IRONCLAD PERFORMANCE WEAR CORP - FORM 10-Q

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EX-32.2 - IRONCLAD PERFORMANCE WEAR CORP	icpw10q111615ex32_2.htm
EX-31.1 - IRONCLAD PERFORMANCE WEAR CORP	icpw10q111615ex31_1.htm
EX-31.2 - IRONCLAD PERFORMANCE WEAR CORP	icpw10q111615ex31_2.htm
EX-32.1 - IRONCLAD PERFORMANCE WEAR CORP	icpw10q111615ex32_1.htm

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 September 30, 2015

[ ]	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 November 6, 2015, the registrant had 82,937,309 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 September 30, 2015 (unaudited) and December 31, 2014	1

	b.	Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2015 and September 30, 2014	2

	c.	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2015 and September 30, 2014	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		25

Item 4.	Controls and Procedures		25

PART II	Other Information		26

Item 1.	Legal Proceedings		26

Item 6.	Exhibits		26

PART I

ITEM 1. FINANCIAL STATEMENTS

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

	September 30, 2015 (unaudited)			December 31, 2014
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	276,968		$	340,903
Accounts receivable, net of allowance for doubtful accounts of $30,000 and $30,000		6,175,904			6,283,032
Inventory, net of reserve of $547,800 and $547,800		7,555,430			7,123,654
Deposits on inventory		151,664			661,744
Prepaid and other assets		759,583			566,022
Deferred tax assets – current		183,000			183,000
Total current assets		15,102,549			15,158,355

PROPERTY AND EQUIPMENT
Computer equipment and software		598,744			507,640
Office equipment and furniture		295,586			255,085
Leasehold improvements		174,298			169,904
Less: accumulated depreciation		(734,669	)		(641,953	)
Total property and equipment, net		333,959			290,676

Trademarks and patents, net of accumulated amortization of $65,711 and $60,945		128,279			135,064
Deposits		21,306			21,306
Deferred tax assets – long term		1,649,000			1,649,000
Total other assets		1,798,585			1,805,370

Total Assets	$	17,235,093		$	17,254,401

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	2,006,977		$	2,589,623
Line of credit		3,229,303			2,586,034
Total current liabilities		5,236,280			5,175,657

Total Liabilities		5,236,280			5,175,657

STOCKHOLDERS’ EQUITY
Common stock, $.001 par value; 172,744,750 shares authorized; 82,937,309 and 80,808,629 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		82,937			80,808
Additional paid-in capital		20,686,013			20,293,486
Accumulated deficit		(8,770,137	)		(8,295,550	)
Total Stockholders’ Equity		11,998,813			12,078,744
Total Liabilities and Stockholders’ Equity	$	17,235,093		$	17,254,401

See Notes to Condensed Consolidated Financial Statements.

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IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended September 30,			Three Months Ended September 30,			Nine Months Ended September 30,			Nine Months Ended September 30,
	2015			2014			2015			2014
REVENUES
Net sales	$	5,420,511		$	5,230,800		$	15,160,159		$	15,126,387

COST OF SALES
Cost of sales		3,504,078			3,379,628			9,700,524			10,148,412

GROSS PROFIT		1,916,433			1,851,172			5,459,635			4,977,975

OPERATING EXPENSES
General and administrative		804,143			1,057,775			2,243,963			2,592,865
Sales and marketing		807,168			690,613			2,239,471			2,053,095
Research and development		166,368			138,174			479,967			391,156
Purchasing, warehousing and distribution		280,810			336,191			805,340			1,020,287
Depreciation and amortization		33,039			30,264			99,867			88,759

Total operating expenses		2,091,528			2,253,017			5,868,608			6,146,162

LOSS FROM OPERATIONS		(175,095	)		(401,845	)		(408,973	)		(1,168,187	)

OTHER INCOME (EXPENSE)

Interest expense		(30,693	)		(2,703	)		(65,635	)		(9,615	)
Interest income		7			7			21			21
Other income, net		—			—			—			131
Gain on disposition of equipment		—			1,697			—			1,802
Total other income (expense)		(30,686	)		(999	)		(65,614	)		(7,661	)

NET LOSS BEFORE PROVISION FOR INCOME TAXES		(205,781	)		(402,844	)		(474,587	)		(1,175,848	)

BENEFIT FROM INCOME TAXES		—			—			—			—

NET LOSS	$	(205,781	)	$	(402,844	)	$	(474,587	)	$	(1,175,848	)

NET LOSS PER COMMON SHARE
Basic	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
Diluted	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		82,292,247			79,072,089			81,443,216			77,639,852
Diluted		82,292,247			79,072,089			81,443,216			77,639,852

See Notes to Condensed Consolidated Financial Statements

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IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(474,587	)	$	(1,175,848	)
Adjustments to reconcile net loss to net cashflows (used) provided by operating activities:

Depreciation		92,716			81,652
Amortization		7,151			7,107
Stock option expense		265,202			245,644
Gain on disposition of equipment		—			(1,802	)
Changes in operating assets and liabilities:
Accounts receivable		107,128			2,365,035
Inventory		(431,776	)		(1,351,506	)
Deposits on inventory		510,080			(456,982	)
Prepaid and other		(193,561	)		(317,747	)
Accounts payable and accrued expenses		(582,646	)		1,020,825
Net cash flows (used) provided by operating activities		(700,293	)		416,378

CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment purchased		(135,999	)		(188,113	)
Proceeds from sale of assets		—			6,233
Investment in trademarks		(366	)		(6,300	)
Net cash flows used in investing activities		(136,365	)		(188,180	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock		129,453			752,238
Proceeds from bank line of credit		10,142,935			4,630,885
Payments to bank line of credit		(9,499,666	)		(5,648,183	)
Net cash flows provided (used) by financing activities		772,722			(265,060	)

NET DECREASE IN CASH		(63,936	)		(36,862	)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD		340,904			313,750
CASH AND CASH EQUIVALENTS END OF PERIOD	$	276,968		$	276,888

SUPPLEMENTAL DISCLOSURES
Interest paid in cash	$	65,635		$	9,616

See Notes to Condensed Consolidated Financial Statements.

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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. trademarks 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, an inactive parent company, and its wholly owned subsidiary Ironclad Performance Wear Corporation, a California corporation (“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. The Company maintains cash in excess of the FDIC and SIPC limits.

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Accounts Receivable

Accounts Receivable	September 30, 2015			December 31, 2014
Accounts receivable	$	6,205,904		$	6,313,032
Less - allowance for doubtful accounts		(30,000	)		(30,000	)

Net accounts receivable	$	6,175,904		$	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 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 file and 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, which the Company is winding down, currently comprises less than 1% 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.

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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 September 30, 2015						Three Months Ended September 30, 2014
Net Sales		Gloves		Apparel		Total		Gloves		Apparel		Total
Domestic	$	4,258,853	$	14,754	$	4,273,607	$	4,844,120	$	16,731	$	4,860,851
International		1,146,904		—		1,146,904		369,949		—		369,949
Total	$	5,405,757	$	14,754	$	5,420,511	$	5,214,069	$	16,731	$	5,230,800

	Nine Months Ended September 30, 2015						Nine Months Ended September 30, 2014
Net Sales		Gloves		Apparel		Total		Gloves		Apparel		Total
Domestic	$	11,145,548	$	45,177	$	11,190,725	$	12,305,509	$	97,983	$	12,403,492
International		3,969,434		—		3,969,434		2,722,156		739		2,722,895
Total	$	15,114,982	$	45,177	$	15,160,159	$	15,027,665	$	98,722	$	15,126,387

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) and charges for inventory obsolescence. Landed costs consist primarily of ocean/air freight, transport insurance, import duties, administrative charges and local trucking charges from the port to our warehouse.

Purchasing, warehousing and distribution costs include all costs related to the sourcing, importation, storage and distribution of the products.

Product and Warranty 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 sales adjustments.

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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 September 30, 2015 and 2014 were approximately $6,000 or 0.1% of net sales and $5,000 or 0.1% of net sales, respectively. Warranty returns for the nine months ended

September 30, 2015 and 2014 were approximately $16,000 or 0.1% of net sales and $39,000 or 0.3% of net sales, 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 September 30, 2015 and 2014 were approximately $4,000 or 0.1% of net sales and $59,000 or 1.1% of net sales. Saleable product returns for the nine months ended September 30, 2105 and 2014 were $258,000 or 1.7% of net sales and $118,000 or 0.8% of net sales, 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 September 30, 2015 and 2014 were approximately $42,000 or 0.8% of net sales and $4,000 or 0.0% of net sales. Sales adjustments for the nine months ended September 30, 2015 and 2014 were $77,000 or 0.5% of net sales and $38,000 or 0.3% of net sales, respectively. Adjustments to the product returns reserve were zero for the three and nine months ended September 30, 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 and Warranty Returns

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
Payments Recorded During the Period		(131,600	)
		(56,600	)
Accrual for New Liabilities During the Reporting Period		131,600
Reserve Balance 6/30/15		75,000
Payments Recorded During the Period		(9,823	)
		67,177
Accrual for New Liabilities During the Reporting Period		9,823
Reserve Balance 9/30/15		75,000

Advertising and Marketing

Advertising and marketing costs are expensed as incurred. Advertising expenses for the three and nine months ended September 30, 2015 and 2014 were $68,961 and $109,405 and $238,674 and $319,334, respectively.

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Shipping and Handling Costs

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

Customer Concentrations

One customer accounted for approximately $1,328,000 or 24.5% of net sales for the quarter ended September 30, 2015. Two customers accounted for approximately $2,159,682 or 41.3% of net sales for the three months ended September 30, 2014. Three customers accounted for approximately $6,807,000 or 44.9% of net sales for the nine months ended September 30, 2015. Two customers accounted for approximately $6,572,159 or 43.4% of net sales for the nine months ended September 30, 2014. No other customers accounted for more than 10% of net sales during the periods.

Supplier Concentrations

Three suppliers, who are located overseas, accounted for approximately 61% of total purchases for the three months ended September 30, 2015. Two suppliers, who are located overseas, accounted for approximately 67% of total purchases for the three months ended September 30, 2014. Two suppliers, who are located overseas, accounted for approximately 51% of total purchases for the nine months ended September 30, 2015. Two suppliers, who are located overseas, accounted for approximately 72% of total purchases for the nine months ended September 30, 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 nine months ended September 30, 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 and nine months ended September 30, 2015 and 2014 if diluted shares were to be included:

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	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Numerator: Net Loss	$	(205,781	)	$	(402,844	)	$	(474,597	)	$	(1,175,848	)
Denominator: Basic and Diluted EPS
Common shares outstanding, beginning of period		81,132,811			77,607,346			80,808,629			76,704,275
Weighted average common shares issued during the period		1,159,436			1,464,743			634,587			935,577
Denominator for basic earnings per common share		82,292,247			79,072,089			81,443,216			77,639,852

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				Nine Months
	Ended September 30,				Ended September 30,
	2015		2014		2015		2014
Options outstanding under the Company’s stock option plans		11,030,721		10,873,216		11,030,721		13,745,671
Common Stock Warrants		43,146		43,146		43,146		43,146

Income Taxes

The Company utilizes FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109”. 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.

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 provision for income taxes for the nine months ended September 30, 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 September 30, 2015 and December 31, 2014.

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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 September 30, 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 September 30, 2015 and December 31, 2014.

Recent Accounting Pronouncements

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.

In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value rather than the lower of cost or market. The standard will be effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance shall be applied prospectively and early adoption is permitted. The Company will adopt this guidance in the first quarter of 2017. The impact is not expected to be material.

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In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which is designed to simplify presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard will be effective for U.S. public companies for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The new guidance shall be applied on a retrospective basis for all periods presented. The Company will adopt this guidance in the first quarter of 2016. The impact is not expected to be material.

3. Inventory

At September 30, 2015 and December 31, 2014 the Company had one class of inventory - finished goods. Inventory is shown net of a provision for obsolescence of $547,800 for both September 30, 2015 and December 31, 2014.

		September 30, 2015				December 31, 2014
Finished goods, net		$	7,555,430			$	7,123,654

4. Property and Equipment

Property and equipment consisted of the following:

	September 30, 2015			December 31, 2014
Computer equipment and software	$	598,744		$	507,640
Office furniture and equipment		295,586			255,085
Leasehold improvements		174,298			169,904

		1,068,628			932,629
Less: Accumulated depreciation		(734,669	)		(641,953	)
Property and equipment, net	$	333,959		$	290,676

Depreciation expense for the three months ended September 30, 2015 and 2014 was $30,656 and $27,875, respectively. Depreciation expense for the nine months ended September 30, 2015 and 2014 was $92,716 and $81,652, respectively.

5. Trademarks and Patents

Trademarks and patents consisted of the following:

	September 30, 2015			December 31, 2014
Trademarks	$	167,754		$	168,789
Patents		26,236			24,835
Less: Accumulated amortization		(65,711	)		(58,560	)
Trademarks and Patents, net	$	128,279		$	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 $67,098 and $67,099 at September 30, 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 September 30, 2015 and 2014 was $2,383 and $2,389, respectively. Amortization expense for the nine months ended September 30, 2015 and 2014 was $7,151 and $7,107, respectively.

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6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following at September 30, 2015 and December 31, 2014:

	September 30, 2015		December 31, 2014
Accounts payable	$	1,268,492	$	1,770,620
Accrued rebates and co-op		122,400		202,805
Customer deposits		50,784		167,410
Accrued returns reserve		75,000		75,000
Accrued expenses – other		490,301		373,788

Total accounts payable and accrued expenses	$	2,006,977	$	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 secured 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 currently provides a revolving loan of up to $8,000,000. The loan expires November 30, 2016. On June 16, 2015, pursuant to the terms of the agreement, we increased the line limit from $6,000,000 to $8,000,000. All advances, up to the line limit of $8,000,000, 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 accrued 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) exceeded $1,000,000 at which time the rate decreased to LIBOR plus 2.50%. The interest rate at September 30, 2015 was 2.697%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. At September 30, 2015, the Company is in compliance with all covenants. At September 30, 2015, we had unused credit available under our current facility of approximately $3,927,718.

As of September 30, 2015 and December 31, 2014, the total amounts due to Capital One, N.A. were $3,229,303 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.

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On June 4, 2015 the Company issued 733,333 shares of restricted common stock with a fair value of $0.28, vesting over a period of one year.

On August 11, 2015 the Company issued 601,055 shares of common stock upon the exercise of stock options at a range in exercise price of $0.09 to $0.095.

On August 16, 2015 the Company issued 503,158 shares of common stock upon the exercise of stock options at a range in exercise price of $0.09 to $0.095.

On August 23, 2015 the Company issued 62,500 shares of common stock upon the exercise of stock options at a range in exercise price of $0.09 to $0.095.

On August 27, 2015 the Company issued 122,034 shares of common stock upon the exercise of stock options at an exercise price of $0.09.

There were 82,937,309 shares of common stock of the Company outstanding at September 30, 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 September 30, 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.

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For stock options issued during the three months and nine months ended September 30, 2015 and 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:

	Three Months Ended		Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2015		September 30, 2014			September 30, 2015			September 30, 2014
Risk free interest rate		—		1.68	%		1.54	%		0.05% to 2.66%
Dividends		—		—			—			—
Volatility factor		—		192.25	%		133.9	%		80.9% to 192.25%
Expected life		—		6.26 years			6.25 years			5.5 to 6.26 years

A summary of stock option and restricted stock activity is as follows:

	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2014		13,408,324		$	0.148
Granted		—		$	—
Exercised		(106,600	)	$	0.094
Cancelled/Expired		(519,487	)	$	0.15
Outstanding at March 31, 2015		12,782,237		$	0.148
Granted		733,333		$	0.280
Exercised		(733,333	)	$	0.230
Cancelled/Expired		—		$	0.150
Outstanding at June 30, 2015		12,782,237		$	0.148
Granted		—		$	—
Exercised		(1,288,747	)	$	0.094
Cancelled/Expired		(462,769	)	$	0.155
Outstanding at September 30, 2015		11,030,721		$	0.154
Exercisable at September 30, 2015		7,559,994		$	0.154

The following table summarizes information about stock options outstanding at September 30, 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		11,030,721		6.53	$	0.154	$	1,146,763

The following table summarizes information about stock options exercisable at September 30, 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		7,559,994		5.56	$	0.154	$	788,144

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The following table summarizes information about non-vested stock options and restricted stock at September 30, 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
Granted		733,333		$	0.280
Vested		(863,645	)	$	0.14
Forfeited		—		$	—
Non-Vested at June 30, 2015		4,301,034		$	0.152
Granted		—		$	—
Vested		(496,975	)	$	0.189
Forfeited.		(333,332	)	$	0.18
Non-Vested at September 30, 2015		3,470,727		$	0.155

In accordance with ASC 718, the Company recorded $90,487 and $88,528 of compensation expense for employee stock options during the three months ended September 30, 2015 and 2014. The Company recorded $265,382 and $245,644 of compensation expense for employee stock options during the nine months ended September 30, 2015 and 2014. There was a total of $517,921 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan outstanding at September 30, 2015. This cost is expected to be recognized over a weighted average period of 2.16 years. The total fair value of shares vested during the nine months ended September 30, 2015 was $392,012.

9. Income Taxes

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the fiscal years 2011 through 2014. The Company’s state tax returns are open to audit under the statute of limitations for the fiscal years 2010 through 2014.

The provision for income taxes differs from the amount that would result from applying the federal statutory rate for the periods ended September 30, 2015 and 2014 as follows:

	September 30, 2015			September 30, 2014
Statutory regular federal income benefit rate		34.0	%		34.0	%
State income taxes, net of federal benefit		2.7	%		5.3	%
Change in valuation allowance		(36.7	%)		(39.3	%)
Total		—	%		—	%

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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 September 30, 2015, the Company had unused federal and states net operating loss carryforwards available to offset future taxable income of approximately $4.1 million and $5.4 million, 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 and nine months ended September 30, 2015 was $2,032 and $4,063, respectively. Rent expense for this facility for the three months and nine months ended September 30, 2014 was $40,716 and $127,778, respectively. 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 of 2014. 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 and nine months ended September 30, 2015 was $24,263 and $72,788, respectively.

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 $3,626 and $4,598 for the three months ended September 30, 2015 and 2014, respectively. Equipment lease expense charged to operations under these leases was $11,468 and $10,200 for the nine months ended September 30, 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	$	65,741	$	2,695	$	68,436
	2016		181,609		10,139		191,748
	2017		97,051		9,240		106,291
	2018		16,175		5,775		21,950

		$	360,576	$	27,849	$	388,425

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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 would 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 would 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 would 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 September 30, 2015 and 2014 for Mr. Jaeger’s fees and COBRA was $60,091 and $48,741, respectively. The total expense recognized in the nine months ended September 30, 2015 and 2014 for Mr. Jaeger’s fees and COBRA was $184,225 and $197,294, respectively.

11. Subsequent Events

The Company evaluated subsequent events through November 13, 2015, the date of issuance of the condensed consolidated financial statements for the three and nine months ended September 30, 2015.

As the Company reported in its Form 8-K filed on November 12, 2015, effective November 6, 2015, the Company terminated its Exclusive License and Distributorship Agreement dated January 6, 2009, as amended on January 27, 2015, with ORR Safety Corporation (the “Distributorship Agreement”), for the reasons stated therein. The Company also terminated its Sub-Distributorship Agreement dated July 22, 2010, as amended on January 27, 2015, with ORR, concurrent with its termination of the Distributorship Agreement.

On September 28, 2015 Ironclad filed suit in Dallas County state court in Texas against ORR Safety alleging breach of the Distributorship Agreement, and seeking damages and a declaration of rights.

On October 23, 2015, ORR removed the Texas state court lawsuit to the US District Court in Dallas, and filed an answer to the complaint generally denying all of the Company’s claims, and additionally filing a counterclaim. The Company believes the counterclaims to be without merit.

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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 and nine months ended September 30, 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” in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2015.

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 third quarter of 2015. From 2006 through 2012 we entered the Canadian and European markets through distributors. International sales represented approximately 21% of total sales for the nine months ended September 30, 2015. We plan to continue to increase sales internationally by expanding our distribution into 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.

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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 secured 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.

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 60 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.

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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 September 30, 2015						Three Months Ended September 30, 2014
Net Sales		Gloves		Apparel		Total		Gloves		Apparel		Total
Domestic	$	4,258,853	$	14,754	$	4,273,607	$	4,844,120	$	16,731	$	4,860,851
International		1,146,904		—		1,146,904		369,949		—		369,949
Total	$	5,405,757	$	14,754	$	5,420,511	$	5,214,069	$	16,731	$	5,230,800

	Nine Months Ended September 30, 2015						Nine Months Ended September 30, 2014
Net Sales		Gloves		Apparel		Total		Gloves		Apparel		Total
Domestic	$	11,145,548	$	45,177	$	11,190,725	$	12,305,509	$	97,983	$	12,403,492
International		3,969,434		—		3,969,434		2,722,156		739		2,722,895
Total	$	15,114,982	$	45,177	$	15,160,159	$	15,027,665	$	98,722	$	15,126,387

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 September 30, 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 periods ended September 30, 2015 and December 31, 2014.

Product and Warranty Returns, Allowances and 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.

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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% of the trailing three months net sales and our current estimated future stock adjustment return rate is approximately 0.5% of the trailing three months net sales. 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 and Warranty Returns

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
Payments Recorded During the Period		(131,600	)
		(56,600	)
Accrual for New Liabilities During the Reporting Period		131,600
Reserve Balance 6/30/15		75,000
Payments Recorded During the Period		(9,823	)
		67,177
Accrual for New Liabilities During the Reporting Period		9,823
Reserve Balance 9/30/15	$	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.

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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, 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 September 30, 2015 and 2014

Net Sales increased $189,711 or 3.6%, to $5,420,511 in the quarter ended September 30, 2015 from $5,230,800 for the corresponding period in 2014. One customer accounted for 24.5% of Net Sales during the quarter ended September 30, 2015 and two customers accounted for 41.2% of Net Sales during the quarter ended September 30, 2014. The Net Sales increase for the quarter is due to increased sales in our industrial and international segments, offset in part by decreases in the private label and retail segments.

Gross Profit increased $65,261 to $1,916,433 for the quarter ended September 30, 2015 from $1,851,172 for the corresponding period in 2014. Gross Profit, as a percentage of net sales, or gross margin, represented 35.4% for both the third quarter of 2015 and the third quarter of 2014.

Operating Expenses decreased $161,489 to $2,091,528 in the three month period ended September 30, 2015 from $2,253,017 for the corresponding period in 2014. As a percentage of net sales, Operating Expenses represented 38.6% for the three months ended September 30, 2015, compared to 43.1% of net sales for the same period in 2014. This decrease is primarily attributable the fact that the 2014 numbers included severance and other move related costs.

Loss from Operations decreased by $226,750, to a loss of $175,095 in the third quarter of 2015, from a loss of $401,845 in the third quarter of 2014. Loss from operations as a percentage of net sales decreased to 3.2% in the third quarter of 2015 from 7.7% in the third quarter of 2014. The decrease in loss from operations in the third quarter was primarily due to increased sales and reduced operating expenses.

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Interest Expense increased $27,990 to $30,693 in the third quarter of 2015 from $2,703 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 increased inventory levels.

Net Loss decreased $197,063 to a loss of $205,781 in the third quarter of 2015 from a loss of $402,844 in the third quarter of 2014.

Comparison of Nine Months Ended September 30, 2015 and 2014

Net Sales increased $33,772 or 0.2%, to $15,160,159 in the nine months ended September 30, 2015 from $15,126,387 for the corresponding period in 2014. Three customers accounted for 44.9% of Net Sales during the nine months ended September 30, 2015 and two customers accounted for 43.4% of Net Sales for the nine months ended September 30, 2014. The Net Sales increase for the nine month period is due to increased sales in the industrial and international segments, offset in part by decreased sales in our private label and retail segments.

Gross Profit increased $481,660 to $5,459,635 for the nine months ended September 30, 2015 from $4,977,975 in the prior year period. Gross Profit, as a percentage of net sales, or gross margin, increased to 36.0% from 32.9% for the same period of 2014. The increase in Gross Profit percentage of 3.1% for the first nine months of the year 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 manufacture of our products as a result of better pricing terms negotiated with our vendors.

Operating Expenses decreased $277,554 to $5,868,608 for the nine months ended September 30, 2015, from $6,146,162 for the corresponding period in 2014. As a percentage of net sales, Operating Expenses represented 38.7% for the nine months ended September 30, 2015, compared to 40.6% of net sales for the same period in 2014. The decrease in actual dollars and percentage of net sales for the nine month period is primarily driven by decreased personnel and benefit costs as a result of numerous vacant positions earlier in 2015 and the non-recurring severance expense of 2014. Our number of employees was 38 at September 30, 2015 and 22 at September 30, 2014, due to the just then completed move to Texas.

Loss from Operations decreased by $759,214 to a loss of $408,973 for the nine months ended September 30, 2015, from a loss of $1,168,187 in the corresponding period of 2014. The decrease in loss from operations in the nine month period was primarily due to lower cost of goods sold and reduced operating expenses.

Interest Expense increased $56,020 to $65,635 in the first nine months of 2015 from $9,615 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 increased inventory levels.

Net Loss decreased $701,261 to a loss of $474,587 for the nine months ended September 30, 2015 from a loss of $1,175,848 in the prior year period. This decreased loss was primarily the result of higher margin sales due to customer and product mix 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.

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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 secured 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 currently provides a revolving loan of up to $8,000,000. The loan matures on November 30, 2016. On June 16, 2015, pursuant to the terms of the agreement, we increased the line limit from $6,000,000 to $8,000,000. All advances, up to the line limit of $8,000,000, 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 accrued at LIBOR plus 2.80% until such time as the Company’s trailing twelve month EBITDAS exceeded $1,000,000 at which time the rate decreased to LIBOR plus 2.50%. The interest rate at September 30, 2015 was 2.697%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. At September 30, 2015, the Company is in compliance with all covenants. At September 30, 2015, we had unused credit available under our current facility of approximately $3,927,718.

The Company utilized cash flow in its operations of $700,294 in the first nine months of 2015. The cash flow used in operations is primarily the result of decreases in accounts receivable and deposits on inventory, offset by increases in inventory and prepaid expenses and decrease in accounts payable.

The Company generated approximately $773,000, net, of cash flow in financing activities primarily from borrowings against the line of credit.

At September 30, 2015 we had available, but unused credit under this facility of approximately $4,770,697.

Off Balance Sheet Arrangements

At September 30, 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

As of September 30, 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 prior to December 31, 2016.

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 1. LEGAL PROCEEDINGS

On September 28, 2015 we filed suit in Dallas County state court in Texas against ORR Safety Corporation alleging breach of our Exclusive License and Distributorship Agreement dated January 27, 2009, as amended on January 27, 2015, with ORR Safety Corporation (the “Distributorship Agreement”), for ORR’s breach of its covenant to refrain from marketing and selling products designed and/or marketed for the petrochemical and offshore exploration markets that are substantially similar to, or competitive with, our KONG glove, and ORR’s failure to actively promote, market and sell KONG gloves, and seeking damages and a declaration of rights.

ITEM 6. EXHIBITS

Exhibit Index

Exhibit Number	Exhibit Title

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.

** Furnished herewith.

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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: November 16, 2015	By:	/s/ William Aisenberg
		William Aisenberg, EVP, Chief Financial Officer

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