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EX-31.1 - IRONCLAD PERFORMANCE WEAR CORPicpw10q05161631_1.htm
EX-31.2 - IRONCLAD PERFORMANCE WEAR CORPicpw10q05161631_2.htm
EX-32.1 - IRONCLAD PERFORMANCE WEAR CORPicpw10q05161632_1.htm
EX-32.2 - IRONCLAD PERFORMANCE WEAR CORPicpw10q051616332_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[ ]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

   
 

For the quarterly period ended March 31, 2016

 

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, 2016, the registrant had 83,098,600 shares of common stock issued and outstanding.

 

TABLE OF CONTENTS

 

      Page

PART I  

Financial Information  

   

     

 

Item 1.  

Financial Statements  

 

   

 

     

 

   

a.

Condensed Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015 

1

   

 

     

 

   

b.

Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2016 and March 31, 2015

2

   

 

     

 

   

c.

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2016 and March 31, 2015  

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  

24

   

     

 

Item 4.  

Controls and Procedures  

24

   

     

 

PART II  

Other Information  

25

     
     

Item 5.  

Exhibits  

25

 

 

 PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2016 AND DECEMBER 31, 2015

  

March 31, 2016

(unaudited)

 

December 31,

2015

           
ASSETS          
CURRENT ASSETS          
Cash and cash equivalents  $276,988   $276,981 
Accounts receivable, net of allowance for doubtful accounts of $30,000 and $30,000   8,310,435    8,857,768 
Inventory, net of reserve of $449,438 and $547,800   9,302,238    6,681,715 
Deposits on inventory   108,597    171,593 
Prepaid and other   1,017,181    610,417 
Total current assets   19,015,439    16,598,474 
           
PROPERTY AND EQUIPMENT          
Computer equipment and software    203,562    622,264 
Office equipment and furniture    286,131    308,398 
Leasehold improvements    140,717    174,298 
Less: accumulated depreciation   (228,912)   (767,047)
Total property and equipment, net   401,498    337,913 
           
Trademarks and patents, net of accumulated amortization of $71,186 and $68,094   164,985    125,895 
Deposits   25,036    21,306 
Deferred tax assets   1,832,000    1,832,000 
Total other assets   2,022,021    1,979,201 
           
Total Assets  $21,438,958   $18,915,588 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $3,419,558   $3,358,724 
Line of credit    5,926,316    3,224,780 
Total current liabilities   9,345,874    6,583,504 
           
Total Liabilities   9,345,874    6,583,504 
           
STOCKHOLDERS’ EQUITY          
Common stock, $.001 par value; 172,744,750 shares authorized; 83,098,600 and 82,937,309 shares  issued and outstanding at March 31, 2016 and December 31, 2015, respectively   83,099    82,937 
Additional paid-in capital    20,895,120    20,776,012 
Accumulated deficit    (8,885,135)   (8,526,865)
Total Stockholders’ Equity   12,093,084    12,332,084 
Total Liabilities and Stockholders’ Equity  $21,438,958   $18,915,588 

 

See Notes to Condensed Consolidated Financial Statements.

 

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

  

Three  Months  Ended

March 31,

 

Three  Months  Ended

March 31,

   2016  2015
REVENUES          
Net sales  $5,046,783   $4,567,682 
           
COST OF SALES          
Cost of sales    3,225,842    2,801,086 
           
GROSS PROFIT   1,820,941    1,766,596 
           
OPERATING EXPENSES          
General and administrative    892,148    678,412 
Sales and marketing    722,222    698,882 
Research and development    162,752    155,471 
Purchasing, warehousing and distribution   326,246    282,998 
Depreciation and amortization    40,326    34,997 
           
 Total operating expenses   2,143,694    1,850,760 
           
LOSS FROM OPERATIONS    (322,753)   (84,164)
           
OTHER INCOME (EXPENSE)          
           
Interest expense   (36,187)   (14,750)
Interest income    —      7 
 Total other expense   (36,187)   (14,743)
           
LOSS BEFORE BENEFIT FROM INCOME TAXES    (358,940)   (98,907)
           
BENEFIT FROM INCOME TAXES   (670)   —   
           
NET LOSS  $(358,270)   (98,907)
           
NET LOSS PER COMMON SHARE           
Basic  $(0.00)   (0.00)
Diluted  $(0.00)   (0.00)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING           
Basic   83,011,751    80,889,171 
Diluted   83,011,751    80,889,171 
           

 

See Notes to Condensed Consolidated Financial Statements.

 

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

  

Three Months 

Ended  March 31, 2016

 

Three Months 

Ended March 31, 2015

CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(358,270)  $(98,907)
Adjustments to reconcile net loss provided by (used in) operating activities:          
Depreciation    37,234    32,612 
Amortization    3,092    2,385 
 Inventory reserve   (98,362)   —   
Stock option expense   104,753    89,540 
Changes in operating assets and liabilities:          
Accounts receivable   547,333    1,548,086 
Inventory   (2,522,161)   (1,312,488)
Deposits on inventory    62,996    420,590 
Prepaid and other   (410,494)   (33,960)
Accounts payable and accrued expenses   60,834    (313,929)
Net cash flows provided by (used in) operating activities   (2,573,045)   333,929 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Property, plant and equipment purchased   (100,819)   (49,101)
Investment in trademarks    (42,182)   (366)
Net cash flows used in investing activities    (143,001)   (49,467)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from issuance of common stock   14,517    10,002 
Proceeds from bank line of credit    5,748,652    3,658,364 
Payments to bank line of credit    (3,047,116)   (3,923,209)
Net cash flows provided by (used in) financing activities    2,716,053    (254,843)
           
NET INCREASE IN CASH   7    29,619 
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD   276,981    340,903 
CASH AND CASH EQUIVALENTS END OF PERIOD  $276,988   $370,522 
           
SUPPLEMENTAL DISCLOSURES          
Interest paid in cash   $36,187   $14,750 

 

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 eight U.S. patents, two international patents, eight U.S. patents and 15 foreign patents pending for design and technological innovations incorporated in its performance work gloves. The Company has 49 registered U.S. trademarks, 6 in-use U.S. trademarks, 18 U.S. trademark pending registration, 23 registered international trademarks, 44 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, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2016.

 

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.   The Company maintains cash in excess of the FDIC and SIPC limits.

 

 

Accounts Receivable

 

Accounts Receivable 

March 31, 2016

  December 31, 2015
           
Accounts receivable  $8,340,435   $8,887,768 
Less - allowance for doubtful accounts   (30,000)   (30,000)
           
     Net accounts receivable  $8,310,435   $8,857,768 

 

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.

 

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our current customers consist 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 by us for credit worthiness before terms are established. Although we expect to collect all amounts due, actual collections may differ.

 

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.

 

We review the inventory level of all products quarterly. For most glove 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. Due to limited market penetration for our apparel products we have decided to provide a 50% allowance against this line of products. Products that are no longer part of the current product offering are considered obsolete. The potential for re-sale of slow-moving and obsolete inventories is based upon our assumptions about future demand and market conditions. The recorded cost of obsolete inventories is then reduced to zero and a reserve is established for slow moving products. Both the write down and reserve adjustments are recorded as charges to cost of goods sold. For the three months ended March 31, 2016 and March 31, 2015 we decreased our inventory reserve by $98,362 and $0 with the corresponding adjustments in cost of goods sold, respectively, and reported an obsolescence reserve balance of $449,438 as of March 31, 2016 and $547,800 as of March 31, 2015. 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.

   

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. The Company retired $575,368 of fully depreciated fixed assets during the quarter ended March 31, 2016.

  

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 substantially from the sale of our core line of task specific work gloves, 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, 2016  Three Months Ended March 31, 2015
 Domestic   $3,748,157   $3,458,058 
 International    1,298,626    1,109,624 
 Total   $5,046,783   $4,567,682 

 

Cost of Goods Sold

 

Our cost of goods sold includes the Free on Board cost of the product plus landed costs. 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 costs, warehousing or distribution costs. These costs are captured as incurred on a separate line in operating expenses. Our gross profit may not be comparable to other entities that may include some or all of these costs in the calculation of gross profit.

 

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 sales 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 for a period of one year from the date of purchase.

 

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 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.

 

Our current estimated future sales return rate is approximately 1.0% of the trailing twelve 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 Returns, Allowances and Adjustments   
    
Reserve Balance 12/31/15  $75,000 
Payments Recorded During the Period   (87,480)
    (12,480)
Accrual for New Liabilities During the Reporting Period   87,480 
Reserve Balance 3/31/16  $75,000 

 

Advertising and Marketing

 

Advertising and marketing costs are expensed as incurred. Advertising expenses for the three months ended March 31, 2016 and 2015 were $62,928 and $86,573, 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 $2,802,000 or 55.5% of net sales for the quarter ended March 31, 2016.   Three customers accounted for approximately $2,468,000 or 54.0% of net sales for the three months ended March 31, 2015.  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 58% of total purchases for the three months ended March 31, 2016.  Four suppliers, who are located overseas, accounted for approximately 74% of total purchases for the three months ended March 31, 2015.  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, 2016 and 2015, 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, 2016 and 2015 if diluted shares were to be included:

 

   2016  2015
Numerator: Net Loss  $(358,270)  $(98,907)
Denominator: Basic and Diluted EPS          
Common shares outstanding, beginning of period   82,937,309    80,808,629 
Weighted average common shares issued during the period   74,442    80,542 
Denominator for basic earnings per common share   83,011,751    80,889,171 
Denominator: Diluted EPS          
Common shares outstanding, beginning of period   82,937,309    80,808,629 
Weighted average common shares issued during the period   74,442    80,542 
Denominator for diluted earnings per common share   83,011,751    80,889,171 

 

 

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,
   2016  2015
Options outstanding under the Company’s stock option plans   11,846,509    12,782,237 
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, 2016 and 2015 was a benefit of $670 pertaining to a tax refund received and $0, respectively.   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. As of March 31, 2016, the Company reviewed our current profitability and forecasted future results and concluded that it is more likely than not that we will not be able to realize more of our deferred tax asset than estimated as of December 31, 2015. Accordingly, there is no adjustment to deferred taxes for the period ended March 31, 2016. We will continue to evaluate if it is more likely than not that we will realize the future benefits from current and future deferred tax assets.. These deferred tax benefits are recorded on the balance sheet as long term deferred tax assets of $1,832,000 as of March 31, 2016 and December 31, 2015.

 

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, 2016 and December 31, 2015, 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, 2016 and December 31, 2015.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 14-09”), which creates a comprehensive set of guidelines for the recognition of revenue under the principle: “Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The requirements of ASU 14-09 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and will require either retrospective application to each prior period presented or retrospective application with the cumulative effect of initially applying the standard recognized at the date of adoption. In July 2015, the FASB approved a deferral of the ASU effective date from annual and interim periods beginning after December 15, 2016 to annual and interim periods beginning after December 15, 2017. We are currently evaluating the impact this ASU will have on our financial position and results of operations.

 

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period” (“ASU 2014-12”).  The FASB issued ASU 2014-12 to clarify that a performance target in a share-based compensation award that could be achieved after an employee completes the requisite service period should be treated as a performance condition that affects the vesting of the award.  As such, the performance target should not be reflected in estimating the grant-date fair value of the award.  ASU 2014-12 is effective for the Company for fiscal year 2016. The adoption of the ASU did not have a material impact on our financial position, results of operations or cash flows.

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The new standard applies prospectively to annual periods ending after December 15, 2016, and to annual and interim periods thereafter. Early adoption is permitted. We are currently evaluating the impact this ASU will have on our financial position and results of operations.

 

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, requiring the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of the related debt liability. In August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting,” which amended the SEC paragraphs of ASC Subtopic 835-30 to include the language from the SEC Staff Announcement indicating that the SEC would not object to presenting deferred debt issuance costs related to line-of-credit agreements as assets and subsequently amortizing the deferred debt issuance costs ratably over the term of the agreement. The standards will be effective for U.S. public companies for annual reporting periods beginning after December 15, 2015. The new guidance shall be applied on a retrospective basis for all periods presented. We adopted this guidance in the first quarter of 2016. The impact was not material as we have a line-of-credit arrangement and debt issuance costs are retained as part of assets.

 

On July 22, 2015, the FASB issued ASU 2015-11, which requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures). The ASU will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method (RIM). For public business entities, the ASU is effective prospectively for annual periods beginning after December 15, 2016, and interim periods therein. Early application of the ASU is permitted. Upon transition, entities must disclose the nature of and reason for the accounting change. We are currently evaluating the impact this ASU will have on our financial position and results of operations.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. The amendments under the new guidance require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted this guidance effective January 1, 2016 on a retrospective basis. Accordingly, we have reclassified $404,000 of deferred tax assets previously classified as current as of December 31, 2015 to non-current.

 

3. Inventory

 

At March 31, 2016 and December 31, 2015 the Company had one class of inventory - finished goods.  Inventory is shown net of a provision of $449,438 as of March 31, 2016 and $547,800 as of December 31, 2015.

 

   March 31, 2016  December 31, 2015
Finished goods, net  $9,302,238   $6,681,715 

 

4. Property and Equipment

 

Property and equipment consisted of the following:

 

   March 31, 2016  December 31, 2015
           
Computer equipment and software  $203,562   $622,264 
Office furniture and equipment   286,131    308,398 
Leasehold improvements   140,717    174,298 
           
    630,410    1,104,960 
Less: Accumulated depreciation   (228,912)   (767,047)
Property and equipment, net  $401,498   $337,913 

 

 

Depreciation expense for the three months ended March 31, 2016 and 2015 was $37,234 and $32,612, respectively.

  

5. Trademarks and Patents

 

Trademarks and patents consisted of the following:

 

   March 31,  December 31,
   2016  2015
           
Trademarks and patents  $236,171   $193,989 
Less: Accumulated amortization   (71,186)   (68,094)
Trademarks and Patents, net  $164,985   $125,895 

 

Trademarks and patents consist of definite-lived trademarks and patents of $182,512 and $126,890 and indefinite-lived trademarks and patents of $53,659 and $67,099 at March 31, 2016 and December 31, 2015, 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, 2016 and 2015 was $3,092 and $2,385, respectively.

 

6. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of the following at March 31, 2016 and December 31, 2015:

 

   March 31,  2016  December 31, 2015
Accounts payable  $2,677,003   $2,468,847 
Accrued rebates and co-op   214,928    159,227 
Customer deposits   —      7,722 
Accrued returns reserve   75,000    75,000 
Accrued expenses – other   452,626    647,928 
           
Total accounts payable and accrued expenses  $3,419,557   $3,358,724 

 

7. Bank Lines of Credit

   

Bank Revolving Loan

 

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 or before the expiration date the Company intends to either renew or replace it with another line of credit. 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 March 31, 2016 was 2.938%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. On March 16, 2016, the Company modified its Revolving Loan and Security Agreement with Capital One, N.A. which allowed the Company to add certain legal expenses of up to $325,000 in the calculation of EBITDAS for the trailing twelve month periods ending March 31, June 30, September 30 and December 31, 2016 and permit including certain receivables of up to $300,000 in the definition of eligible accounts receivable in determining the Borrowing Base. At March 31, 2016, the Company is in compliance with all covenants. At March 31, 2016, we had unused credit available under our current facility of approximately $1,585,661.

 

 

As of March 31, 2016 and December 31, 2015, the total amounts due to Capital One, N.A. were $5,926,316 and $3,224,780, respectively.

 

8. Equity Transactions

 

Common Stock

  

On February 18, 2016 the Company issued 161,291 shares of common stock upon the exercise of stock options at an exercise price of $0.09.

 

There were 83,098,600 shares of common stock of the Company outstanding at March 31, 2016.

 

Warrant Activity

 

A summary of warrant activity is as follows:

 

   Number
of Shares
  Weighted Average
Exercise Price
Warrants outstanding at December 31, 2015   43,146    0.19 
Warrants exercised   —        
Warrants outstanding at March 31, 2016   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, 2016, the fair value of these options amounting to $262,800 was estimated at the date of the grant using a Black-Scholes option pricing model with the following range of assumptions:

 

   March 31, 2016
Risk free interest rate    1.705%
Dividends    —   
Volatility factor    101.0%
Expected life    6.25 years 

  

A summary of stock option activity is as follows:

 

   Number
of Shares
  Weighted
Average
Exercise Price
 

Outstanding at December 31, 2014  

    12,674,991   $0.16 
 Exercised      (1,395,347)  $0.09 
 Cancelled/Expired      (1,148,924)  $0.16 
 Outstanding at December 31, 2015      10,130,720   $0.16 
 Granted      1,200,000   $0.27 
 Exercised      (161,291)  $0.090 
 Cancelled/Expired      (56,253)  $0.220 
 Outstanding at March 31, 2016      11,113,176   $0.18 
 Exercisable at March 31, 2016      7,657,231   $0.15 

 

The following table summarizes information about stock options outstanding at March 31, 2016:

 

Range of Exercise 
Price
  Number
Outstanding
  Weighted Average
Remaining Contractual
Life (Years)
  Weighted Average
Exercise Price
  Intrinsic Value
Outstanding Shares
 $    0.09 - $0.27    11,113,176    6.45   $0.166    $    1,291, 201 

 

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 - $0.27    7,657,231    5.49   $0.150   $1,025,513 

 

The following table summarizes information about non-vested stock options at March 31, 2016:

 

   Number of Shares  Weighted Average Grant Date Fair Value
  Non-Vested at December 31, 2015     2,615,422   $0.16 
   Granted     1,200,000   $0.27 
   Vested     (303,224)  $0.116 
   Forfeited     (56,253)  $0.22 
  Non-Vested at March 31, 2016     3,455,945   $0.193 

 

From time to time, we issue awards of restricted common stock to our board members. Generally, the awards vest over a period of one year after the date of grant contingent upon the continued service of the recipients. Awards are valued based on the market value of the common stock at grant date and compensation expense is recognized over the vesting period. The Company granted 733,333 restricted common stock awards in both 2015 and 2014.

 

 

The following tables summarize information about non-vested stock awards:

 

   Number of Shares  Weighted Average Grant Date Fair Value
  Non-Vested at December 31, 2014     366,667   $0.23 
Granted     733,333   $0.28 
 Vested     (733,335)  $0.26 
 Non-Vested at December 31, 2015     366,665   $0.28 
 Granted     —     $—   
  Vested     (183,333)  $0.28 
  Non-Vested at March 31, 2016     183,332   $0.28 

 

In accordance with ASC 718, the Company recorded $104,753 and $89,540 of compensation expense for employee stock options during the three months ended March 31, 2016 and 2015. There was a total of $558,663 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan outstanding at March 31, 2016. This cost is expected to be recognized over a weighted average period of 2.5 years. The total fair value of shares vested during the three months ended March 31, 2016 was $92,936.

 

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 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 Company’s 2015 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, 2016 and 2015 as follows:  

 

   March 31,  2016  March 31,  2015
Statutory regular federal income benefit rate   34.0%   34.0%
State income taxes, net of federal benefit   2.9%   2.7%
Change in valuation allowance   (36.7%)   (36.7%)
Total   0.2%   —  %

 

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, 2016, the Company had unused federal and states net operating loss carryforwards available to offset future taxable income of approximately $4,104,000 and $5,384,000, respectively, that expire between 2016 and 2027.

 

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, 2016 was $0. 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 ended March 31, 2016 was $27,799.

 

On November 10, 2015, the Company entered into a 24 month lease for a new international sourcing office in Jakarta, Indonesia, commencing on January 1, 2016. The monthly base rent is approximately $1,200 during the first year of the lease with an increase to approximately $1,325 per month for the second year of the lease. A security deposit of three month’s rent has been made in the amount of $3,730. Rent expense attributable to this facility for the three months ended March 31, 2016 was $4,197.

 

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 $7,485 and $4,249 for the three months ended March 31, 2016 and 2015, respectively.

 

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

 

Year  Facilities  Equipment  Total
 2016   $125,886   $7,444   $133,330 
 2017  $112,919   $9,240   $122,159 
 2018   $16,175   $5,775   $21,950 
                  
     $254,980   $22,459   $277,439 

 

 

11. Legal Proceedings

 

On September 28, 2015 Ironclad Performance Wear Corporation filed a Petition in the District Court of Dallas County, Texas, 193rd Judicial District, Cause No. DC-15-11878, against Orr Safety Corporation (“Orr”), a significant customer of the Company.  The Petition alleged that Orr had materially breached an Exclusive License and Distributorship Agreement with Ironclad by, inter alia, failing to use its best efforts to actively promote, market and sell the KONG® brand of gloves manufactured by Ironclad, and selling gloves that were similar to, or competitive with, the KONG® brand.  The Petition also alleged that Orr materially breached other agreements between the parties, and provided notice that Ironclad was terminating the Exclusive License and Distributorship Agreement due to Orr’s material breaches.  The Petition sought damages, declaratory relief regarding Ironclad’s rights and obligations under the relevant agreements, and all other available relief.  On October 23, 2015, Orr filed an Answer and Counterclaim in the Dallas County action, and concurrently removed the case to the United States District Court for the Northern District of Texas, Case No. 3:15-cv-03453-D.  Orr’s Counterclaim alleged that Ironclad breached the Exclusive License and Distributorship Agreement, as well as a Sub-Distributorship Agreement between the parties by, inter alia, infringing upon Orr’s exclusive rights under the agreements, failing to pay appropriate royalties to Orr, and failing to protect the intellectual property of the KONG® brand of glove.  The Counterclaim also alleged that Ironclad engaged in selling “counterfeit” KONG® products in violation of the parties’ agreement.  Ironclad filed an Answer to the Counterclaim on November 27, 2015 denying all material allegations.  On December 7, 2015, Orr filed an Amended Answer to Ironclad’s Petition responding to each of the allegations pursuant to the pleading standards in federal court.  On December 3, 2015, the Court entered a Scheduling Order setting deadlines for discovery and dispositive motions.  No trial date has been set.  Discovery in the case is ongoing.

 

 

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, 2016 and 2015. 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 our Annual Report on Form 10-K filed with the SEC on March 23, 2016.

  

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 2015 we entered the Canadian and European markets through distributors. International sales represented approximately 30% of total sales in fiscal year 2015. 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, 2016.

 

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.

 

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 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 or before the expiration date the Company intends to either renew or replace it with another line of credit. 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 March 31, 2016 was 2.938%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. On March 16, 2016, the Company modified its Revolving Loan and Security Agreement with Capital One, N.A. which allowed the Company to add certain legal expenses of up to $325,000 in the calculation of EBITDAS for the trailing twelve month periods ending March 31, June 30, September 30 and December 31, 2016 and permit including certain receivables of up to $300,000 in the definition of eligible accounts receivable in determining the Borrowing Base. At March 31, 2016, the Company is in compliance with all covenants. At March 31, 2016, we had unused credit available under our current facility of approximately $1,585,661.

 

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, 2016  Three Months Ended March 31, 2015
 Domestic   $3,748,157   $3,458,058 
 International    1,298,626    1,109,624 
 Total   $5,046,783   $4,567,682 

 

Inventory Obsolescence Allowance

 

We review the inventory level of all products quarterly. For most glove 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. Due to limited market penetration for our apparel products we have decided to provide a 50% allowance against this line of products. Products that are no longer part of the current product offering are considered obsolete. The potential for re-sale of slow-moving and obsolete inventories is based upon our assumptions about future demand and market conditions. The recorded cost of obsolete inventories is then reduced to zero and a reserve is established for slow moving products. Both the write down and reserve adjustments are recorded as charges to cost of goods sold. For the three months ended March 31, 2016 and March 31, 2015 we adjusted our inventory reserve by $98,362 and $0 with the corresponding adjustments in cost of goods sold, respectively, and reported an obsolescence reserve balance of $449,438 as of March 31, 2016 and $547,800 as of March 31, 2015. 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 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 by us for credit worthiness before terms are established. Although we expect to collect all amounts due, actual collections may differ.

 

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 sales 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 for a period of one year from the date of purchase.

 

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 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.

 

Our current estimated future sales return rate is approximately 1.0% of the trailing twelve 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 Returns, Allowances and Adjustments   
Reserve Balance 12/31/15  $75,000 
Payments Recorded During the Period   (87,480)
    (12,480)
Accrual for New Liabilities During the Reporting Period   87,480 
Reserve Balance 3/31/16  $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.  As of March 31, 2016, the Company reviewed our current profitability and forecasted future results and concluded that it is more likely than not that we will not be able to realize more of our deferred tax asset than estimated as of December 31, 2015. Accordingly, there is no adjustment to deferred taxes for the period ended March 31, 2016. We will continue to evaluate if it is more likely than not that we will realize the future benefits from current and future deferred tax assets. These deferred tax benefits are recorded on the balance sheet as long term deferred tax assets of $1,832,000 as of March 31, 2016 and December 31, 2015.

 

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, 2016 and 2015

 

Net Sales increased $479,101, or 10.5%, to $5,046,783 in the quarter ended March 31, 2016 from $4,567,682 for the corresponding period in 2015. Three customers accounted for 55.5% of Net Sales during the quarter ended March 31, 2016 and three customers accounted for 54.0% of Net Sales during the quarter ended March 31, 2015. The increase is primarily due to increased sales in our industrial segment, offset by reduced sales in our international, private label and retail segments   The sales increase in our industrial segment was primarily due to our increased business with Grainger. 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 $54,345, or 3.0%, to $1,820,941 for the quarter ended March 31, 2016 from $1,766,596 for the corresponding period in 2015. Gross profit, as a percentage of net sales, or gross margin, decreased to 36.1% in the first quarter of 2016 from 38.7% in the same quarter of 2015.  The decrease in gross profit percentage points of 2.6% for the first quarter was primarily due to ramp up costs of initiating our new program with Grainger. This includes expediting product from the factories to Grainger and certain start-up costs in distributions and operations.

 

Operating Expenses increased by $292,934, or 15.8%, to $2,143,694 in the first quarter of 2016 from $1,850,760 in the first quarter of 2015. As a percentage of net sales, operating expenses increased to 42.5% in the first quarter of 2016 from 40.5% in the same period of 2015.  The increased spending for the first three months of 2016 was primarily driven by two factors. The majority of the increase is driven by approximately $160,000 of legal costs related to the ORR litigation. The balance of the variance is primarily due to an increase in wage and benefit costs. Part of this increase comes from additional headcount required to service the Grainger business and generate new business. The remainder of the wage and benefit increase is attributable to the year-over-year impact of post Q1 2015 new hires.

 

Loss from Operations increased by $238,589, or 283%, to a loss of $322,753 in the first quarter of 2016, from a loss of $84,164 in the first quarter of 2015. Loss from operations as a percentage of net sales increased to 6.4% in the first quarter of 2016 from 1.8% in the first quarter of 2015.  The increase in loss from operations in the three month period was primarily due to the increase in operating expenses.

 

Interest Expense increased $21,437 to $36,187 in the first quarter of 2016 from $14,750 in the same period of 2015. This increase is due to greater borrowings under our bank line of credit agreement which were utilized to fund the build in accounts receivable inventory levels.

 

 

Net Loss increased by $259,363, or 262%, to a loss of $358,270 in the first quarter of 2016 from a loss of $98,907 in the first quarter of 2015.  This increased loss was primarily the result of the increase in 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.  

  

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 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 or before the expiration date the Company intends to either renew or replace it with another line of credit. 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 March 31, 2016 was 2.938%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. On March 16, 2016, the Company modified its Revolving Loan and Security Agreement with Capital One, N.A. which allowed the Company to add certain legal expenses of up to $325,000 in the calculation of EBITDAS for the trailing twelve month periods ending March 31, June 30, September 30 and December 31, 2016 and permit including certain receivables of up to $300,000 in the definition of eligible accounts receivable in determining the Borrowing Base. At March 31, 2016, the Company is in compliance with all covenants. At March 31, 2016, we had unused credit available under our current facility of approximately $1,585,661.

 

The Company utilized cash flow from operations of $2,573,045 in the first quarter of 2016. The cash flow used in operations is primarily the result of increases in inventory and prepaid expenses, offset by decreases in accounts receivable and deposits on inventory. The increase in inventory of $2,522,161 from December 31, 2015 and $866,096 from March 31, 2015 is attributable to the build-up of inventory to service our greatly expanded program with Grainger and the introduction of our new Vibram/IVE lines. It is projected that inventory levels will reduce during the second quarter of 2016.

 

The Company used approximately $2,716,000, net, of cash flow in financing activities through borrowings on the line of credit.

 

 

Off Balance Sheet Arrangements

 

At March 31, 2016, 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, 2016, 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 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 5. 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.

 

 

 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 16, 2016

By:  

/s/ William Aisenberg
 

William Aisenberg,

EVP, Chief Financial Officer