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, 2015

 

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.)

 

1920 Hutton Court, Suite 300

Farmers Branch, TX 75234

(Address of principal executive offices, zip code)

 

(972) 996 -5664

(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 8, 2015, the registrant had 80,915,229 shares of common stock issued and outstanding.

TABLE OF CONTENTS

 

			Page
PART I	Financial Information		1
Item 1.	Financial Statements
	a.	Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	1
	b.	Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2015 and March 31, 2014	2
	c.	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2015 and March 31, 2014	3
	d.	Notes to Condensed Consolidated Financial Statements	4 – 15
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4.	Controls and Procedures		22
PART II	Other Information		24
Item 6.	Exhibits		24

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2015 AND DECEMBER 31, 2014 

		March 31, 2015 (unaudited)				December 31, 2014
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	370,522			$	340,903
Accounts receivable, net of allowance for doubtful accounts of $30,000 and $30,000			4,734,946				6,283,032
Inventory, net of reserve of $547,800 and $547,800			8,436,142				7,123,654
Deposits on inventory			241,154				661,744
Prepaid and other			598,365				566,022
Deferred tax assets – current			183,000				183,000
Total current assets			14,564,129				15,158,355
PROPERTY AND EQUIPMENT
Computer equipment and software			551,501				507,640
Office equipment and furniture			260,325				255,085
Leasehold improvements			169,904				169,904
Less: accumulated depreciation			(674,565	)			(641,953	)
Total property and equipment, net			307,165				290,676
Trademarks and patents, net of accumulated amortization of $60,945 and $58,560			133,044				135,064
Deposits			22,924				21,306
Deferred tax assets – long term			1,649,000				1,649,000
Total other assets			1,804,968				1,805,370
Total Assets		$	16,676,262			$	17,254,401
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	2,275,694			$	2,589,623
Line of credit			2,321,189				2,586,034
Total current liabilities			4,596,883				5,175,657
Total Liabilities			4,596,883				5,175,657
STOCKHOLDERS’ EQUITY
Common stock, $.001 par value; 172,744,750 shares authorized; 80,915,229 and 80,808,629 shares  issued and outstanding at March 31, 2015 and December 31, 2014, respectively			80,915				80,808
Additional paid-in capital			20,392,921				20,293,486
Accumulated deficit			(8,394,457	)			(8,295,550	)
Total Stockholders’ Equity			12,079,379				12,078,744
Total Liabilities and Stockholders’ Equity		$	16,676,262			$	17,254,401

 

See Notes to Condensed Consolidated Financial Statements.

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		Three  Months  Ended March 31, 2015				Three  Months  Ended March 31, 2014
REVENUES
Net sales		$	4,567,682			$	5,076,335
COST OF SALES
Cost of sales			2,801,086				3,607,189
GROSS PROFIT			1,766,596				1,469,146
OPERATING EXPENSES
General and administrative			678,412				772,057
Sales and marketing			698,882				703,219
Research and development			155,471				120,648
Purchasing, warehousing and distribution			282,998				327,797
Depreciation and amortization			34,997				29,820
Total operating expenses			1,850,760				1,953,541
LOSS FROM OPERATIONS			(84,164	)			(484,395	)
OTHER INCOME (EXPENSE)
Interest expense			(14,750	)			(6,913	)
Interest income			7				7
Total other expense			(14,743	)			(6,906	)
LOSS BEFORE PROVISION FOR INCOME TAXES			(98,907	)			(491,301	)
PROVISION FOR INCOME TAXES			—				—
NET LOSS		$	(98,907	)			(491,301	)
NET LOSS PER COMMON SHARE
Basic		$	(0.00	)			(0.01	)
Diluted		$	(0.00	)			(0.01	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic			80,889,171				76,704,275
Diluted			80,889,171				76,704,275

 

See Notes to Condensed Consolidated Financial Statements.

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Three Months  Ended March 31, 2015				Three Months  Ended  March 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(98,907	)		$	(491,301	)
Adjustments to reconcile net loss provided by operating activities:
Allowance for bad debts			—				(10,000	)
Depreciation			32,612				27,501
Amortization			2,385				2,319
Inventory reserve			—				(56,400	)
Non-cash compensation:
Stock option expense			89,540				64,009
Changes in operating assets and liabilities:
Accounts receivable			1,548,086				2,833,537
Inventory			(1,312,488	)			(368,334	)
Deposits on inventory			420,590				(212,269	)
Prepaid and other			(33,960	)			(1,129	)
Accounts payable and accrued expenses			(313,929	)			1,088,792
Net cash flows provided by operating activities			333,929				2,876,725
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment purchased			(49,101	)			(12,181	)
Investment in trademarks			(366	)			(2,100	)
Net cash flows used in investing activities			(49,467	)			(14,281	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock			10,002				—
Proceeds from bank line of credit			3,658,364				905,497
Payments to bank line of credit			(3,923,209	)			(3,074,908	)
Net cash flows used in financing activities			(254,843	)			(2,169,411	)
NET INCREASE IN CASH			29,619				693,033
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD			340,903				313,750
CASH AND CASH EQUIVALENTS END OF PERIOD		$	370,522			$	1,006,783
SUPPLEMENTAL DISCLOSURES
Interest paid in cash		$	14,750			$	6,913

 

See Notes to Condensed Consolidated Financial Statements.

IRONCLAD PERFORMANCE WEAR CORPORATION

Notes to Condensed Consolidated Financial Statements

 

1. Description of Business

 

Ironclad Performance Wear Corporation (“Ironclad”, the “Company”, “we”, “us” or “our”) 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 U.S. patents, one international patent and four U.S. patents pending for design and technological innovations incorporated in its performance work gloves. The Company has 57 registered U.S. trademarks, 9 in-use U.S. trademarks, 4 U.S. trademark pending registration, 21 registered international trademarks, 3 international trademarks pending and 7 copyright marks.

 

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, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2015.

 

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.

 

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.

 

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

 

		March 31, 2015				December 31, 2014
Accounts receivable		$	4,764,946			$	6,313,032
Less - allowance for doubtful accounts			(30,000	)			(30,000	)
Net accounts receivable		$	4,734,946			$	6,283,032

 

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.

 

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.

 

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

 

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 work wear 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 2% 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, however we have negotiated special terms with certain customers and industries. The Company typically collects payment from a customer within 30 to 60 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, or shipped to customers, based on terms of agreement with the customers. All transactions are conducted in United States Dollars and therefore there are no transaction gains or losses incurred on transactions with foreign 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 work wear 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, 2015												Three Months Ended March 31, 2014
Net Sales		Gloves				Apparel				Total				Gloves				Apparel				Total
Domestic		$	3,450,211			$	7,847			$	3,458,058			$	3,934,921			$	68,333			$	4,003,254
International			1,109,624				—				1,109,624				1,073,081				—				1,073,081
Total		$	4,559,835			$	7,847			$	4,567,682			$	5,008,002			$	68,333			$	5,076,335

 

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, 2015 and 2014 were $2,801,086 and $3,607,189, 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 ended March 31, 2015 and 2014 were $282,998 and $327,797, respectively.

 

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 ended March 31, 2015 and 2014 were approximately $6,700 or 0.1% and $19,700 or 0.4%, 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 ended March 31, 2015 and 2014 were approximately $126,000 or 2.7% and $43,300 or 0.8%, respectively.

 

Sales Adjustments - these adjustments include pricing and shipping corrections and periodic adjustments to the product returns reserve. Pricing and shipping corrections for the three months ended March 31, 2015 and 2014 were approximately $16,000 or 0.4% and $28,000 or 0.6%, respectively. Adjustments to the product returns reserve were both zero for the three months ended March 31, 2015 and 2014.

 

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 12/31/14		$	75,000
Payments Recorded During the Period			(132,390	)
			(57,390	)
Accrual for New Liabilities During the Reporting Period			132,390
Reserve Balance 3/31/15		$	75,000

 

Advertising and Marketing

 

Advertising and marketing costs are expensed as incurred. Advertising expenses for the three months ended March 31, 2015 and 2014 were $86,573 and $159,478, respectively.

 

Shipping and Handling Costs

 

Freight billed to customers is recorded as sales revenue and the related freight costs as cost of sales.

 

Customer Concentrations

 

Three customers accounted for approximately $2,468,000 or 54.0% of net sales for the quarter ended March 31, 2015.   Four customers accounted for approximately $3,070,000 or 60.5% of net sales for the three months ended March 31, 2014.  No other customers accounted for more than 10% of net sales during the periods.  

 

Supplier Concentrations

 

Four suppliers, who are located overseas, accounted for approximately 74% of total purchases for the three months ended March 31, 2015.  Three suppliers, who are located overseas, accounted for approximately 85% of total purchases for the three months ended March 31, 2014.  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 earnings (loss) per share is computed by dividing earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (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.

 

As a result of the net loss for the three months ended March 31, 2015 and 2014, the Company calculated diluted earnings per share using weighted average basic shares outstanding only, as using diluted shares would be anti-dilutive to loss per share.

 

The following table sets forth the calculation of the numerators and denominators of the basic and diluted per share computations for the three months ended March 31, 2015 and 2014 if diluted shares were to be included:

 

		2015				2014
Numerator: Net Loss		$	(98,907	)		$	(491,301	)
Denominator: Basic and Diluted EPS
Common shares outstanding, beginning of period			80,808,629				76,681,498
Weighted average common shares issued during the period			80,542				22,777
Denominator for basic earnings per common share			80,889,171				76,704,275
Denominator: Diluted EPS
Common shares outstanding, beginning of period			80,808,629				76,681,498
Weighted average common shares issued during the period			80,542				22,777
Dilutive warrants outstanding at end of the period			43,146				43,146
Dilutive stock options outstanding at the end of the period			12,782,237				10,229,349
Denominator for diluted earnings per common share			93,714,554				86,976,770

 

The following potential common shares have been excluded from the computation of diluted net income (loss) per share for the periods presented as the effect would have been anti-dilutive:

 

		Three Months
		Ended March 31,
		2015				2014
Options outstanding under the Company’s stock option plans			-0-				13,156,974
Common Stock Warrants			43,146				43,146

Income Taxes

 

The Company adopted the provisions of FASB ASC 740-10 effective January 1, 2007. The implementation of FASB ASC 740-10 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.

 

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, 2015 and 2014 were zero.   Based on its history of losses, the Company historically provided a 100% valuation allowance against its deferred tax assets, as it was not more likely than not that any future benefit from deductible temporary differences and net operating loss carryforwards would be realized. For the year ended December 31, 2014, the Company reassessed the need for a valuation allowance against its deferred tax assets and, based on the positive evidence of the last three year’s pre-tax income and forecasted future results, concluded that it is more likely than not that it would be able to realize some of its deferred tax assets. Accordingly, the Company reversed approximately 28% of its valuation allowance for its current deferred tax assets and recorded a deferred tax benefit of $760,000. These deferred tax benefits are recorded on the balance sheet as current deferred tax assets of $183,000 and long term deferred tax assets of $1,649,000 as of March 31, 2015 and December 31, 2014.

 

We will continue to evaluate if it is more likely than not that we will realize the benefits from future deferred taxes.

 

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, 2015 and December 31, 2014, 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.

 

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.

 

There were no items measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014.

 

Recent Accounting Pronouncements 

 

In February 2015, the FASB issued ASU Update 2015-02, “Consolidation” (“ASU 2015-02”).  This Update was issued to address concerns about the current accounting for consolidation by changing the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities.  All legal entities are subject to reevaluation under the revised consolidation model.  The amendments in this Update: 1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; 2) Eliminate the presumption that a general partner should consolidate a limited partnership; 3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and 4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.  The amendments in ASU 2015-02 are effective for the Company beginning in 2016.  Early adoption is permitted and both retrospective and modified retrospective application is permitted.  We currently intend to adopt ASU 2015-02 on January 1, 2016.  We don’t anticipate that our adoption of ASU 2015-02 will have a material impact on the Company’s financial statements or related disclosures as we are not currently involved with the types of legal entities to which the amendments apply. 

 

In January 2015, the FASB issued ASU Update  2015-01, “Income Statement – Extraordinary and Unusual Items” (“ASU 2015-01”).  This Update eliminates from U.S. GAAP the concept of extraordinary items.  However, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently have been retained and expanded to include items that are both unusual in nature and infrequently occurring.  The amendments in ASU 2015-01 are effective for the Company beginning in 2016.  Early adoption is permitted and both prospective and retrospective application is permitted.  We currently intend to adopt ASU 2015-01 on January 1, 2016 and apply its provisions on a prospective basis.  We don’t anticipate that application of ASU 2015-01 will have a material impact on the Company’s financial statements or related disclosures.

 

3. Inventory

 

At March 31, 2015 and December 31, 2014 the Company had one class of inventory - finished goods.  Inventory is shown net of a provision of $547,800 for both March 31, 2015 and December 31, 2014.

		March 31, 2015				December 31,  2014
Finished goods, net		$	8,436,142			$	7,123,654

4. Property and Equipment

 

Property and equipment consisted of the following:

 

		March 31, 2015				December 31, 2014
Computer equipment and software		$	551,501			$	507,640
Office furniture and equipment			260,325				255,085
Leasehold improvements			169,904				169,904
			981,730				932,629
Less: Accumulated depreciation			(674,565	)			(641,953	)
Property and equipment, net		$	307,165			$	290,676

 

Depreciation expense for the three months ended March 31, 2015 and 2014 was $32,612 and $27,501, respectively.

 

5. Trademarks and Patents

 

Trademarks and patents consisted of the following:

 

		March 31,				December 31,
		2015				2014
Trademarks		$	167,753			$	168,789
Patents			26,236				24,835
Less: Accumulated amortization			(60,945	)			(58,560	)
Trademarks and Patents, net		$	133,044			$	135,064

 

Trademarks and patents consist of definite-lived trademarks and patents of $126,890 and $126,525 and indefinite-lived trademarks and patents of $67,099 and $67,099 at March 31, 2015 and December 31, 2014, respectively. All trademark and patent costs have been generated by the Company, and consist of legal and filing fees.

 

Amortization expense for the three months ended March 31, 2015 and 2014 was $2,385 and $2,319, respectively.

 

6. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of the following at March 31, 2015 and December 31, 2014:

 

		March 31,  2015				December 31, 2014
Accounts payable		$	1,692,958			$	1,770,620
Accrued rebates and co-op			173,551				202,805
Customer deposits			19,430				167,410
Accrued returns reserve			75,000				75,000
Accrued expenses – other			314,755				373,788
Total accounts payable and accrued expenses		$	2,275,694			$	2,589,623

7. Bank Lines of Credit

   

Bank Revolving Loan

 

On November 30, 2012 we entered into a Business Loan Agreement with Union Bank, N.A. which provided a revolving loan of up to $6,000,000. The first $3,500,000 of advances under this facility were under an open line-of-credit. Advances in excess of $3,500,000, up to the line limit of $6,000,000, were subject to a Borrowing Base report. The term Borrowing Base means an amount equal to (a) 80% of the net amount of all eligible accounts receivable plus, (b) the lesser of (i) 50% of the value of eligible landed inventory and (ii) $2,750,000, plus (c) 35% of eligible in-transit inventory. In addition, during the months of April to October each calendar year, the outstanding principal amount of all advances against eligible inventory were not to not exceed 150% of the aggregate outstanding principal amount of advances against eligible accounts receivable. All of our assets secure amounts borrowed under the terms of this agreement. Interest on borrowed funds were to accrue at Prime minus 0.25% unless we chose to “fix” a portion of the indebtedness (minimum $150,000) at LIBOR plus 2% for fixed periods of time ranging from 30 days to 360 days. This loan expired on November 30, 2014 and was paid off with the proceeds from the Capital One, N.A. line described below.

 

On November 28, 2014 we entered into a Revolving Loan and Security Agreement with Capital One, N.A. which provides a revolving loan of up to $6,000,000. All advances, up to the line limit of $6,000,000, are subject to a Borrowing Base report. The term Borrowing Base means an amount equal to (a) 80% of the net amount of all eligible accounts receivable plus, (b) 50% of the value of eligible landed inventory, plus (c) 35% of eligible in-transit inventory. In addition, the outstanding principal amount of all advances against eligible inventory shall not exceed 50% of the total line limit. All of our assets secure amounts borrowed under the terms of this agreement. Interest on borrowed funds will accrue at LIBOR plus 2.80%, or 2.97%, until such time as the Company’s trailing twelve month EBITDAS (Earnings Before Interest, Taxes, Depreciation, Amortization and Stock compensation expense) exceeds $1,000,000 at which time the rate will decrease to LIBOR plus 2.50%. The interest rate at March 31, 2015 was 2.97%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. At March 31, 2015, the Company is in compliance with all covenants. At March 31, 2015, we had unused credit available under our current facility of approximately $3,678,811.

 

As of March 31, 2015 and December 31, 2014, the total amounts due to Capital One, N.A. were $2,321,189 and $2,586,034, respectively.

 

8. Equity Transactions

 

Common Stock

  

On January 23, 2015 the Company issued 106,600 shares of common stock upon the exercise of stock options at a range in exercise price of $0.09 to $0.095.

 

There were 80,915,229 shares of common stock of the Company outstanding at March 31, 2015.

 

Warrant Activity

 

A summary of warrant activity is as follows:

 

		Number of Shares				Weighted Average Exercise Price
Warrants outstanding at December 31, 2014			43,146				0.19
Warrants exercised			—
Warrants outstanding at March 31, 2015			43,146				0.19

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. In May, 2013, the shareholders of the Company approved a further increase in the number of shares of common stock reserved under the 2006 Plan to 16,000,000 shares. In April, 2014, the shareholders of the Company approved a further increase in the number of shares of common stock reserved under the 2006 Plan to 21,000,000 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.

 

No stock options were issued during the three months ended March 31, 2015. For stock options issued during the three months ended March 31, 2014, the fair value of these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following range of assumptions:

 

			March 31, 2014
Risk free interest rate			0.05% to 2.25%
Dividends			—
Volatility factor			80.9% to 84.5%
Expected life			5.5 to 6.25 years

 

 A summary of stock option activity is as follows:

		Number of Shares				Weighted Average Exercise Price
Outstanding at December 31, 2013			10,143,765			$	0.140
Granted			5,871,583			$	0.157
Exercised			(1,246,330)			$	0.116
Cancelled/Expired			(1,360,694)			$	0.168
Outstanding at December 31, 2014			13,408,324			$	0.148
Granted			-			$
Exercised			(106,600)			$	0.094
Cancelled/Expired			(519,487)			$	0.150
Outstanding at March 31, 2015			12,782,237			$	0.148
Exercisable at March 31, 2015			8,350,891			$	0.133

The following table summarizes information about stock options outstanding at March 31, 2015:

 

Range of Exercise Price				Number Outstanding				Weighted Average Remaining Contractual Life (Years)				Weighted Average Exercise Price				Intrinsic Value Outstanding Shares
$	0.09 - $0.27				12,782,237				6.10			$	0.148			$	1,813,670

 

The following table summarizes information about stock options exercisable at March 31, 2015:

 

Range of Exercise Price				Number Exercisable				Weighted Average Remaining Contractual Life (Years)				Weighted Average Exercise Price				Intrinsic Value Exercisable Shares
$	0.09 - $0.26				8,350,891				4.80			$	0.133			$	1,310,324

 

The following table summarizes information about non-vested stock options at March 31, 2015:

				Number of Shares				Weighted Average Grant Date Fair Value
	Non-Vested at December 31, 2014				5,858,535			$	0.146
	Granted				—			$	—
	Vested				(1,127,189	)		$	0.14
	Forfeited				(300,000	)		$	0.16
	Non-Vested at March 31, 2015				4,431,346			$	0.147

 

In accordance with ASC 718, the Company recorded $89,540 and $64,009 of compensation expense for employee stock options during the three months ended March 31, 2015 and 2014. There was a total of $541,414 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan outstanding at March 31, 2015. This cost is expected to be recognized over a weighted average period of 2.8 years. The total fair value of shares vested during the three months ended March 31, 2015 was $95,025.

 

9. Income Taxes

 

The Company adopted FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” as of January 1, 2007. FASB ASC 740-10 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 740-10 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 740-10.

 

  The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the fiscal years 2010 through 2013. The Company’s state tax returns are open to audit under the statute of limitations for the fiscal years 2009 through 2013.   The Company’s 2014 tax returns are currently on extension.

 

The provision for income taxes differs from the amount that would result from applying the federal statutory rate for the periods ended March 31, 2015 and 2014 as follows:

		March 31,  2015				March 31,  2014
Statutory regular federal income benefit rate			34.0	%			34.0	%
State income taxes, net of federal benefit			2.7	%			5.4	%
Change in valuation allowance			(36.7	%)			(39.4	%)
Total			—	%			—	%

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 sufficient 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 likely than not that the Company will realize some portion or all of the benefits of these deductible differences. The Company’s glove business generally shows an increase in sales during the third and fourth quarters due primarily to an increase in the sale of the winter glove line during this period. The Company typically generates 55% - 65% of the glove net sales during these months. The change in valuation allowance is affected by the seasonality of the business.

 

As of March 31, 2015, the Company had unused federal and states net operating loss carryforwards available to offset future taxable income of approximately $4,238,141 and $5,364,801, respectively, that expire between 2015 and 2026.

 

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 for tenant improvements. Rent expense for this facility for the three months ended March 31, 2014 was $46,298. The Company has sublet this facility for the remainder of its lease term as the Company relocated to Texas.

 

On June 11, 2014, the Company entered into a 42 month lease for a new corporate office facility in Farmers Branch, Texas, commencing in the third quarter of 2014. The Company relocated its corporate headquarters to Texas in the third quarter. This new facility is approximately 13,026 square feet and the Company has negotiated six months of rent abatement. The monthly base rent is $7,653 plus $3,449 for common area operating expenses. A security deposit of one month’s rent has been made in the amount of $11,102. As part of this process, we were granted $60,000 for tenant improvements. Rent expense attributable to this facility for the three months ended March 31, 2015 was $24,263.

 

The Company has various non-cancelable operating leases for office equipment expiring through August, 2018. Equipment lease expense charged to operations under these leases was $4,249 and $2,530 for the three months ended March 31, 2015 and 2014, respectively.

 

Future minimum rental commitments under these non-cancelable operating leases for years ending December 31 are as follows:

 

Year				Facilities				Equipment				Total
	2015			$	197,222			$	8,086			$	205,308
	2016				181,609				10,139				191,748
	2017				97,051				9,240				106,291
	2018				16,175				5,775				21,950
				$	492,057			$	33,240			$	525,297

 

Ironclad California executed a Consulting Agreement with Eduard Albert Jaeger, its founder and former CEO, effective in February 18, 2014. Pursuant to the terms of this two year Consulting Agreement, Mr. Jaeger will be paid an initial base fee of $225,000 for the first year of the agreement and a base fee of $150,000 for the second year of the agreement. In addition, the Company will reimburse Mr. Jaeger for 100% of the premiums for COBRA coverage for himself and his family for the first 12 months of the agreement. The Company will also reimburse Mr. Jaeger for any travel and lodging expense incurred while rendering services to the Company. The total expense recognized in the three months ended March31, 2015 and 2014 for Mr. Jaeger’s fees and COBRA was $54,070 and $52,629, respectively. 

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, 2015 and 2014. 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 10% of total sales for the quarter presented. From 2006 through 2012 we entered the Canadian and European markets through distributors. International sales represented approximately 21% of total sales in fiscal year 2014. We plan to continue to increase sales internationally by expanding our distribution into Europe and other international markets during the fiscal year ending December 31, 2015.

 

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 November 30, 2012 we entered into a Business Loan Agreement with Union Bank, N.A. which provides a revolving loan of up to $6,000,000. The first $3,500,000 of advances under this facility are under an open line-of-credit. Advances in excess of $3,500,000, up to the line limit of $6,000,000, are subject to a Borrowing Base report. The term Borrowing Base means an amount equal to (a) 80% of the net amount of all eligible accounts receivable plus, (b) the lesser of (i) 50% of the value of eligible landed inventory and (ii) $2,750,000, plus (c) 35% of eligible in-transit inventory. In addition, during the months of April to October each calendar year, the outstanding principal amount of all advances against eligible inventory shall not exceed 150% of the aggregate outstanding principal amount of advances against eligible accounts receivable. All of our assets secure amounts borrowed under the terms of this agreement. Interest on borrowed funds accrue at Prime minus 0.25% unless we choose to “fix” a portion of the indebtedness (minimum $150,000) at LIBOR plus 2% for fixed periods of time ranging from 30 days to 360 days. This loan expired on November 30, 2014 and was paid off with the proceeds from the Capital One, N.A. line described below.

 

On November 28, 2014 we entered into a Revolving Loan and Security Agreement with Capital One, N.A. which provides a revolving loan of up to $6,000,000. All advances, up to the line limit of $6,000,000, are subject to a Borrowing Base report. The term Borrowing Base means an amount equal to (a) 80% of the net amount of all eligible accounts receivable plus, (b) 50% of the value of eligible landed inventory, plus (c) 35% of eligible in-transit inventory. In addition, the outstanding principal amount of all advances against eligible inventory shall not exceed 50% of the total line limit. All of our assets secure amounts borrowed under the terms of this agreement. Interest on borrowed funds will accrue at LIBOR plus 2.80% until such time as the Company’s trailing twelve month EBITDAS (Earnings Before Interest, Taxes, Depreciation, Amortization and Stock compensation expense) exceeds $1,000,000 at which time the rate will decrease to LIBOR plus 2.50%. The interest rate at March 31, 2015 was 2.97%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. At March 31, 2015, the Company is in compliance with all covenants. At March 31, 2015, we had unused credit available under our current facility of approximately $3,678,811.

 

Critical Accounting Policies, Judgments 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, however we have negotiated special terms with certain customers and industries. 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 title is transferred 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 work wear 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, 2015													Three Months Ended March 31, 2014
Net Sales		Gloves				Apparel				Total				Gloves				Apparel				Total
Domestic		$	3,450,211			$	7,847			$	3,458,058			$	3,934,921			$	68,333			$	4,003,254
International			1,109,624				—				1,109,624				1,073,081				—				1,073,081
Total		$	4,559,835			$	7,847			$	4,567,682			$	5,008,002			$	68,333			$	5,076,335

 

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. As of March 31, 2015 and December 31, 2014, our inventory reserve was $547,800 for both period ended. 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.

 

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 $30,000 for both March 31, 2015 and December 31, 2014.

 

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.

Sales 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.

 

Reserve for Product Returns, Allowances and Adjustments
Reserve Balance 12/31/14		$	75,000
Payments Recorded During the Period			(132,390	)
			(57,390	)
Accrual for New Liabilities During the Reporting Period			132,390
Reserve Balance 3/31/15		$	75,000

 

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.  We have reported losses for 2003, 2004, 2005, 2006, 2007, 2008 and 2009, and uncertainty exists as to whether benefits from deferred tax assets will be utilized. In the past we have fully reserved our deferred tax assets, however, we have now had several years in a row of sustained profits and believe it would now be appropriate to reduce this valuation allowance. For the year ended December 31, 2013 the Company reassessed the need for a valuation allowance against its deferred tax assets and, based on the positive evidence of the last three year’s pre-tax income and forecasted future results, concluded that it is more likely than not that it would be able to realize some of its deferred tax assets. Accordingly, the Company reversed approximately 7% of its valuation allowance for its current deferred tax assets and recorded a deferred tax benefit of $214,500. For the year ended December 31, 2014, the Company once again evaluated its need for a valuation allowance against its deferred tax assets and determined that an additional 28% reduction in the valuation allowance was appropriate and recorded an additional deferred tax benefit of $760,000. These deferred tax benefits are recorded on the balance sheet as current deferred tax assets of $183,000 and long term deferred tax assets of $1,649,000.

 

Interest and penalties associated with unrecognized tax benefits would be classified as additional income taxes in the statement of operations.

 

Results of Operations

 

Comparison of Three Months Ended March 31, 2015 and 2014

 

Net Sales decreased $508,683, or10.0%, to $4,567,682 in the quarter ended March 31, 2015 from $5,076,335 for the corresponding period in 2014. Three customers accounted for 54.0% of Net Sales during the quarter ended March 31, 2015 and four customers accounted for 60.5% of Net Sales during the quarter ended March 31, 2014. The decrease is primarily due to increased sales in our industrial and international segments, offset by reduced sales in our private label and retail segments   The sales decline in the private label segment was attributable to year-over-year order timing differences of a single private label customer. We expect these year-over-year shipment changes to reverse in later quarters. 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 $297,450, or 20.2%, to $1,766,596 for the quarter ended March 31, 2015 from $1,469,146 for the corresponding period in 2014. Gross profit, as a percentage of net sales, or gross margin, increased to 38.7% in the first quarter of 2015 from 28.9% in the same quarter of 2014.  The increase in gross profit percentage points of 9.8% for the first quarter was primarily due to an increase in higher margin sales, due to the mix of sales, plus the fact that we are paying more favorable prices for the production of our product.

 

Operating Expenses decreased by $102,781, or 5.3%, to $1,850,760 in the first quarter of 2015 from $1,953,541 in the first quarter of 2014. As a percentage of net sales, operating expenses increased to 40.5% in the first quarter of 2015 from 38.5% in the same period of 2014.  The increase in the percentage of net sales is driven by the year-over-year decrease in net sales. The decreased spending for the first three months of 2015 was primarily driven by decreases in commissions and personnel costs of $56,000, decreases in advertising and promotional costs of $91,000, decreases in legal fees of $44,000, decreased rent expense of $17,000 and decreases in professional fees of $15,000.  These were offset by increased research and development expense of $21,000 and increased travel expenses of $102,000.  Our number of employees was 29 at March 31, 2015 and 28 at March 31, 2014.

Loss from Operations decreased by $400,231, or 82.6%, to a loss of $84,164 in the first quarter of 2015, from a loss of $484,395 in the first quarter of 2014. Loss from operations as a percentage of net sales decreased to 1.8% in the first quarter of 2015 from 9.5% in the first quarter of 2014.  The decrease in loss from operations in the three month period was primarily due to the improved gross profit mentioned above and the reduction in operating expenses.

 

Interest Expense increased $7,837 to $14,750 in the first quarter of 2015 from $6,913 in the same period of 2014. This increase is due to greater borrowings under our bank line of credit agreement which were utilized to fund the build in inventory levels.

 

Net Loss decreased by $392,394, or 79.9%, to a loss of $98,907 in the first quarter of 2015 from a loss of $491,301 in the first quarter of 2014.  This decreased loss was primarily the result of higher margin sales due to customer and product mix, lower prices for inventory purchased and reduced operating expenses.

 

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 and fall promotions.  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 have been experiencing some mixed growth in certain channels, international and private label, which helps offset declines in other areas.

 

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 June 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 November 30, 2012 we entered into a Business Loan Agreement with Union Bank, N.A. which provides a revolving loan of up to $6,000,000. The first $3,500,000 of advances under this facility are under an open line-of-credit. Advances in excess of $3,500,000, up to the line limit of $6,000,000, are subject to a Borrowing Base report. The term Borrowing Base means an amount equal to (a) 80% of the net amount of all eligible accounts receivable plus, (b) the lesser of (i) 50% of the value of eligible landed inventory and (ii) $2,750,000, plus (c) 35% of eligible in-transit inventory. In addition, during the months of April to October each calendar year, the outstanding principal amount of all advances against eligible inventory shall not exceed 150% of the aggregate outstanding principal amount of advances against eligible accounts receivable. All of our assets secure amounts borrowed under the terms of this agreement. Interest on borrowed funds will accrue at Prime minus 0.25% unless we choose to “fix” a portion of the indebtedness (minimum $150,000) at LIBOR plus 2% for fixed periods of time ranging from 30 days to 360 days. This loan expired on November 30, 2014 and was paid off with the proceeds from the Capital One, N.A. line described below.

On November 28, 2014 we entered into a Revolving Loan and Security Agreement with Capital One, N.A. which provides a revolving loan of up to $6,000,000. All advances, up to the line limit of $6,000,000, are subject to a Borrowing Base report. The term Borrowing Base means an amount equal to (a) 80% of the net amount of all eligible accounts receivable plus, (b) 50% of the value of eligible landed inventory, plus (c) 35% of eligible in-transit inventory. In addition, the outstanding principal amount of all advances against eligible inventory shall not exceed 50% of the total line limit. All of our assets secure amounts borrowed under the terms of this agreement. Interest on borrowed funds will accrue at LIBOR plus 2.80% until such time as the Company’s trailing twelve month EBITDAS exceeds $1,000,000 at which time the rate will decrease to LIBOR plus 2.50%. The interest rate at March 31, 2015 was 2.97%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. At March 31, 2015, the Company is in compliance with all covenants. At March 31, 2015, we had unused credit available under our current facility of approximately $3,678,811.

 

The Company generated positive cash flow from operations of $333,929 in the first quarter of 2015. The cash flow from operations is primarily the result of decreases in accounts receivable and deposits on inventory, offset by increases in inventory and decreases in accounts payable and accrued expenses. We generated positive cash flow for the quarter of $29,619.

 

The Company utilized approximately $255,000, net, of cash flow in financing activities through the pay down of the line of credit.

 

At March 31, 2015 we had available, but unused credit under this facility of approximately $3,678,811.  

 

Off Balance Sheet Arrangements

 

At March 31, 2015, 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.

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Controls and Procedures

 

As of March 31, 2015, the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Principal 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 Principal 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 under the 1992 Framework (COSO). The COSO Commission has recently adopted a revision of the Internal Control-Integrated Framework which became effective for us in December 2014. We expect to be in full compliance later this year.

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.

PART II:  OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

Exhibit Index

 

Exhibit Number				Exhibit Title
	10.1	*		Revolving Loan and Security Agreement dated November 28, 2014, among Ironclad Performance Wear Corporation, a California corporation, Ironclad Performance Wear Corporation, a Nevada corporation and Capital One, N.A.
	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.

*

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.

**

Furnished herewith.

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, 2015	By:	/s/ William Aisenberg
		William Aisenberg
		EVP, Chief Financial Officer