,000 or 48% of net sales for the three months ended March 31, 2011.  No other customers accounted for more than 10% of net sales during the periods.  All transactions are conducted in United States Dollars and therefore there are no transaction gains or losses incurred on transactions with foreign customers.
 
Supplier Concentrations
 
Two suppliers, who are located overseas, accounted for approximately 74% and 73% of total purchases for the three months ended March 31, 2012 and 2011, respectively.  All transactions are conducted in United States Dollars and therefore there are no transaction gains or losses incurred on transactions with foreign suppliers.

Stock Based Compensation

The Company follows the provisions of FASB ASC 718, “Share-Based Payment.”  This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, as well as transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.  ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements based on the fair value of the share-based payment.  ASC 718 establishes fair value as the measurement objective in accounting for share-based payment transactions with employees, such as the options issued under our stock incentive plans.

Earnings (Loss) Per Share
 
The Company utilizes FASB ASC 260, “Earnings per Share.” Basic income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted income (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.

The following potential common shares have been excluded from the computation of diluted net income (loss) per share for the periods presented where the effect would have been anti-dilutive:
 
   
Quarter
   
Ended March 31,
   
2012
 
2011
Options outstanding under the Company’s stock option plans
   
-
 
1,278,000
Common Stock Warrants
   
-
 
10,115,994

Income Taxes

The Company adopted the provisions of FASB ASC 740 effective January 1, 2007. The implementation of FASB ASC 740 has not caused the Company to recognize any changes in its identified tax positions. Interest and penalties associated with unrecognized tax benefits would be classified as additional income taxes in the statement of operations.
 
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to the difference between the basis of the allowance for doubtful accounts, accumulated depreciation and amortization, accrued payroll and net operating loss carryforwards for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
 
 
8

 
 
Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.
 
The components of the provision for income taxes for the three months ended March 31, 2012 and 2011 were $39,000 and $76,950, respectively.  The current quarter’s tax provision is comprised of $36,000 for the current year’s state provision and $3,000 for the current year’s federal provision.  The components of the provision for income taxes for the prior year quarter’s tax provision is comprised of $55,750 for the previous year’s state taxes, $6,200 for the previous year’s federal taxes and $15,000 for the prior year’s state provision.  Due to its history of net losses, the Company has provided a valuation allowance in full on its net deferred tax assets in accordance with FASB ASC 740 and in light of the uncertainty regarding ultimate realization of the net deferred tax assets.
 
Use of Estimates
 
The preparation of financial statements requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant estimates and assumptions made by management are used for, but not limited to, the allowance for doubtful accounts, inventory obsolescence, allowance for returns and the estimated useful lives of long-lived assets.
 
Fair Value of Financial Instruments

The fair value of the Company’s financial instruments is determined by using available market information and appropriate valuation methodologies. The Company’s principal financial instruments are cash, accounts receivable, accounts payable and short term line of credit debt. At March 31, 2012 and December 31, 2011, cash, accounts receivable, accounts payable and short term line of credit debt, due to their short maturities, and liquidity, are carried at amounts which reasonably approximate fair value.

The Company measures the fair value of its financial instruments using the procedures set forth below for all assets and liabilities measured at fair value that were previously carried at fair value pursuant to other accounting guidelines.
 
Under FASB ASC 820, “Fair Value Measurements” fair value is defined as the price that would be received to sell 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 on the measurement date.
 
FASB ASC 820 establishes a three-level hierarchy for disclosure to show the extent and level of judgment used to estimate fair value measurements.
 
Level 1 — Uses unadjusted quoted prices that are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
 
Level 2 — Uses inputs, other than Level 1, that are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data. Instruments in this category include non-exchange-traded derivatives, including interest rate swaps.
 
 
9

 
 
Level 3 — Uses inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
 
The table below sets forth our financial assets and liabilities that were accounted for at fair value as of March 31, 2012 and December 31, 2011. The table does not include cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.
 
   
March 31, 2012
   
December 31, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Level 1
   
Level 2
   
Level 3
 
Item measured at fair value on a recurring basis: None
  $ -     $ -     $ -     $ -     $ -     $ -  
 
Recently Issued Accounting Pronouncements

None.

3. Inventory
 
At March 31, 2012 and December 31, 2011 the Company had one class of inventory - finished goods.  Inventory is shown net of a provision of $460,000 at March 31, 2012 and December 31, 2011.

   
March 31,
2012
   
December 31,
 2011
 
             
Finished goods
3,900,716
   
$
4,449,315
 
 
4. Property and Equipment
 
Property and equipment consisted of the following:
 
    March 31,
2012
    December 31,
2011
 
                 
Computer hardware and software
  $ 510,529     $ 486,066  
Vehicle
    43,680       43,680  
Furniture and equipment
    165,547       162,871  
Leasehold improvements
    43,589       43,589  
                 
      763,345       736,206  
Less accumulated depreciation
    (453,405     (416,672 )
Property and equipment, net
  $ 309,940     $ 319,534  
 
Depreciation expense for the three months ended March 31, 2012 and twelve months ended December 31, 2011 was $36,733 and $125,330, respectively.
 
 
10

 

5. Trademarks and Patents
 
Trademarks and patents consisted of the following:
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
             
Trademarks
  $ 140,957     $ 139,057  
Patents
    24,270       24,270  
Less: Accumulated amortization
    (33,966     (31,915 )
Trademarks and Patents, net
  $ 131,261     $ 131,412  
 
Trademarks and patents consist of definite-lived trademarks and patents of $105,603 and $103,703 and indefinite-lived trademarks and patents of $59,624 and $59,624 at March 31, 2012 and December 31, 2011, respectively. All trademark and patent costs have been generated by the Company, and consist of initial legal and filing fees.
 
Amortization expense was $2,051 and $7,153 for the three months ended March 31, 2012 and twelve months ended December 31, 2011, respectively.

6. Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses consisted of the following at March 31, 2012 and December 31, 2011:
 
   
March 31,
 2012
   
December 31,
2011
 
Accounts payable
  $ 354,941     $ 487,398  
Accrued inventory
    194,141       183,436  
Accrued rebates and co-op
    308,352       307,707  
Accrued bonus
    135,941       569,680  
Customer deposits
    805,696       515,794  
Accrued returns reserve
    87,000       62,000  
Accrued expenses - other
    392,116       434,489  
                 
Total accounts payable and accrued expenses
  $ 2,278,187     $ 2,560,504  
 
7. Bank Lines of Credit
  
Factoring Agreement
 
On December 7, 2009 the Company entered into a factoring agreement with FCC, LLC, dba First Capital Western Region, LLC (“FCC”), whereby it assigns certain of its accounts receivable without recourse and other accounts receivable with recourse.  FCC, based on its internal credit policies, determines which accounts receivable it will accept without recourse.  This facility allows the Company to borrow the lesser of (a) $3,000,000 or (b) the sum of (i) the threshold for the net amount of total eligible accounts receivable set forth in the agreement, with and without recourse, and (ii) the threshold for the value of eligible inventory set forth in the agreement, which amount shall not exceed the lesser of $1,500,000 or the net amount of eligible accounts receivable.  All of the Company’s assets secure amounts borrowed under the terms of this agreement.  Interest on outstanding balances based on accounts receivable accrues at LIBOR plus 5.5% and interest on outstanding balances based on inventory accrues at LIBOR plus 6.5%.  This agreement has an initial term of thirty-six (36) months.  On December 1, 2011, this agreement was amended to increase the Company’s limit on permissible capital equipment expenditures from $100,000 to $250,000 per year, effective for 2011 and 2012.
 
 
11

 
 
As of March 31, 2012, the total amount due to FCC was $443,853 offset by $662,920 due from factor, thereby creating a net due from factor of $219,067.  As of December 31, 2011, the total amount due to FCC was $1,661,220 offset by $2,462,973 due from factor, thereby creating a net due from factor of $801,753.
 
8. Equity Transactions
 
Common Stock
 
On March 17, 2011, the Company issued a stock bonus of 518,033 shares to an officer of the company as a bonus.   The bonus was valued at $62,164 and was based on a current market valuation of $0.12 per common share.
 
On April 11, 2011 the Company issued 36,674 shares of common stock upon the exercise of a stock option at an exercise price of $0.09.
 
On November 30, 2011 the Company issued 362,862 shares of common stock upon the exercise of stock options at an exercise prices between $0.09 and $0.095.
 
On December 7, 2011 the Company issued 682,000 shares of common stock upon the exercise of stock options at an exercise prices between $0.09 and $0.15.
 
On February 7, 2012 the Company issued 60,000 shares of common stock upon the exercise of a warrant at an exercise price of $0.05.
 
On February 27, 2012 the Company issued 268,792 shares of common stock upon the exercise of a stock option at an exercise price of $0.09.
 
On February 29, 2012 the Company issued 561,291 shares of common stock upon the exercise of various stock options at an average exercise price of $0.092.
 
On March 15, 2012 the Company issued 43,146 shares of common stock upon the exercise of a stock option at an exercise price of $0.09.
 
On March 20, 2012 the Company issued 833,333 shares of common stock upon the exercise of various stock options at an exercise price of $0.09.
 
On March 22, 2012 the Company issued 36,687 shares of common stock upon the cashless exercise of a stock option at an exercise price of $0.11.
 
There were 76,354,001 shares of common stock of the Company outstanding at March 31, 2012.

Warrant Activity
 
A summary of warrant activity is as follows:
 
   
 
Number
of Shares
   
Weighted Average
Exercise Price
 
Warrants outstanding at December 31, 2010
    10,175,994     $ 0.93  
Warrants expired
    (10,072,848 )     (0.93 )
Warrants outstanding at December 31, 2011
    103,146       0.11  
Warrants exercised
    (60,000 )     0.05  
Warrants outstanding at March 31, 2012
    43,146     $ 0.19  
 
 
12

 
 
Stock Based Compensation
 
Ironclad California reserved 3,020,187 shares of its common stock for issuance to employees, directors and consultants under the 2000 Stock Incentive Plan, which the Company assumed in the merger (the “2000 Plan”). Under the 2000 Plan, options may be granted at prices not less than the fair market value of the Company’s common stock at the grant date. Options generally have a ten-year term and shall be exercisable as determined by the Board of Directors.
 
Effective May 18, 2006, the Company reserved 4,250,000 shares of its common stock for issuance to employees, directors and consultants under its 2006 Stock Incentive Plan (the “2006 Plan”). In June, 2009, the shareholders of the Company approved an increase in the number of shares of common stock reserved under the 2006 Plan to 11,000,000 shares.  In April, 2011, the shareholders of the Company approved a further increase in the number of shares of common stock reserved under the 2006 Plan to 13,000,000 shares. Under the 2006 Plan, options may be granted at prices not less than the fair market value of the Company’s common stock at the grant date. Options generally have a ten-year term and shall be exercisable as determined by the Board of Directors.
 
The fair value of each stock option granted under either the 2000 Plan or 2006 Plan is estimated on the date of the grant using the Black-Scholes Model.  The Black-Scholes Model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the options and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on historical market prices of the Company’s common stock. The expected life of an option grant is based on management’s estimate. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a straight line basis.
 
There were no stock options issued during the quarters ended March 31, 2012 and 2011.

A summary of stock option activity is as follows:
 
   
 
Number
of Shares
   
Weighted
Average
Exercise Price
 
Outstanding at December 31, 2010  
    9,610,488     $ 0.095  
Granted  
    3,203,033     $ 0.099  
Exercised  
    (1,599,568 )   $ 0.109  
Cancelled/Expired  
    (797,417 )   $ 0.093  
Outstanding at December 31, 2011  
    10,416,536     $ 0.094  
Granted  
    -     $ -  
Exercised  
    (1,743,248 )   $ 0.091  
Cancelled/Expired  
    (163,313 )   $ 0.110  
Outstanding at March 31, 2012  
    8,509,975     $ 0.094  
Exercisable at March 31, 2012  
    4,808,200     $ 0.093  
 
The following tables summarize information about stock options outstanding at March 31, 2012:
 
Range of Exercise 
Price
   
Number
Outstanding
   
Weighted Average
Remaining Contractual
Life (Years)
   
Weighted Average
Exercise Price
   
Intrinsic Value
Outstanding Shares
 
$ 0.09 - $0.11       8,509,975       7.08     $ 0.094     $ 1,239,481  
 
 
13

 
 
The following tables summarize information about stock options exercisable at March 31, 2012:
 
Range of Exercise
Price
   
Number
Exercisable
   
Weighted Average
Remaining Contractual
Life (Years)
   
Weighted Average
Exercise Price
   
Intrinsic Value
Exercisable Shares
 
$ 0.09 - $0.11       4,808,200       5.62     $ 0.093     $ 707,893  

In accordance with ASC 718, the Company recorded $27,421 and $32,974 of compensation expense for employee stock options during the three months ended March 31, 2012 and 2011. These compensation expense charges were recorded in the following operating expense categories for 2012 and 2011, respectively; general and administrative - $5,202 and $9,891; sales and marketing - $14,464 and $16,270; research and development - $3,608 and $2,974; and purchasing, warehousing and distribution - $4,147 and $3,839. There was a total of $232,817 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan outstanding at March 31, 2012. This cost is expected to be recognized over a weighted average period of 3.0 years. The total fair value of shares vested during the three months ended March 31, 2012 was $19,159.

9. Income Taxes

The Company adopted FASB ASC 740, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” as of January 1, 2007. FASB ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax position taken or expected to be taken on a tax return. Additionally, FASB ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. No adjustments were required upon adoption of FASB ASC 740. The Company has provided a full valuation allowance against its deferred tax assets.

  The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the fiscal years 2008 through 2011. The Company’s state tax returns are open to audit under the statute of limitations for the fiscal years 2007 through 2011.  The Company’s 2011 tax returns are currently on extension.  In 2011 the suspension of the California NOL for the prior year caused the Company to recognize additional prior year tax liabilities.  The federal and state income tax provision in 2012 is primarily due to higher 2011 and higher projected 2012 profits, and the continuing California NOL utilization suspension.
 
The provision for income taxes differs from the amount that would result from applying the federal statutory rate for the quarters ended March 31, 2012 and 2011 as follows:  
 
   
 
March 31, 
2012
   
March 31, 
2011
 
Statutory regular federal income benefit rate  
    34.0 %     34.0 %
State income taxes, net of federal benefit  
    6.0 %     (24.3 %)
Change in valuation allowance  
    (25.2 %)     (52.2 %)
Total  
    14.8 %     (42.5 %)
 
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more unlikely than not that the Company will realize all of the benefits of these deductible differences, and has chosen to provide a 100% valuation allowance against its deferred tax asset.
 
 
14

 
 
Significant components of the Company’s deferred tax assets and liabilities for federal incomes taxes at March 31, 2012 and 2011 consisted of the following:
 
   
   
2012
   
2011
 
Deferred tax assets  
               
Net operating loss carryforward  
 
$
3,463,805
   
$
4,166,076
 
Stock option expense  
   
1,196,570
     
1,141,960
 
Allowance for doubtful accounts  
   
15,851
     
55,692
 
Allowance for product returns  
   
37,271
     
33,415
 
Accrued compensation  
   
103,444
     
80,631
 
Inventory reserve
   
197,064
     
97,461
 
Other  
   
20,116
     
108
 
Valuation allowance  
   
(4,647,947
)
   
(5,193,064
)
Total deferred tax assets  
   
386,174
     
382,279
 
Total deferred tax liabilities  
   
(386,174
)
   
(382,279
)
Net deferred tax assets/liabilities  
 
$
-
   
$
-
 
 
As of March 31, 2012, the Company had unused federal and state contribution carryovers of $3,091 that expire in 2012 through 2016.

As of March 31, 2012, the Company had unused federal and states net operating loss carryforwards available to offset future taxable income of approximately $7,842,000 and $9,551,000, respectively, that expire between 2015 and 2024.

10. Commitments and Contingencies
  
The Company entered into a five-year lease with one option to renew for an additional five years for a corporate office and warehouse lease commencing in July 2006.  The Company exercised its five year option to renew this lease commencing in July 2011.  The facility is located in El Segundo, California.   As part of this renewal process we reduced our square footage by approximately 1,700 square feet of unneeded warehouse space in exchange for six months of rent concessions and approximately $40,000 of tenant improvements.  Rent expense for this facility for the three months ended March 30, 2011 was $25,330.
 
The Company has various non-cancelable operating leases for office equipment expiring through September 1, 2014.  Equipment lease expense charged to operations under these leases for the three months ended March 31, 2012 was $3,040.
 
Future minimum rental commitments under these non-cancelable operating leases for years ending December 31 are as follows:
 
Year
 
Facility
   
Equipment
   
Total
 
2012
    104,520       8,982       113,502  
2013
    158,940       3,733       162,673  
2014
    163,212       2,383       165,595  
2015
    167,496       -       167,496  
Thereafter
    85,350       -       85,350  
                         
    $ 679,518     $ 15,098     $ 694,616  
 
 
15

 
 
Ironclad California executed a Separation Agreement with Eduard Jaeger effective in April 2004, which was subsequently amended on November 26, 2008. Pursuant to the terms of the Separation Agreement, if Ironclad terminates Mr. Jaeger’s employment with Ironclad California at any time other than for Cause, then: (a) Ironclad California must pay Mr. Jaeger all accrued and unpaid salary and other compensation payable by the Company for services rendered through the termination date, payable in a lump sum payment on the termination date;  (b) Ironclad California must pay a cash amount equal to Two Hundred Thousand Dollars ($200,000), payable in installments throughout the one (1) year period following the termination date in the same manner as Ironclad California pays salaries to its other executive officers; and (c) all outstanding options issue to Mr. Jaeger under the Company’s 2006 Stock Incentive Plan, or any other plan or agreement approved by the Company’s Board of Directors shall become immediately vested and exercisable. Further, the Separation Agreement, as amended, also provides that the Company’s Board of Directors can’t remove Mr. Jaeger during his then current board term, except for Cause (as defined in the Separation Agreement).  Finally, the Separation Agreement requires Mr. Jaeger to sign a general release and non-competition agreement in order to receive the lump sum payment. For the purposes of the Separation Agreement, termination for “Cause” means termination by reason of: (i) any act or omission knowingly undertaken or omitted by Executive with the intent of causing damage to Ironclad California, its properties, assets or business or its stockholders, officers, directors or employees; (ii) any improper act of Mr. Jaeger involving a material personal profit to him, including, without limitation, any fraud, misappropriation or embezzlement, involving properties, assets or funds of Ironclad or any of its subsidiaries; (iii) any consistent failure by Mr. Jaeger to perform his normal duties as directed by the Chairman of the Board, in the sole discretion of the Board of Directors; (iv) any conviction of, or pleading nolo contendere to, (A) any crime or offense involving monies or other property of Ironclad; (B) any felony offense; or (C) any crime of moral turpitude; or (v) the chronic or habitual use or consumption of drugs or alcoholic beverages.

11. Related Party Transactions
 
Mr. Jarus, an Ironclad board member since May 2006 and currently Chairman of the Board, was appointed in September 2008, in a consulting capacity, as Executive Chairman of the Corporation with a compensation of $10,000 per month. In May 2009, Mr. Jarus also took on the role of Interim Chief Executive Officer. He
performed in this capacity through December 31, 2009. On January 1, 2010, Mr. Jarus was employed by the Company in the role of Chief Executive Officer. On January 1, 2012 Mr. Jarus received an increase in his annual salary to $250,000.

Mr. Alderton, an Ironclad board member since August 2002, is a partner of the law firm, Stubbs Alderton and Markiles, LLP (“SAM”) which is Ironclad’s attorney of record. SAM rendered services to Ironclad California as its primary legal firm since 2002, and became the Company’s primary legal counsel upon closing of the merger with Ironclad Nevada on May 9, 2006.
 
Prior to Dr. Frank’s appointment to the Company’s board of directors, Dr. and Mrs. Frank purchased 1,000,000 shares of the Company’s common stock on April 22, 2008, at $0.20 per share for an aggregate purchase price of $200,000. Further, Dr. Frank and Mrs. Frank purchased an additional 4,000,000 shares of the Company common stock on February 5, 2009, at $0.05 per share for an aggregate purchase price of $200,000. Dr. Frank is the father-in-law of Mr. Eduard Albert Jaeger, the Company’s Founder and head of new business development.
 
 Subsequent to the end of the quarter, on April 5, 2012, Dr. Frank resigned from the Board of Directors.
 
12. Gain/Loss Contingency

Early in 2008 the Company became aware that competitors had been importing gloves similar to many of its products under a temporary tariff provision at a lower duty rate.  This lower duty rate of 2.8% was significantly less than the 10.4% rate the Company had been paying.  The Company filed retroactive, formal protests with U.S. Customs and Border Protection (CBP) for refund of duties for previous entries totaling approximately $165,000.
 
In July, 2008, the Company received a written denial on its formal protest from CBP. The Company is continuing to contest this denial through the courts.
 
 
16

 
 
In summary, the outcome of the Company’s challenge to the classification of some of its products for the purpose of determining the appropriate duty rate is still in question at this time.  We have received successful rulings lowering duties on specific styles of gloves, and we have modified the wrist closure on some of our gloves to conform with the current classification, where feasible.  The Company continues to challenge the higher classification for certain styles of gloves under protest and the protest denials have been summonsed to the Court of International Trade (“CIT”).  The first entries at the CIT have been approved for stipulation to the Justice Department and the Company has received reimbursement from the U.S. Customs Office of previously paid duties of $54,675 plus accrued interest of $11,855.
 
Should the Company prevail in later court actions, the Company could receive additional refunds for previously paid duties.
 
 
17

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion summarizes the significant factors affecting our operating results, financial condition and liquidity and cash flows for the three months ended March 31, 2012 and 2011. The following discussion of our results of operations and financial condition should be read together with the condensed consolidated financial statements and the notes to those statements included elsewhere in this report. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Our actual results could differ materially from the results anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors.”

Overview
 
We are a leading designer and manufacturer of branded performance work wear. Founded in 1998, we have grown and leveraged our proprietary technologies to produce task-specific gloves and performance apparel that are designed to significantly improve the wearer’s ability to safely, efficiently and comfortably perform general to highly specific job functions. We have built and continue to augment our reputation among professionals in the construction and industrial service markets, and do-it-yourself and sporting goods consumers with products specifically designed for individual tasks or task types. We believe that our dedication to quality and durability and focus on our client needs has created a high level of brand loyalty and has solidified substantial brand equity.
 
We plan to increase our domestic revenues by leveraging our relationships with existing retailers and industrial distributors, including “Big Box,” automotive and sporting goods retailers, increasing our product offerings in new and existing locations, and introducing new products, developed and targeted for specific customers and/or industries.
 
We believe that our products have international appeal. In 2005, we began selling products in Australia and Japan through independent distributors, which accounted for approximately 4% of total sales.  From 2006 through 2011 we entered the Canadian and European markets through distributors and international sales represented approximately 7% - 13% of total sales. We plan to continue to pursue sales internationally by expanding our distribution into Europe and other international markets during the fiscal year ending December 31, 2012. 

General
 
Net sales are comprised of gross sales less returns and discounts. Our operating results are seasonal, with a greater percentage of net sales being earned in the third and fourth quarters of our fiscal year due to the fall and winter selling seasons.

Our cost of goods sold includes the FOB cost of the product plus landed costs and a reserve for slow-moving inventory. Landed costs include freight-in, insurance, duties and administrative costs to deliver the finished goods to our distribution warehouse. Cost of goods sold does not include purchasing, warehousing or distribution costs. These costs are captured as incurred on a separate line in operating expenses. Our gross margins may not be comparable to other entities that may include some or all of these costs in the calculation of gross margin.

Our operating expenses consist primarily of payroll and related costs, marketing costs, corporate infrastructure costs and our purchasing, warehousing and distribution costs. We expect that our operating expenses will decrease as a percentage of net sales if we are able to increase our net sales through expansion and growth. We expect this reduction in operating expenses to be offset by investment in sales and marketing to achieve brand growth, the development of new product lines, and the increased costs of operating as a public company.
 
Historically, we have funded our working capital needs through a combination of our existing asset-based credit facility along with subordinated debt and equity financing transactions.  On December 7, 2009 we entered into a factoring agreement with FCC, LLC, dba First Capital Western Region, LLC (“FCC”), whereby we assign certain of our accounts receivables without recourse and other accounts receivable with recourse. FCC, based on its internal credit policies, determines which accounts receivable it will accept on a no recourse basis. This facility allows us to borrow the lesser of (a)$3,000,000 or (b) the sum of (i) the threshold for the net amount of eligible accounts receivable set forth in the agreement and (ii) the threshold for the value of eligible inventory set forth in the agreement, which amount shall not exceed the lesser of $1,500,000, 50% of eligible inventory or the net amount of eligible accounts receivable. All of our assets secure amounts borrowed under the terms of this agreement. Interest on outstanding balances based on accounts receivable currently accrues at LIBOR plus 5.5% and interest on outstanding balances based on inventory accrues at LIBOR plus 6.5%. This agreement has an initial term of thirty-six (36) months.  This facility had an outstanding balance of $443,853 at March 31, 2012.
 
 
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Critical Accounting Policies and Estimates
 
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. On an ongoing basis, management evaluates its estimates and judgment, including those related to revenue recognition, accrued expenses, financing operations and contingencies and litigation. Management bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

       Revenue Recognition
 
Under our sales model, a customer is obligated to pay us for products sold to it within a specified number of days from the date that title to the products is transferred to the customer. Our standard terms are typically net 30 days from the transfer of title to the products to a customer. We typically collect payment from a customer within 30 to 45 days from the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery, depending on the terms of our agreement with a particular customer. The sale price of our products is substantially fixed or determinable at the date of sale based on purchase orders generated by a customer and accepted by us. A customer’s obligation to pay us for products sold to it is not contingent upon the resale of those products. We recognize revenue at the time product is delivered to a customer.
 
Revenue Disclosures

Our revenues are derived from the sale of our core line of task specific work gloves plus our line of workwear apparel products, available to all of our customers, both domestically and internationally.  Below is a table outlining this breakdown for the comparative periods:
 
   
Three Months Ended March 31, 2012
   
Three Months Ended March 31, 2011
   
Net Sales
 
Gloves
   
Apparel
   
Total
   
Gloves
   
Apparel
   
Total
Domestic
  $ 4,368,520     $ 22,465     $ 4,390,985     $ 2,732,928     $ 26,521     $ 2,759,449  
International
    956,830       50       956,880       637,679       -       637,679  
Total
  $ 5,325,350     $ 22,515     $ 5,347,865     $ 3,370,607     $ 26,521     $ 3,397,128  
 
Inventory Obsolescence Allowance
 
We review the inventory level of all products quarterly. For most products that have been in the market for one year or greater, we consider inventory levels of greater than one year’s sales to be excess.  Products that are no longer part of the current product offering are considered obsolete. The potential for re-sale of slow-moving and obsolete inventories is based upon our assumptions about future demand and market conditions. The recorded cost of obsolete inventories is then reduced to zero and a reserve is established for slow moving products. Both the write down and reserve adjustments are recorded as charges to cost of goods sold. For the three months ended March 31, 2012, our inventory reserve was $460,000.  For the year ended December 31, 2011, our inventory reserve was $460,000. All adjustments for obsolete inventory establish a new cost basis for that inventory as we believe such reductions are permanent declines in the market price of our products. Generally, obsolete inventory is sold to companies that specialize in the liquidation of these items or contributed to charities, while we continue to market slow-moving inventories until they are sold or become obsolete. As obsolete or slow-moving inventory is sold or disposed of, we reduce the reserve.
 
 
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Allowance for Doubtful Accounts
 
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our current customers consist primarily of large national, regional and smaller independent customers with good payment histories with us. We perform periodic credit evaluations of our customers and maintain allowances for potential credit losses based on management’s evaluation of historical experience and current industry trends. If the financial condition of our customers were to deteriorate, resulting in the impairment of their ability to make payments, additional allowances may be required. New customers are evaluated for credit worthiness before terms are established. Although we expect to collect all amounts due, actual collections may differ.  The allowance for doubtful accounts was $37,000 at March 31, 2012 and December 31, 2011.
 
Product Returns, Allowances and Adjustments
 
Product returns, allowances and adjustments is a broad term that encompasses a number of offsets to gross sales. Included herein are warranty returns of defective products, returns of saleable products and accounting adjustments.

Warranty Returns - We have a warranty policy that covers defects in workmanship. It allows customers to return damaged or defective products to us following a customary return merchandise authorization process.

Saleable Product Returns - We may allow from time to time, depending on the customer and existing circumstances, stock adjustment returns, whereby the customer is given the opportunity to ‘trade out’ of a style of product that does not sell well in their territory, usually in exchange for another product, again following the customary return merchandise authorization process. In addition we may allow from time to time other saleable product returns from customers for other business reasons, for example, in settlement of an outstanding accounts receivable, from a discontinued distributor customer or other customer service purpose.

Accounting Adjustments - These adjustments include pricing and shipping corrections and periodic adjustments to the product returns reserve.

For both warranty and saleable product returns we utilize actual historical return rates to determine our allowance for returns in each period, adjusted for unique, one-time events. Gross sales is reduced by estimated returns. We record a corresponding accrual for the estimated liability associated with the estimated returns which is based on the historical gross sales of the products corresponding to the estimated returns. This accrual is offset each period by actual product returns.
 
Our current estimated future warranty product return rate is approximately 1.5% and our current estimated future stock adjustment return rate is approximately 0.5%. As noted above, our return rate is based upon our past history of actual returns and we estimate amounts for product returns for a given period by applying this historical return rate and reducing actual gross sales for that period by a corresponding amount. We believe that using a trailing 12-month return rate provides us with a sufficient period of time to establish recent historical trends in product returns for two primary reasons:  (i) our products’ useful life is approximately 3-4 months and (ii) we are able to quickly correct any significant quality issues as we learn about them. If an unusual circumstance exists, such as a product that has begun to show materially different actual return rates as compared to our average 12-month return rates, we will make appropriate adjustments to our estimated return rates. Factors that could cause materially different actual return rates as compared to the 12-month return rates include a new product line, a change in materials or product being supplied by a new factory. Although we have no specific statistical data on this matter, we believe that our practices are reasonable and consistent with those of our industry. Our warranty terms under our arrangements with our suppliers do not provide for individual products returned by retailers or retail customers to be returned to the vendor.
 
 
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Reserve for Product Returns, Allowances and Adjustments
 
 
 
   
 
 
 
Reserve Balance 12/31/11
 
$
62,000
 
Payments Recorded During the Period  
   
(57,302
)
   
   
4,698
 
Accrual for New Liabilities During the Reporting Period
   
82,302
 
Reserve Balance 3/31/12
 
$
87,000
 

Stock Based Compensation
 
We follow the provisions of FASB ASC 718, “Share-Based Payment.”  This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, as well as transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.  ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements based on the fair value of the share-based payment.  ASC 718 establishes fair value as the measurement objective in accounting for share-based payment transactions with employees, such as the options issued under our stock incentive plans.
 
Income Taxes

Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates as of the date of enactment.
 
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be effectively sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  Due to its history of net losses, the Company has provided a valuation allowance in full on its net deferred tax assets in accordance with FASB ASC 740 and in light of the uncertainty regarding ultimate realization of the net deferred tax assets.

Interest and penalties associated with unrecognized tax benefits would be classified as additional income taxes in the statement of operations.
 
 
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Results of Operations
 
Comparison of Three Months Ended March 31, 2012 and 2011
 
Net Sales increased $1,950,737 or 57.4%, to $5,347,865 in the quarter ended March 31, 2012 from $3,397,128 for the corresponding period in 2011. Two customers accounted for 46.9% of net sales during the quarter ended March 31, 2012 and three customers accounted for 48.2% of net sales for the quarter ended March 31, 2011.  Net sales increased for the quarter due primarily to continuing increases in our industrial/safety, international, co-branded gloves and automotive segments.  In addition, almost all of our sales channels are showing increases over the prior year.  We continue to focus our sales efforts on those areas where we see growth opportunities, the industrial and safety markets and job specific and specialty glove styles.
 
Gross Profit increased $577,180 to $1,953,349 for the quarter ended March 31, 2012 from $1,376,169 for the corresponding period in 2011. Gross profit, as a percentage of net sales, or gross margin, decreased to 36.5% in the first quarter of 2012 from 40.5% in the same quarter of 2011.   The decrease in gross profit of 4% for the first quarter ended March 31, 2012 versus 2011 was primarily due to increased international sales, higher factory direct shipments for the period, higher royalty expenses and increased raw material costs.
 
Operating Expenses increased by $192,205, or 12.5%, to $1,724,853 in the first quarter of 2012 from $1,532,648 in the first quarter of 2011. As a percentage of net sales, operating expenses decreased to 32.3% in the first quarter of 2012 from 45.1% in the same period of 2011.  The increased spending for the first three months of 2012 was slightly below our budgeted expectations.  This increased spending in the first three months of 2012 was primarily driven by increases in personnel costs of $149,000; professional fees and services of $8,000; outside third-party services of $37,000; and depreciation and amortization charges of $10,000.  These were offset by decreased stock option expenses of $5,000; travel & entertainment expenses of $5,000 and overall general operating expenses of $2,000.  We continue our efforts to identify, capitalize on and maintain cost saving measures and opportunities throughout the company.  Our number of employees was 27 at March 31, 2012 and 24 at March 31, 2011.

Income from Operations increased $384,975 or 246%, to $228,496 in the first quarter of 2012 from ($156,479) in the first quarter of 2011. Income from operations as a percentage of net sales increased to 4.3% in the first quarter of 2012 from (4.6%) in the first quarter of 2011.  The increase in income from operations in the three month period was primarily due to increased sales and our continuing control over operating costs.
 
Interest Expense decreased $15,544 to $9,077 in the first quarter of 2012 from $24,621 in the same period of 2011 due to reduced borrowings and lower interest rates under our bank factoring agreement.

Interest/Other Income was $66,567 in the first quarter of 2012 as compared with $13 in the first quarter of 2011.  This was comprised of refunds from the U.S. Customs Department for previously contested duties of $54,675 plus accrued interest of $11,855.
 
Net Income increased $505,023 to $246,986 in the first quarter of 2012 from ($258,037) in the first quarter of 2011.  These gains are the result of the combination of each of the factors discussed above, principally the increase in sales.
 
Seasonality and Quarterly Results
 
Our glove business generally shows an increase in sales during the third and fourth quarters due primarily to an increase in the sale of our winter glove line during this period.  We typically generate 55% - 65% of our glove net sales during these months.  The first and second quarters of the year are generally considered our slower season.  Even though the overall economy continues to exhibit moderate and uneven growth, which affects some of our channels, we are experiencing some growth in certain channels, automotive, specialty-branded glove styles and industrial and safety, which helps offset declines in other areas.
 
 
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Our working capital, at any particular time, reflects the seasonality of our glove business and plans to expand product lines and enter new markets.  We expect inventory and current liabilities to be higher in the third and fourth quarters for these reasons. 
 
Liquidity and Capital Resources
 
Our cash requirements are principally for working capital. Our need for working capital is seasonal, with the greatest requirements from July through the end of October each year as a result of our inventory build-up during this period for the fall and winter selling seasons. Historically, our main sources of liquidity have been borrowings under our existing revolving credit facility, the issuance of subordinated debt and the sale of equity.  In the short term we monitor our credit issuances and cash collections to maximize cash flows and investigate opportunities to reduce our current inventories to convert these assets into cash.  Over the past several years, and continuing in the near and longer term we are focused on controlling our operating costs, managing margins and improving operating procedures to generate sustained profitability.
 
On December 7, 2009 we entered into a factoring agreement with FCC, LLC, dba First Capital Western Region, LLC (“FCC”), whereby we assign certain of our accounts receivables without recourse and other accounts receivable with recourse.  FCC, based on its internal credit policies, determines which accounts receivable it will accept without recourse.  This facility allows us to borrow the lesser of (a) $3,000,000 or (b) the sum of (i) the threshold for the net amount of total eligible accounts receivable set forth in the agreement, with and without recourse, and (ii) the threshold for the value of eligible inventory set forth in the agreement, which amount shall not exceed the lesser of $1,500,000, 50% of eligible inventory or the net amount of eligible accounts receivable. All of our assets secure amounts borrowed under the terms of this agreement.  The interest rate is based on the level of the Company’s rolling twelve month EBITDA/ASC718 balance.  In 2011 the Company achieved a 1.5% rate savings in Q1 and Q2, and a 2% rate savings in Q3 and Q4.  The 2% rate savings is the best rate available under our agreement. Interest on outstanding balances based on accounts receivable accrues at LIBOR plus 5.5% and interest on outstanding balances based on inventory accrues at LIBOR plus 6.5%.  Our factoring agreement with FCC does not contain any financial covenants.  The credit facility contains a number of other affirmative and negative covenants customarily found in factoring agreements for similar transactions, including, but not limited to, restrictions on the following transactions: the merger or sale of assets, creation of new debt or liens, distribution of dividends or equity interest, ERISA liabilities, transactions with affiliates, extending credit, advances, or loans to any person, and capital expenditures exceeding $100,000 within any fiscal year.  On December 1, 2011, this agreement was amended to increase the Company’s limit on permissible capital equipment expenditures from $100,000 to $250,000 per year, effective for 2011 and 2012.
 
At March 31, 2012 and December 31, 2011 the Company had available, but unused credit under this facility of approximately $1,724,000 and $1,149,000, respectively.  This agreement has an initial term of thirty-six (36) months.
 
Off Balance Sheet Arrangements

At March 31, 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
 
Risk Factors
 
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this report before purchasing our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of the money you paid to purchase our common stock.
 
 
23

 
 
RISKS RELATING TO OUR BUSINESS
 
We may need additional funding to support our operations and capital expenditures.  Our inability to obtain such funding could adversely affect our business.
 
We have funded our operations and capital expenditures with cash flow from operations, our cash on hand, the net proceeds of various private placements and the factoring agreement entered into on December 7, 2009.  As part of our planned growth, we will be required to make expenditures necessary to expand and improve our operating and management infrastructure.
 
While capital resources have historically been insufficient to support the continued growth of our operations, we believe that the proceeds from our financing transactions, our cash flows from operations and borrowings available to us under our senior secured credit facility, the availability of purchase order financing and our continuing cost containment measures will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.  In the event that our working capital needs exceed our cash sources we will need to raise additional funds.  There can be no assurance that any financing arrangements will be available in amounts or on terms acceptable to us, if at all.  Furthermore, if we are able to raise additional capital through the sale of equity or convertible debt securities it may result in additional dilution to our existing shareholders.  If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of the implementation of our business strategy.  This limitation could substantially harm our business, results of operations and financial condition.
 
Our operating results may fluctuate significantly and our stock price could decline or fluctuate if our results do not meet the expectation of analysts or investors.
 
Management expects that we will experience substantial variations in our net sales and operating results from quarter to quarter.  We believe that the factors which influence this variability of quarterly results include:
 
 
the timing of our introduction of new product lines, particularly our specialty apparel;
 
 
the level of consumer acceptance of each new product line;
 
 
general economic and industry conditions that affect consumer spending and retailer purchasing;
 
 
the availability of manufacturing capacity;
 
 
the seasonality of the markets in which we participate;
 
 
the timing of trade shows;
 
 
the product mix of customer orders;
 
 
the timing of the placement or cancellation of customer orders;
 
 
the weather;
 
 
transportation delays;
 
 
quotas and other regulatory matters; and
 
 
the timing of expenditures in anticipation of increased sales and actions of competitors.
 
As a result of fluctuations in our revenue and operating expenses that may occur, management believes that period-to-period comparisons of our results of operations are not a good indication of our future performance.  It is possible that in some future quarter or quarters, our operating results will be below the expectations of securities analysts or investors.  In that case, our common stock price could fluctuate significantly or decline.
 
 
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We have a history of operating losses and there can be no assurance that we can maintain profitability.
 
We have a history of operating losses and may not sustain profitability.  We cannot guarantee that we will remain profitable.  Even if we remain profitable, given the competitive and evolving nature of the industry in which we operate, we may be unable to sustain or increase profitability and our failure to do so would adversely affect our business, potentially requiring us to raise additional funds to continue operations.
 
We may be unable to effectively manage our growth.
 
Our strategy envisions growing our business.  Any growth in or expansion of our business is likely to continue to place a strain on our financial, managerial and other administrative resources, infrastructure and systems.  We have historically been undercapitalized to effectively manage and sustain our growth.  As with other growing businesses, we expect that we will need to continually restructure and expand our business development capabilities, our systems and processes and our access to financing sources.  We also will need to hire, train, supervise and manage new employees.  These processes are time consuming and expensive, will increase management responsibilities and will divert management attention.  We cannot assure you that we will be able to:
 
 
expand our systems effectively or efficiently or in a timely manner;
 
 
allocate our human resources optimally;
 
 
meet our capital needs;
 
 
identify and hire qualified employees or retain valued employees; or
 
 
incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.
 
Our inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating results and financial condition.
 
Substantially all of our revenues have been derived from a relatively limited product line consisting of task-specific gloves and performance apparel, and our future success depends on our ability to expand our product line and achieve broader market acceptance of our company and our products.
 
To date, our products have consisted mainly of task-specific gloves and performance apparel, targeted primarily to the construction, do-it-yourself, industrial and sporting goods markets.  Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance in our existing market segments as well as in new segments.  We may be required to enter into new arrangements and relationships with vendors, suppliers and others to achieve broader acceptance of our products, but cannot guarantee that we will be able to enter into such relationships.  We also may be required to undertake new types of risks or obligations that we may be unable to manage.  There can be no assurance that consumers will purchase our products or that retail outlets will stock our products.  Though we plan to continue to expend resources on promoting, marketing and advertising to increase product awareness, we cannot guarantee that any expenses we incur in such efforts will generate the desired product awareness or commensurate increase in sales of our products.  If we are unable to expand into new market segments, we may be unable to grow and expand our business or implement our business strategy as described in this report.  This could materially impair our ability to increase sales and revenue and materially and adversely affect our margins, which could harm our business and cause our stock price to decline.
 
We may be unable to compete successfully against existing and future competitors, which could decrease our revenue and margins, and harm our business.
 
The performance task specific glove and apparel industries are highly competitive.  There are several other companies that provide similar products, many of which are larger and have greater financial resources than us.  Our future growth and financial success depend on our ability to further penetrate and expand our existing distribution channels and to increase the size of our average annual net sales per account in these channels, as well as our ability to penetrate and expand other distribution channels.  For example, we encounter competition in our existing glove and workwear distribution channels from a number of competitors.  Unknown or unforeseen new entrants into our distribution channels, particularly low-cost overseas producers, will further increase the level of competition in these channels.  There can be no assurance that we will be able to maintain our growth rate or increase our market share in our distribution channels at the expense of existing competitors and other apparel manufacturers choosing to enter the market segments in which we compete.  In addition, there can be no assurance that we will be able to enter and achieve significant growth in other distribution channels.
 
 
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Failure to expand into new distribution channels and new international markets could materially and adversely impact our growth plan and profitability.
 
Our sales growth depends in part on our ability to expand from our existing hardware and lumber retail channels and industrial distributors into new distribution channels, particularly “Big Box” home centers and work wear and sporting goods retailers.  Failure to expand into these mass-market channels could severely limit our growth.
 
Our business plan also depends in part on our ability to expand into international markets.  We have begun the distribution of our products in Japan, Australia, Canada and Europe and we are in the process of establishing additional distribution in Europe and other international markets.  Failure to expand international sales through these and other markets could limit our growth capability and leave us vulnerable solely to United States market conditions.
 
Our dependence on independent manufacturers reduces our ability to control the manufacturing process, which could harm our sales, reputation and overall profitability.
 
We depend on independent contract manufacturers to maintain sufficient manufacturing and shipping capacity in an environment characterized by declining prices, labor shortages, continuing cost pressure and increased demands for product innovation and speed-to-market.  This dependence could subject us to difficulty in obtaining timely delivery of products of acceptable quality.  In addition, a contractor’s failure to ship products to us in a timely manner or to meet the required quality standards could cause us to miss the delivery date requirements of our customers.  The failure to make timely deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices or reduce future orders, any of which could harm our sales, reputation and overall profitability.
 
We do not have long-term contracts with any of our independent contractors and any of these contractors may unilaterally terminate their relationship with us at any time.  While management believes that there exists an adequate supply of contractors to provide products and services to us, to the extent we are not able to secure or maintain relationships with independent contractors that are able to fulfill our requirements, our business would be harmed.
 
We have initiated standards for our suppliers, and monitor our independent contractors’ compliance with applicable labor laws, but we do not control our contractors or their labor practices.  The violation of federal, state or foreign labor laws by one of our contractors could result in us being subject to fines and our goods that are manufactured in violation of such laws being seized or their sale in interstate commerce being prohibited.  To date, we have not been subject to any sanctions that, individually or in the aggregate, have had a material adverse effect on our business, and we are not aware of any facts on which any such sanctions could be based.  There can be no assurance, however, that in the future we will not be subject to sanctions as a result of violations of applicable labor laws by our contractors, or that such sanctions will not have a material adverse effect on our business and results of operations.
 
Our dependence on a single provider for all warehouse and fulfillment functions reduces our ability to control the warehousing and fulfillment processes, which could harm our sales, reputation, and overall business.
 
We have entered into an agreement to outsource most of our warehouse and fulfillment functions to a single provider where we will consolidate most of our inventory at one site, which is managed by an independent contractor who will then perform most of our warehousing, assembly, packaging and fulfillment services.  We depend on our independent contractor fulfiller to properly fulfill customer orders in a timely manner and to properly protect our inventories.  The contractor’s failure to ship products to customers in a timely manner, to meet the required quality standards, to correctly fulfill orders, to maintain appropriate levels of inventory, or to provide adequate security measures and protections against excess shrinkage could cause us to miss delivery date requirements of our customers or incur increased expense to replace or replenish lost or damaged inventory or inventory shortfall.  The failure to make timely and proper deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices or reduce future orders, any of which could harm our sales, reputation and overall profitability.
 
 
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Trade matters may disrupt our supply chain, which could result in increased expenses and decreased sales.
 
We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the U.S. and other foreign governments, including the likelihood, type or effect of any such restrictions.  Trade restrictions, including increased tariffs or quotas, embargoes, safeguards and customs restrictions, against apparel items, as well as U.S. or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition and results of operations.  Although the quota system established by the Agreement on Textiles and Clothing was completely phased out for World Trade Organization countries effective January 1, 2005, there can be no assurances that restrictions will not be reestablished for certain categories in specific countries.  We are unable to determine the impact of the changes to the quota system on our sourcing operations, particularly in China.  Our sourcing operations may be adversely affected by trade limits or political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and/or other trade disruptions.
 
Our international operations, and the operations of our foreign manufacturers and suppliers, are subject to additional risks that are beyond our control and that could harm our business.
 
Our glove products are manufactured by 6 manufacturers operating in China, Hong Kong and Indonesia. Our performance apparel products are manufactured in Taiwan, Vietnam, Mexico and the Dominican Republic.  We may in the future use offshore manufacturers for all or some of these products.  In addition, approximately 13% of our fiscal 2011 net revenues were generated through international sales and we plan to increase our sales to international markets in the future.  As a result of our international manufacturing and sales, we are subject to additional risks associated with doing business abroad, including:
 
 
political unrest, terrorism and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured;
 
 
difficulties in managing foreign operations, including difficulties associated with inventory management and collection on foreign accounts receivable;
 
 
dependence on foreign distributors and distribution networks;
 
 
currency exchange fluctuations and the ability of our Chinese manufacturers to change the prices they charge us based on fluctuations in the value of the U.S. dollar relative to that of the Chinese Yuan;
 
 
the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards as well as restrictions on the transfer of funds;
 
 
disruptions or delays in shipments;
 
 
changes in local economic and non-economic conditions and standards in which our manufacturers, suppliers or customers are located; and
 
 
reduced protection for intellectual property rights in jurisdictions outside the United States.
 
 
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These and other factors beyond our control could interrupt our manufacturers’ production in offshore facilities, influence the ability of our manufacturers to export our products cost-effectively or at all, inhibit our and our unaffiliated manufacturer’s ability to produce certain materials and influence our ability to sell our products in international markets, any of which could have an adverse effect on our business, financial conditions and operations.
 
We may be unable to adequately protect our intellectual property rights.
 
We rely in part on patent, trade secret, trade dress and trademark law to protect our rights to certain aspects of our products, including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks, all of which we believe are important to the success of our products and our competitive position.  There can be no assurance that any of our pending patent or trademark applications will result in the issuance of a registered patent or trademark, or that any patent or trademark granted will be effective in thwarting competition or be held valid if subsequently challenged.  In addition, there can be no assurance that the actions taken by us to protect our proprietary rights will be adequate to prevent imitation of our products, that our proprietary information will not become known to competitors, that we can meaningfully protect our rights to unpatented proprietary information or that others will not independently develop substantially equivalent or better products that do not infringe on our intellectual property rights.  We could be required to devote substantial resources to enforce our patents and protect our intellectual property, which could divert our resources and result in increased expenses.  In addition, an adverse determination in litigation could subject us to the loss of our rights to a particular patent or other intellectual property, could require us to grant licenses to third parties, could prevent us from manufacturing, selling or using certain aspects of our products or could subject us to substantial liability, any of which could harm our business.
 
We may become subject to litigation for infringing the intellectual property rights of others.
 
Others may initiate claims against us for infringing on their intellectual property rights.  We may be subject to costly litigation relating to such infringement claims and we may be required to pay compensatory and punitive damages or license fees if we settle or are found culpable in such litigation, we may be required to pay damages, including punitive damages.  In addition, we may be precluded from offering products that rely on intellectual property that is found to have been infringed by us.  We also may be required to cease offering the affected products while a determination as to infringement is considered.  These developments could cause a decrease in our operating income and reduce our available cash flow, which could harm our business and cause our stock price to decline.
 
We may be unable to attract and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation of our business plan.
 
Our success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel.  If we fail to attract, train and retain sufficient numbers of these qualified people, our prospects, business, financial condition and results of operations will be materially and adversely affected.  In particular, we are heavily dependent on the continued services of Eduard Albert Jaeger, Scott Jarus and the other members of our senior management team.  We do not have long-term employment agreements with any of the members of our senior management team, each of whom may voluntarily terminate their employment with us at any time.  Following any termination of employment, these employees would not be subject to any non-competition covenants.  The loss of any key employee, including members of our senior management team, and our inability to attract highly skilled personnel with sufficient experience in our industries could harm our business.
 
Adverse conditions in the economy and disruption of financial markets could negatively impact us and our customers and therefore our results of operations.
 
A further economic downturn in the businesses or geographic areas in which we sell our products could reduce demand for these products and result in a decrease in sales volume that could have a negative impact on our results of operations.  Volatility and disruption of financial markets could limit our ability, as well as our customers’ ability, to obtain adequate financing or credit to purchase and pay for our products in a timely manner, or to maintain operations, and result in a decrease in sales volume that could have a negative impact on our results of operations.
 
 
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If we are unable to adequately fund our operations, we may be forced to voluntarily file for deregistration of our common stock with the U.S. Securities and Exchange Commission.
 
Compliance with the periodic reporting requirements required by the U.S. Securities and Exchange Commission (or SEC) consumes a considerable amount of both internal, as well external, resources and represents a significant cost for us.  If we are unable to continue to devote adequate funding and the resources needed to maintain such compliance, while continuing our operations, we may be forced to deregister with the SEC.  If we file for deregistration, our common stock will no longer be listed on NASDAQ’s OTC Bulletin Board (or OTCBB), and it may suffer a decrease in or absence of liquidity as after the deregistration process is complete, our common stock will only be tradable on the “Pink Sheets.”  As a result of such deregistration, non-affiliates will no longer have access to information regarding our results of operations.  Without the availability of such information, our lenders may be forced to increase their monitoring of our operations which may result in higher costs to us when borrowing money which could have a negative impact and harm our business.
 
RISKS RELATING TO OUR INDUSTRY
 
If we are unable to respond to the adoption of technological innovation in our industry and changes in consumer demand, our products will cease to be competitive, which could result in a decrease in revenue and harm our business.
 
Our future success will depend, in part, on our ability to keep up with changes in consumer tastes and our continued ability to differentiate our products through implementation of new technologies, such as new materials and fabrics.  We may not, however, be able to successfully do so, and our competitors may be able to produce designs that are more appealing, implement new technologies or innovations in their designs, or manufacture their products at a much lower cost.  These types of developments could render our products less competitive and possibly eliminate any differentiating advantage in designs and materials that we might hold at the present time.
 
We are susceptible to general economic conditions, and a downturn in our industries or a reduction in spending by consumers could adversely affect our operating results.
 
The apparel industry in general has historically been characterized by a high degree of volatility and subject to substantial cyclical variations.  Our operating results will be subject to fluctuations based on general economic conditions, in particular conditions that impact consumer spending and construction and industrial activity.  A downturn in the construction, industrial or housing sectors could be expected to directly and negatively impact sales of protective gear to workers in these sectors, which could cause a decrease in revenue and harm our sales.
 
Difficult economic conditions could also increase the risk of extending credit to our retailers.  Since we have entered into a factoring relationship, a customer’s financial problems would limit the amount of customer receivables that we could assign to such factor on the receivables, and could cause us to assume more credit risk relating to those assigned receivables or to curtail business with that customer.
 
Changes in international treaties or governmental regulatory schemes could adversely impact our business.
 
Any negative changes to international treaties and regulations such as the North American Free Trade Agreement (or NAFTA), and to the effects of international trade agreements and embargoes imposed by entities such as the World Trade Organization, could result in a rise in trade quotas, duties, taxes and similar impositions, limit the countries from whom we can purchase our fabric or other component materials, or limit the countries where we might market and sell our products, any of which could correspondingly have an adverse effect on our business.
 
Any changes in regulation by the Federal Trade Commission (or FTC) with respect to labeling and advertising of our products could have an adverse effect on our business.  The FTC requires apparel companies to provide a label clearly stating the country of origin of manufacture and the company’s apparel registration number and a second label stating washing instructions for the product.  A change in these requirements could add additional cost to the production of our products, though we do not believe that this additional cost would be material, especially in relation to the cost of producing our products.
 
 
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RISKS RELATING TO OUR COMMON STOCK
 
There is a limited trading market for our common stock and a market for our stock may not be sustained, which will adversely affect the liquidity of our common stock and could cause our market price to decline.
 
Although prices for our shares of common stock are quoted on the OTCBB (under the symbol ICPW.OB), there is a limited public trading market for our common stock, and no assurance can be given that a public trading market will be sustained.
 
Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders.  The absence of an active trading market reduces the liquidity of our common stock.  As a result of the lack of trading activity, the quoted price for our common stock on the OTC Bulletin Board is not necessarily a reliable indicator of its fair market value.  Further, if we cease to be quoted, holders of our common stock would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock, and the market value of our common stock would likely decline.
 
The market price of our common stock is likely to be highly volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the offering price.
 
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including announcements of new products or services by our competitors.  In addition, the market price of our common stock could be subject to wide fluctuations in response to a variety of factors, including:
 
 
quarterly variations in our revenues and operating expenses;
 
 
developments in the financial markets, apparel industry and the worldwide or regional economies;
 
 
announcements of innovations or new products or services by us or our competitors;
 
 
announcements by the government that affect international trade treaties;
 
 
fluctuations in interest rates and/or the asset backed securities market;
 
 
significant sales of our common stock or other securities in the open market; and
 
 
changes in accounting principles.
 
In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities.  If a stockholder were to file any such class action suit against us, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to respond to the litigation, which could harm our business.
 
Substantial future sales of our common stock in the public market could cause our stock price to fall.
 
Sales of a significant number of shares of our common stock in the open market could depress the market price of our common stock.  Further reduction in the market price for our shares could make it more difficult to raise funds through future equity offerings.
 
Moreover, as additional shares of our common stock become available for resale in the open market (including shares issued upon the exercise of our outstanding options and warrants), the supply of our publicly traded shares will increase, which could decrease its price.
 
Some of our shares may also be offered from time-to-time in the open market pursuant to Rule 144, and these sales may have a depressive effect on the market for our shares.  In general, a non-affiliate who has held restricted shares for a period of six months may sell an unrestricted number of shares of our common stock into the market.  The resale of these shares under Rule 144 may cause our stock price to decline.
 
 
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The sale of securities by us in any equity or debt financing could result in dilution to our existing stockholders and have a material adverse effect on our earnings.
 
Any sale of common stock by us in a future private placement offering could result in dilution to the existing stockholders as a direct result of our issuance of additional shares of our capital stock.  In addition, our business strategy may include expansion through internal growth, by acquiring complementary businesses, by acquiring or licensing additional brands, or by establishing strategic relationships with targeted customers and suppliers.  In order to do so, or to finance the cost of our other activities, we may issue additional equity securities that could dilute our stockholders’ stock ownership.  We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if we acquire another company and this could negatively impact our earnings and results of operations.
 
The trading of our common stock on the OTCBB and the potential designation of our common stock as a “penny stock” could impact the trading market for our common stock.
 
Our securities, as traded on the OTCBB, may be subject to SEC rules that impose special sales practice requirements on broker-dealers who sell these securities to persons other than established customers or accredited investors.  For the purposes of the rule, the phrase “accredited investors” means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse’s income, exceeds $300,000).  For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction before the sale.  Consequently, the rule may affect the ability of broker-dealers to sell our securities and also may affect the ability of purchasers to sell their securities in any market that might develop therefor.
 
In addition, the SEC has adopted a number of rules to regulate “penny stock” that restrict transactions involving these securities.  Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities Exchange Act of 1934, as amended.  These rules may have the effect of reducing the liquidity of penny stocks.  “Penny stocks” generally are equity securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market if current price and volume information with respect to transactions in such securities is provided by the exchange or system).  Because our securities may constitute “penny stock” within the meaning of the rules, the rules would apply to us and to our securities.
 
Shareholders should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.  Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, resulting in investor losses.  Our management is aware of the abuses that have occurred historically in the penny stock market.  Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.
 
We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our common stock.
 
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future.  Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time.  To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price appreciates, which may never occur.  In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price of our stock does not appreciate, then there will be no return on investment.  Investors seeking cash dividends should not purchase our common stock.
 
 
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Our officers, directors and principal stockholders can exert significant influence over us and may make decisions that are not in the best interests of all stockholders.
 
Our officers, directors and principal stockholders (greater than 5% stockholders) collectively control approximately 32% of our outstanding common stock.  As a result, these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control.  In particular, this concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us.  This, in turn, could have a negative effect on the market price of our common stock.  It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock.  Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.
 
Anti-takeoverprovisions may limit the ability of another party to acquire us, which could cause our stock price to decline.
 
Our Articles of Incorporation, as amended, our bylaws and Nevada law contain provisions that could discourage, delay or prevent a third party from acquiring us, even if doing so may be beneficial to our stockholders.  In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 Not applicable.
 
ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures
 
As of March  31, 2012, the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934 Act, as amended. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective.  In making this assessment, our management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Our disclosure controls and procedures, and internal controls over financial reporting, provide reasonable, but not absolute, assurance that all deficiencies in design and or operation of those control systems, or all instances of errors or fraud, will be prevented or detected.  Those control systems are designed to provide reasonable assurance of achieving the goals of those systems in light of our resources and nature of our business operations.  Our disclosure controls and procedures, and internal control over financial reporting, remain subject to risks of human error and the risk that controls can be circumvented for wrongful purposes by one or more individuals in management or non-management positions.
 
Internal Control Over Financial Reporting
 
During the last fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II:  OTHER INFORMATION

ITEM 6.EXHIBITS

Exhibit Index

Exhibit
Number
Exhibit Title
   
3.2
Amended and Restated Bylaws of Ironclad Performance Wear Corporation.  Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K (File No. 000-51365) filed with the Securities and Exchange Commission on March 15, 2012.
10.2
Ironclad Performance Wear Annual Incentive Plan – 2012.  Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-51365) filed with the Securities and Exchange Commission on March 2, 2012. †*
31.1
Certification by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2
Certification by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**
XBRL Instance.
101.SCH**
XBRL Taxonomy Extension Schema.
101.CAL**
XBRL Taxonomy Extension Calculation.
101.DEF**
XBRL Taxonomy Extension Definition.
101.LAB**
XBRL Taxonomy Extension Labels.
101.PRE**
XBRL Taxonomy Extension Presentation.
† A management contract or compensatory plan or arrangement required to be filed as an exhibit to this Quarterly Report.

* Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

**  XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
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SIGNATURES
 
Pursuant to the requirements 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.
 
 
IRONCLAD PERFORMANCE WEAR CORPORATION
     
Date: May 11, 2012
By:  
/s/ Thomas Kreig
 
Thomas Kreig,
Senior Vice President - Finance