UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q











þ
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934For
      the quarterly period ended March 31,
2009




or




 ̈
              Transition
      Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period from 
      to .




Commission
file number 0-51536







IRONCLAD
PERFORMANCE WEAR CORPORATION


(Exact
name of registrant as specified in its charter)







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





2201
Park Place, Suite 101


El
Segundo, CA 90245


(Address
of principal executive offices, zip code)




(310)
643 -7800


(Registrant’s
telephone number, including area code)







Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  þ    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  ̈  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.




Large
      accelerated filer   ̈
            Accelerated
      filer
             ̈Non-accelerated
      filer     ̈  (Do not
      check if smaller reporting company)
            Smaller
      reporting company
            þ




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes   ̈    No  þ




As of May
15, 2009, the registrant had 72,951,183 shares of common stock issued and
outstanding.





TABLE OF CONTENTS





PagePART
      I
            Financial
      Information
            1Item
      1.
            Financial
      Statementsa.
            Consolidated
      Balance Sheets as of March 31, 2009 (Unaudited) andDecember
      31, 2008
            1b.
            Consolidated
      Statements of Operations (Unaudited) for the three months ended March 31,
      2009 and March 31, 2008
            2c.
            Consolidated
      Statements of Cash Flows (Unaudited) for the three months ended March 31,
      2009 and March 31, 2008
            3d.
            Notes
      to Condensed Consolidated Financial Statements
            4 -
      17Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            18Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            35Item
      4.
            Controls
      and Procedures
            35PART
      II
            Other
      Information
            36Item
      6.
            Exhibits
            36






i


PART
I




ITEM
1.              
FINANCIAL
STATEMENTS





IRONCLAD
PERFORMANCE WEAR CORPORATION


CONSOLIDATED
BALANCE SHEETS AS OF MARCH 31, 2009 (unaudited)


AND
DECEMBER 31, 2008





March
      31,
                                                        2009
                                                      
                                                      
                                                      December
      31,
                                                        2008(unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                                      
                                                      $
                                                      615,924
                                                      
                                                      
                                                      $
                                                      215,203Accounts
      receivable net of allowance for doubtful accounts of $65,000 and
      $60,000
                                                      
                                                      
                                                      1,423,685
                                                      
                                                      
                                                      
                                                      1,705,435Inventory,
      net of reserve of $112,000 and $112,000
                                                      
                                                      
                                                      3,053,524
                                                      
                                                      
                                                      
                                                      3,132,842Deposits
      on inventory
                                                      
                                                      
                                                      604,710
                                                      
                                                      
                                                      
                                                      271,725Prepaid
      and other
                                                      
                                                      
                                                      139,428
                                                      
                                                      
                                                      
                                                      115,400Total current
      assets
                                                      
                                                      
                                                      5,837,271
                                                      
                                                      
                                                      
                                                      5,440,605PROPERTY, PLANT AND
      EQUIPMENTComputer
      equipment and software
                                                      
                                                      
                                                      202,853
                                                      
                                                      
                                                      
                                                      200,932Vehicles
                                                      
                                                      
                                                      43,680
                                                      
                                                      
                                                      
                                                      43,680Office
      equipment and furniture
                                                      
                                                      
                                                      143,755
                                                      
                                                      
                                                      
                                                      143,478Leasehold
      improvements
                                                      
                                                      
                                                      36,934
                                                      
                                                      
                                                      
                                                      36,934Less:
      accumulated depreciation
                                                      
                                                      
                                                      (274,967
                                                      )
                                                      
                                                      
                                                      (252,650
                                                      )Total property, plant and
      equipment, net
                                                      
                                                      
                                                      152,255
                                                      
                                                      
                                                      
                                                      172,374Trademarks,
      net of $15,269 and $14,073 of accumulated
      amortization
                                                      
                                                      
                                                      93,116
                                                      
                                                      
                                                      
                                                      94,312Deposits
      and other
                                                      
                                                      
                                                      11,630
                                                      
                                                      
                                                      
                                                      11,354Total
      Assets
                                                      
                                                      $
                                                      6,094,272
                                                      
                                                      
                                                      $
                                                      5,718,645LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                                                      
                                                      $
                                                      1,329,146
                                                      
                                                      
                                                      $
                                                      1,799,020Line
      of credit
                                                      
                                                      
                                                      1,362,391
                                                      
                                                      
                                                      
                                                      1,599,300Total current
      liabilities
                                                      
                                                      
                                                      2,691,537
                                                      
                                                      
                                                      
                                                      3,398,320Fair
      value of warrant liability
                                                      
                                                      
                                                      4,048
                                                      
                                                      
                                                      
                                                      2,097Total
      Liabilities
                                                      
                                                      
                                                      2,695,585
                                                      
                                                      
                                                      
                                                      3,400,417STOCKHOLDERS’
      EQUITYCommon
      stock, $.001 par value; 172,744,750 shares authorized; 72,951,183 and
      42,803,487 shares issued and outstanding at March 31, 2009 and
      December 31, 2008, respectively
                                                      
                                                      
                                                      72,951
                                                      
                                                      
                                                      
                                                      42,804Additional
      paid-in capital
                                                      
                                                      
                                                      17,494,641
                                                      
                                                      
                                                      
                                                      15,922,832Accumulated
      deficit
                                                      
                                                      
                                                      (14,168,905
                                                      )
                                                      
                                                      
                                                      (13,647,408
                                                      )Total Stockholders’
      Equity
                                                      
                                                      
                                                      3,398,687
                                                      
                                                      
                                                      
                                                      2,318,228Total Liabilities and
      Stockholders’ Equity
                                                      
                                                      $
                                                      6,094,272
                                                      
                                                      
                                                      $
                                                      5,718,645






See Notes
to Condensed Consolidated Financial Statements.


1


IRONCLAD
PERFORMANCE WEAR CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS


(unaudited)






Three Months
                                                        Ended
                                                        March 31,
      2009
                                                      
                                                      
                                                      Three Months
                                                        Ended
                                                        March 31,
      2008REVENUESNet
      sales
                                                      
                                                      $
                                                      2,517,175
                                                      
                                                      
                                                      $
                                                      1,851,103COST
      OF SALESCost
      of sales
                                                      
                                                      
                                                      1,609,059
                                                      
                                                      
                                                      
                                                      1,057,106GROSS
      PROFIT
                                                      
                                                      
                                                      908,116
                                                      
                                                      
                                                      
                                                      793,997OPERATING
      EXPENSESGeneral
      and administrative
                                                      
                                                      
                                                      548,523
                                                      
                                                      
                                                      
                                                      678,279Sales
      and marketing
                                                      
                                                      
                                                      577,260
                                                      
                                                      
                                                      
                                                      899,031Research
      and development
                                                      
                                                      
                                                      91,960
                                                      
                                                      
                                                      
                                                      104,914Purchasing,
      warehousing and distribution
                                                      
                                                      
                                                      161,636
                                                      
                                                      
                                                      
                                                      212,934Depreciation
      and amortization
                                                      
                                                      
                                                      23,513
                                                      
                                                      
                                                      
                                                      24,031Total operating
      expenses
                                                      
                                                      
                                                      1,402,892
                                                      
                                                      
                                                      
                                                      1,919,189LOSS FROM OPERATIONS
                                                      
                                                      
                                                      (494,776
                                                      )
                                                      
                                                      
                                                      (1,125,192
                                                      )OTHER
      INCOME (EXPENSE)Interest
      expense
                                                      
                                                      
                                                      (23,793
                                                      )
                                                      
                                                      
                                                      (35,017
                                                      )Interest
      income
                                                      
                                                      
                                                      222
                                                      
                                                      
                                                      
                                                      3,235Change
      in fair value of warrant liability
                                                      
                                                      
                                                      (1,951
                                                      )
                                                      
                                                      
                                                      -Other
      income (expense), net
                                                      
                                                      
                                                      269
                                                      
                                                      
                                                      
                                                      9,014Unrealized
      gain (loss) on financing activities
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (3,090
                                                      )Total other income
      (expense)
                                                      
                                                      
                                                      (25,253
                                                      )
                                                      
                                                      
                                                      (25,858
                                                      )NET LOSS BEFORE PROVISION FOR
      INCOME TAXES
                                                      
                                                      
                                                      (520,029
                                                      )
                                                      
                                                      
                                                      (1,151,050
                                                      )PROVISION
      FOR (REFUND OF) INCOME TAXES
                                                      
                                                      
                                                      1,466
                                                      
                                                      
                                                      
                                                      810NET LOSS
                                                      
                                                      $
                                                      (521,495
                                                      )
                                                      
                                                      $
                                                      (1,151,860
                                                      )BASIC AND DILUTED NET LOSS PER
      COMMON SHARE
                                                      
                                                      $
                                                      (0.01
                                                      )
                                                      
                                                      $
                                                      (0.03
                                                      )WEIGHTED AVERAGE  
      COMMON SHARES
      OUTSTANDING
                                                      
                                                      
                                                      60,892,105
                                                      
                                                      
                                                      
                                                      35,389,504






See Notes
to Condensed Consolidated Financial Statements.


2


IRONCLAD
PERFPRMANCE WEAR CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(unaudited)






Three Months
                                Ended
                                March 31,
      2009
                              
                              
                              Three Months
                                Ended
                                March
      31, 2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                              
                              $
                              (521,495
                              )
                              
                              $
                              (1,151,860
                              )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesAllowance
      for bad debts
                              
                              
                              5,000
                              
                              
                              
                              65,000Depreciation
                              
                              
                              22.317
                              
                              
                              
                              22,958Amortization
                              
                              
                              1,196
                              
                              
                              
                              1,073Change
      in fair value of warrant liability
                              
                              
                              1,951
                              
                              
                              
                              -Non-cash
      compensation:Stock
      option expense
                              
                              
                              94,571
                              
                              
                              
                              158,222Changes
      in operating assets and liabilities:Accounts
      receivable
                              
                              
                              276,750
                              
                              
                              
                              2,159,760Inventory
                              
                              
                              79,318
                              
                              
                              
                              (613,994
                              )Deposits
      on inventory
                              
                              
                              (332,985
                              )
                              
                              
                              10,068Deposits
                              
                              
                              (277
                              )
                              
                              
                              (31,756
                              )Prepaid
      and other
                              
                              
                              (24,028
                              )
                              
                              
                              21,320Accounts
      payable and accrued liabilities
                              
                              
                              (469,875
                              )
                              
                              
                              (338,627
                              )Net
      cash flows provided by (used in) operating activities
                              
                              
                              (867,557
                              )
                              
                              
                              302,164CASH
      FLOWS FROM INVESTING ACTIVITIESProperty,
      plant and equipment purchased
                              
                              
                              (2,198
                              )
                              
                              
                              (26,924
                              )Investment
      in trademarks
                              
                              
                              -
                              
                              
                              
                              (4,810
                              )Net
      cash flows used in investing activities
                              
                              
                              (2,198
                              )
                              
                              
                              (31,734
                              )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of common stock
                              
                              
                              1,507,385
                              
                              
                              
                              -Drawdown
      (payback) on bank line of credit
                              
                              
                              (236,909
                              )
                              
                              
                              (588,440
                              )Payments
      on capital leases
                              
                              
                              -
                              
                              
                              
                              (968
                              )Net
      cash flows provided by (used in) financing activities
                              
                              
                              1,270,476
                              
                              
                              
                              (589,408
                              )NET INCREASE (DECREASE) IN
      CASH
                              
                              
                              400,721
                              
                              
                              
                              (318,978
                              )CASH AND CASH EQUIVALENTS
      BEGINNING OF PERIOD
                              
                              
                              215,203
                              
                              
                              
                              585,826CASH AND CASH EQUIVALENTS END
      OF PERIOD
                              
                              $
                              615,924
                              
                              
                              $
                              266,848SUPPLEMENTAL
      DISCLOSURESInterest
      paid in cash
                              
                              $
                              23,793
                              
                              
                              $
                              35,017Income
      taxes
                              
                              
                              1,466
                              
                              
                              
                              810






See Notes
to Condensed Consolidated Financial Statements.


3




IRONCLAD
PERFORMANCE WEAR CORPORATION


Notes
to Condensed Consolidated Financial Statements




1.            
Description of
Business




The
Company was incorporated in Nevada on May 26, 2004 and engages in the business
of design and manufacture of branded performance work wear including
task-specific gloves and performance apparel designed to significantly improve
the wearer’s ability to safely, efficiently and comfortably perform general to
highly specific job functions. Its customers are primarily hardware, lumber
retailers, “Big Box” home centers, industrial distributors and sporting goods
retailers. The Company has received five patents and three patents pending for
design and technological innovations incorporated in its performance work
gloves. The Company has 53 registered U.S. trademarks, 10 registered
international trademarks, 11 in-use U.S. trademarks and 3 in-use international
trademarks. The Company introduced its line of specialty work apparel in the
fourth quarter of 2005. The apparel is engineered to keep the wearer dry and
cool under extreme work conditions.




2.            
Accounting
Policies




Basis of
Presentation




The
accompanying interim condensed consolidated financial statements are unaudited
and have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) including those for interim
financial information and with the instructions for Form 10-Q and Article 8 of
Regulation S-X issued by the Securities and Exchange Commission (“SEC”).
Accordingly, they do not include all of the information and note disclosures
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been reflected in these
interim financial statements. These financial statements should be read in
conjunction with the audited financial statements and notes for the year ended
December 31, 2008 included in the Company’s Annual Report on Form 10-K filed
with the SEC on March 27, 2009.




Basis of
Consolidation




The
condensed consolidated financial statements include the accounts of Ironclad
Performance Corporation, an inactive parent company, and its wholly owned
subsidiary Ironclad California. All significant inter-company transactions have
been eliminated in consolidation.




Cash and Cash
Equivalents




The
Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents. The Company places
its cash with high credit quality institutions. The Federal Deposit Insurance
Company (FDIC) insures cash amounts at each institution for up to $250,000. From
time to time, the Company maintains cash in excess of the FDIC
limit.




Accounts
Receivable




Trade
receivables are carried at the original invoice amount less an estimate made for
doubtful accounts. The allowance for doubtful accounts is based on management’s
regular evaluation of individual customer 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.


4


Inventory




Inventory
is stated at the lower of average cost (which approximates first in, first out)
or market and consists primarily of finished goods. The Company regularly
reviews its inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on management’s estimated forecast of product
demand and production requirements.





Property and
Equipment




Property
and equipment are recorded at cost less accumulated depreciation. Depreciation
is recorded using the straight-line method over the estimated useful lives of
the related assets, which range from three to seven years. Leasehold
improvements are depreciated over fifteen years or the lease term, whichever is
shorter. Maintenance and repairs are charged to expense as
incurred.




Trademarks




The costs
incurred to acquire trademarks, which are active and relate to products with a
definite life cycle, are amortized over the estimated useful life of fifteen
years. Trademarks, which are active and relate to corporate identification, such
as logos, are not amortized. Pending trademarks are capitalized and reviewed
monthly for active status.




Long-Lived Asset
Impairment




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





Operating Segment
Reporting




As
previously discussed, the Company has two product lines, “gloves” and “apparel,”
both of which have similar characteristics.  They each provide
functional protection and comfort to workers in the form of workwear for various
parts of the body; their production processes are similar; they are both sold to
the same type of class of customers, typically on the same purchase order; and
they are warehoused and distributed from the same warehouse
facility.  In addition, the “apparel” segment currently comprises less
than 10% of the Company’s revenues.  The Company believes that the
aggregation criteria of SFAS 131, paragraph 17 applies and will accordingly
aggregate these two segments.




Revenue
Recognition




A
customer is obligated to pay for products sold to it within a specified number
of days from the date that title to the products is transferred to the customer.
The Company’s standard terms are typically net 30 days from the transfer of
title to the products to the customer. The Company typically collects payment
from a customer within 30 to 45 days from the transfer of title to the products
to a customer. Transfer of title occurs and risk of ownership generally passes
to a customer at the time of shipment or delivery, depending on the terms of the
agreement with a particular customer. The sale price of the Company’s products
is substantially fixed or determinable at the date of sale based on purchase
orders generated by a customer and accepted by the Company. A customer’s
obligation to pay the Company for products sold to it is not contingent upon the
resale of those products. The Company recognizes revenues when products are
delivered to customers.


5


Cost of Goods
Sold





Cost of
goods sold includes all of the costs associated with producing the product by
independent, third party factories (FOB costs), plus the costs of transporting,
inspecting and delivering the product to our distribution warehouse in
California (landed costs.) Landed costs consist primarily of ocean/air freight,
transport insurance, import duties, administrative charges and local trucking
charges from the port to our warehouse. Cost of goods sold for the three months
ended March 31, 2009 and 2008 were $1,609,059 and $1,057,106,
respectively.





Purchasing,
warehousing and distribution costs are reported in operating expenses on the
line item entitled “Purchasing, warehousing and distribution expenses” and, for
the three months ending March 31, 2009 and 2008 were $161,635 and $212,936,
respectively. These costs were comprised of salaries and benefits of
approximately $52,000 and $64,000; office expenses of approximately $2,000 and
$14,000; travel and lodging of approximately $300 and $900; and warehouse
operations of approximately $107,000and $134,000, respectively.





Product Returns, Allowances
and Adjustments





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





Warranty
Returns - the Company has a warranty policy that covers defects in workmanship.
It allows customers to return damaged or defective products to us following a
customary return merchandise authorization process. Warranty returns for the
three months ending March 31, 2009 and 2008 were approximately $26,000 or 0.9%
and $38,000 or 1.7%, 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 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. Saleable product returns for the three months ending March 31, 2009 and
2008 were approximately $27,000 or 1.0% and $48,000 or 2.2%,
respectively.





Accounting
Adjustments - these adjustments include pricing and shipping corrections and
periodic adjustments to the product returns reserve. Pricing and shipping
corrections for the three months ending March 31, 2009 and 2008 were
approximately $22,000 or 0.8% and $9,000 or 0.4%, respectively. Adjustments to
the product returns reserve for the three months ending March 31, 2009 and 2008
were approximately $4,000 or 0.1% and $154,000 or 7.0%,
respectively.





For
warranty returns the Company utilizes actual historical return rates to
determine the allowance for returns in each period. For saleable product returns
the Company also utilizes actual historical return rates, adjusted for large,
non-recurring occurrences. The Company does not accrue for pricing and shipping
corrections as they are unpredictable and generally de minimis. Gross sales are
reduced by estimated returns. We record a corresponding accrual for the
estimated liability associated with the estimated returns which is based on the
historical gross sales of the products corresponding to the estimated returns.
This accrual is offset each period by actual product returns.





6





Reserve
      for Product Returns, Allowances and AdjustmentsReserve
      Balance 12/31/08
                            
                            
                            137,000Payments
      Recorded During the Period
                            
                            
                            (52,891
                            )84,109Adjustment
      to Reserve for Pre-existing Liabilities
                            
                            
                            4,000Accrual
      for New Liabilities During the Reporting
Period
                            
                            
                            52,891Reserve
      Balance 3/31/09
                            
                            $
                            141,000




Advertising and
Marketing




Advertising
and marketing costs are expensed as incurred. Advertising expenses for the three
months ended March 31, 2009 and 2008 were $105,146 and $171,432,
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 $1,318,000 or 52% of net sales for the
quarter ended March 31, 2009 and one customer accounted for approximately
$406,000 or 22% for the three months ended March 31, 2008.




Supplier
Concentrations




One
supplier, who is located overseas, accounted for approximately 73% of total
purchases during the quarter ended March 31, 2009 and 44% for the three months
ended March 31, 2008.




Loss Per
Share




The
Company utilizes SFAS No. 128, “Earnings per Share.” Basic loss per share is
computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Common equivalent shares are excluded from the
computation if their effect is anti-dilutive.





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




QuarterEnded
      March 31,2009
                            
                            2008Options
      outstanding under the Company’s stock option plans
                            
                            
                            5,369,933
                            
                            5,459,726Common
      Stock Warrants
                            
                            
                            10,175,994
                            
                            10,454,522




7


Income
Taxes





The
Company adopted the provisions of FIN 48 effective January 1, 2007. The
implementation of FIN 48 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 quarters ended
March 31, 2009 and 2008 were $1,466 and $810, respectively, for the current
state provisions. There was no state deferred and federal tax provision. Due to
its current net loss position, the Company has provided a valuation allowance in
full on its net deferred tax assets in accordance with SFAS 109 and in light of
the uncertainty regarding ultimate realization of the net deferred tax
assets.




Use of
Estimates




The
preparation of financial statements requires management to make a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates. Significant estimates and assumptions made by
management are used for, but not limited to, the allowance for doubtful
accounts, inventory obsolescence, allowance for returns and the estimated useful
lives of long-lived assets.




Valuation of Derivative
Instruments




SFAS No.
133 “Accounting for Derivative
Instruments and Hedging Activities” requires that embedded derivative
instruments be bifurcated and assessed, along with free-standing derivative
instruments such as warrants, on their issuance date in accordance with EITF
00-19 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” to determine whether they should
be considered a derivative liability and measured at their fair value for
accounting purposes. In determining the appropriate fair value, the Company uses
the Black-Scholes-Merton Option Pricing Formula (the “Black-Scholes
Model”).  At each period end, or when circumstances indicate that the
Company reevaluate the accounting for the derivative liability, derivative
liabilities are adjusted to reflect changes in fair value, with any increase or
decrease in the fair value being recorded in results of operations as
Adjustments to Fair Value of Derivatives.




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, 2009 and December 31, 2008,
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.


8


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
SFAS No. 157, “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.




SFAS 157
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.




The table
below sets forth our financial assets and liabilities that were accounted for at
fair value as of March 31, 2009 and December 31, 2008. The table does not
include cash on hand or assets and liabilities that are measured at historical
cost or any basis other than fair value.




March
      31, 2009
                      
                      
                      December
      31, 2008Level
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3
                      
                      
                      Level
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3Item
      measured at fair value on a recurring basis:Warrant
      liability
                      
                      $
                      -
                      
                      
                      $
                      4,048
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      2,097
                      
                      
                      $
                      -





The
Company’s warrant liability arises from warrants issued to a third party in
exchange for services.  The fair value of these warrants is indirectly
measurable using a Black-Scholes pricing model and therefore qualifies as Level
2.


9


RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS




In
February, 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial
Assets and Liabilities - Including an Amendment of FASB Statement No.
115” (“SFAS 159”).  SFAS 159 permits entities to choose to
measure certain financial assets and liabilities at fair value. Unrealized gains
and losses, arising subsequent to adoption, are reported in earnings. SFAS 159
is effective for fiscal years beginning after November 15, 2007.  The
Company has adopted SFAS 159 and determined that it has no effect on its
condensed consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
160”).  SFAS 160 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  As such, the Company is required to adopt these provisions at
the beginning of the fiscal year ended December 31, 2009.  The Company
is currently evaluating the impact of SFAS 160 on its condensed consolidated
financial statements but does not expect it to have a material
effect.





In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB
110”).  SAB 110 permits companies to continue to use the simplified
method, under certain circumstances, in estimating the expected term of “plain
vanilla” options beyond December 31, 2007.  SAB 110 updates guidance
provided in SAB 107 that previously stated that the Staff would not expect a
company to use the simplified method for share option grants after December 31,
2007.  The Company will continue to use the simplified method until it
has sufficient historical exercise data to provide a reasonable basis upon which
to estimate the expected term of its options.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133” (“SFAS 161”).  SFAS 161 requires enhanced disclosures
about an entity’s derivative and hedging activities.  SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 with early application
encouraged.  The Company has adopted SFAS 161 and determined that it
has no effect on its condensed consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”).  SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States.  SFAS 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles.  The Company is currently evaluating the impact
of SFAS 162 on its condensed consolidated financial statements but does not
expect it to have a material effect.





In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60” (“SFAS
163”).  SFAS 163 interprets Statement 60 and amends existing
accounting pronouncements to clarify their application to the financial
guarantee insurance contracts included within the scope of that
Statement.  SFAS 163 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and all interim periods within
those fiscal years.  As such, the Company is required to adopt these
provisions at the beginning of the fiscal year ended December 31,
2009.  The Company is currently evaluating the impact of SFAS 163 on
its condensed consolidated financial statements but does not expect it to have a
material effect.


10


3.            
Inventory




At March
31, 2009 and 2008 the Company had one class of inventory - finished
goods.  Inventory is shown net of a provision of $112,000 at March 31,
2009 and December 31, 2008.




March
      31,
                      2009
                    
                    December 31,
                      2008Finished
      goods
                    $
                    3,053,524
                    
                    $
                    3,132,842






4.            
Property and
equipment




Property
and equipment consisted of the following:


March
      31,
                                                          2009
                                                        
                                                        December 31,
                                                          2008Computer
      hardware and software
                                                        $
                                                        202,853
                                                        
                                                        $
                                                        200,932Furniture
      and equipment
                                                        
                                                        143,755
                                                        
                                                        
                                                        143,478Vehicle
                                                        
                                                        43,680
                                                        
                                                        
                                                        43,680Leasehold
      improvements
                                                        
                                                        36,934
                                                        
                                                        
                                                        36,934427,222
                                                        
                                                        
                                                        425,024Less
      accumulated depreciation
                                                        
                                                        (274,967
                                                        )
                                                        
                                                        (252,650
                                                        )Property
      and equipment, net
                                                        $
                                                        152,255
                                                        
                                                        $
                                                        172,374




Depreciation
expense for the three months ended March 31, 2009 and 2008 was $22,317 and
$22,958, respectively.






5.            
Trademarks and
Patents




Trademarks
and patents consisted of the following:




March
      31,
                                    
                                    December
      31,2009
                                    
                                    2008Trademarks
                                    
                                    $
                                    88,241
                                    
                                    
                                    $
                                    88,241Patents
                                    
                                    
                                    20,144
                                    
                                    
                                    
                                    20,144Less:
      Accumulated amortization
                                    
                                    
                                    (15,269
                                    )
                                    
                                    
                                    (14,073
                                    )Trademarks,
      net
                                    
                                    $
                                    93,116
                                    
                                    
                                    $
                                    94,312




Trademarks
and patents consist of definite-lived trademarks and patents of $68,982 and
indefinite-lived trademarks and patents of $39,403 at March 31, 2009 and
December 31, 2008. All trademark and patent costs have been generated by the
Company, and consist of initial legal and filing fees.




Amortization
expense was $1,196 and $1,073 for the three months ended March 31, 2009 and
2008, respectively.


11


6.            
Accounts payable and accrued
expenses




Accounts
payable and accrued expenses consisted of the following at September 30,
2008:




March
      31,
                                2009
                              
                              December
      31,
                                2008Accounts
      payable
                              $
                              655,156
                              
                              $
                              896,600Accrued
      inventory
                              
                              57,356
                              
                              
                              76,224Accrued
      rebates and co-op
                              
                              207,125
                              
                              
                              228,376Accrued
      returns reserve
                              
                              141,000
                              
                              
                              137,000Accrued
      expenses - other
                              
                              268,509
                              
                              
                              460,820Total
      accounts payable and accrued expenses
                              $
                              1,329,146
                              
                              $
                              1,799,020




7.           
Bank Lines of
Credit





Factoring
Agreement




On
September 15, 2006 the Company entered into a factoring agreement with Wells
Fargo Century, Inc., dba Wells Fargo Trade Capital Services, Inc. (“WFTC”),
whereby it assigned certain of its accounts receivables with full recourse. On
November 21, 2006, the Company entered into an amendment to this factoring
agreement. This facility allows the Company to borrow the lesser of (a)
$2,500,000 or (b) the sum of (i) seventy-five percent (75%) of the net amount of
eligible accounts receivable and (ii) 40% of the value of eligible inventory,
which amount shall not exceed the lesser of $750,000 and the net amount of
eligible accounts receivable. All of the Company’s assets secure amounts
borrowed under the terms of this agreement. Interest on outstanding balances
accrues at the prime rate announced from time to time by Wells Fargo Bank N.A.
(or such other bank as WFTC shall select in its discretion) as its “prime” or
base rate for commercial loans and the agreement has an initial term of
twenty-four (24) months.  On November 30, 2008, the Company entered
into an amendment to this factoring agreement under the same terms except for an
increase in the lending rate to Prime plus 2%.  As of March 31, 2009
and December 31, 2008, total amount due to WFTC was $ 1,362,391 and $1,599,300,
respectively.




On July
25, 2008 the Company entered into a Master Agreement with EPK Financial
Corporation (“EPK”) whereby the Company would finance purchase orders for three
customer’s special promotions.  In conjunction with this agreement an
intercreditor agreement was executed between the Company, WFTC and EPK whereby
WFTC would waive its security interest in the inventory purchased under the EPK
financed purchase orders and, when the Company presented the sales invoices from
these three customers for this promotional inventory, WFTC would accept these
sales as collateral and remit the eligible funds first to EPK for approved
principal, interest and fees, and then to the Company.  As of March
31, 2009 and December 31, 2008, all of these EPK financed purchase orders
totaling approximately $987,000 have been paid and cleared.




8.            Equity
transactions




Common
Stock




In April
2008, the Company completed a private placement transaction with trusts and
other high net worth individuals (the “April Private
Placement”).  Pursuant to its subscription agreements with these
investors, the Company sold 7,075,000 shares of common stock, at $0.20 per
share. In accordance with the terms of the subscription agreements the Company
was required to file a registration statement for resale of the common stock
sold within forty-five (45) days of the closing date of the offering, use
commercially reasonable efforts to cause such registration statement to become
effective within one hundred fifty (150) days after the closing date and
maintain such registration for twenty-four (24) months after the closing
date.  In April 2009, the holders of shares bought in the April
Private Placement waived their right to keep the registration statement
effective as the shares are available for resale under Rule 144. After
commissions and expenses, the Company received net proceeds of approximately
$1.38 million in the private placement.


12


In
December 2008, the Company issued 338,983 shares of common stock to an
investment banking firm in exchange for services.  The services were
valued at $70,000 and were based on a current market valuation of $0.2065 per
common share.




In
February 2009, the Company completed a private placement transaction with trusts
and other high net worth individuals.  Pursuant to its subscription
agreements with these investors, the Company sold 30,147,698 shares of common
stock, at $0.05 per share.  The Company received net proceeds of
approximately $1.5 million in the private placement.




There
were 72,951,183 shares of common stock of the Company outstanding at March 31,
2009.





Warrant
Activity




A summary
of warrant activity is as follows:




Number of
                              Shares
                            
                            Weighted Average
                              Exercise PriceWarrants
      outstanding at December 31, 2008
                            10,115,994
                            
                            $
                            0.93Warrants
      issued
                            60,000
                            
                            $
                            0.05Warrants
      outstanding at March 31, 2009
                            10,175,994
                            
                            $
                            0.93




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”). 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 the U.S. Treasury Bill rate with a maturity based on the expected
life of the options and on the closest day to an individual stock option grant.
Dividend rates are based on the Company’s dividend history. The stock volatility
factor is based on historical market prices of the Company’s common stock. The
expected life of an option grant is based on management’s estimate. The fair
value of each option grant is recognized as compensation expense over the
vesting period of the option on a straight line basis.




There
were no stock options issued during the quarter ended March 31,
2009.


13


A summary
of stock option activity is as follows:




Number of
                            Shares
                          
                          Weighted
                            Average
                            Exercise PriceOutstanding
      at December 31, 2008
                          5,747,069
                          
                          $
                          0.55Granted
                          -
                          
                          
                          -Exercised
                          -
                          
                          
                          -Cancelled/Expired
                          (77,136)
                          
                          $
                          0.44Outstanding
      at March 31, 2009
                          5,669,933
                          
                          $
                          0.56Exercisable
      at March 31, 2009
                          4,691,613
                          
                          $
                          0.55




The
following tables summarize information about stock options outstanding at March
31, 2009:




Range of
                                                  ExercisePrice
                                                
                                                
                                                Number
                                                  Outstanding
                                                
                                                
                                                Weighted
      Average
                                                  Remaining Contractual
                                                  Life
      (Years)
                                                
                                                
                                                Weighted
      Average
                                                  Exercise
      Price
                                                
                                                
                                                Intrinsic
      Value
                                                  Outstanding
      Shares$0.06
      - $0.35
                                                
                                                
                                                2,811,578
                                                
                                                
                                                5.63
                                                
                                                
                                                $
      0.31
                                                
                                                
                                                $
      3,000$0.38
      - $1.05
                                                
                                                
                                                2,858,355
                                                
                                                
                                                6.97
                                                
                                                
                                                $
      0.73
                                                
                                                
                                                $   
       -0-




The
following tables summarize information about stock options exercisable at
September 30, 2008:


Range of
                                                      ExercisePrice
                                                    
                                                    
                                                    Number
                                                      Exercisable
                                                    
                                                    
                                                    Weighted
      Average
                                                      Remaining Contractual
                                                      Life
      (Years)
                                                    
                                                    
                                                    Weighted
      Average
                                                      Exercise
      Price
                                                    
                                                    
                                                    Intrinsic
      Value
                                                      Exercisable
      Shares$0.06
      - $0.35
                                                    
                                                    
                                                    2,811,578
                                                    
                                                    
                                                    5.35
                                                    
                                                    
                                                    $
      0.33
                                                    
                                                    
                                                    $
      1,167$0.38
      - $1.05
                                                    
                                                    
                                                    2,063,323
                                                    
                                                    
                                                    7.80
                                                    
                                                    
                                                    $
      0.74
                                                    
                                                    
                                                    $     -0-





The
Company recorded $92,507 and $153,381 of compensation expense for employee stock
options during the three months ended March 31, 2009 and 2008, respectively.
These compensation expense charges were recorded in the following operating
expense categories for 2009 and 2008 respectively, general and administrative -
$53,671 and $91,736; sales and marketing - $22,713 and $44,149; research and
development - $8,891 and $10,168; and purchasing, warehousing and distribution -
$7,231 and $7,328. There was a total of $859,442 of unrecognized compensation
costs related to non-vested share-based compensation arrangements under the Plan
outstanding at March 31, 2009. This cost is expected to be recognized over a
weighted average period of 1.6 years. The total fair value of shares vested
during the three months ended March 31, 2009 was $94,025.





9.            
Income
Taxes





The
Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109” (FIN 48) as of
January 1, 2007. FIN 48 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, FIN 48 provides guidance
on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. No adjustments were required upon adoption
of FIN 48. The Company has provided a full valuation allowance against its
deferred tax assets.





The Company is currently open to audit
under the statute of limitations by the Internal Revenue Service for the fiscal
years 2005 through 2008. The Company’s state tax returns are open to audit under
the statute of limitations for the fiscal years 2004 through
2008.


14


The
provision for income taxes differs from the amount that would result from
applying the federal statutory rate for the quarter ended March 31, 2009 as
follows:




March 31,
                          2009Statutory
      regular federal income benefit rate
                        
                        
                        (34.0
                        )%State
      income taxes, net of federal benefit
                        
                        
                        (5.3
                        )Change
      in valuation allowance
                        
                        
                        39.3Total
                        
                        
                        --
                        %




In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize all of the benefits
of these deductible, differences, however the Company chooses to provide a 100%
valuation allowance against its deferred tax asset.




Significant
components of the Company’s deferred tax assets and liabilities for federal
incomes taxes at March 31, 2009 consisted of the following:




2009Deferred
      tax assetsNet
      operating loss carryforward
                        
                        $
                        4,524,225Stock
      option expense
                        
                        
                        813,892Allowance
      for doubtful accounts
                        
                        
                        27,846Allowance
      for product returns
                        
                        
                        60,404Accrued
      compensation
                        
                        
                        70,964Inventory reserve
                        
                        
                        18,421Other
                        
                        
                        3,678Valuation
      allowance
                        
                        
                        (5,136,603
                        )Total
      deferred tax assets
                        
                        
                        382,827Total
      deferred tax liabilities
                        
                        
                        (382,827
                        )Net deferred tax
      assets/liabilities
                        
                        $
                        -




As of
March 31, 2009, the Company had unused federal and state contribution carryovers
of $6,680 that expire in 2009 through 2011.





As of
March 31, 2009, the Company had unused federal and states net operating loss
carryforwards available to offset future taxable income of approximately
$10,598,000 and $11,152,000, respectively, that expire between 2009 and
2027.


15


10.          Commitments and
Contingencies





The
Company entered into a new 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 facility is located in El Segundo, California. Rent expense for
this facility for the quarter ended March 31, 2009 was $44,094.




The
Company has various non-cancelable operating leases for office equipment
expiring through December 31, 2012.  Equipment lease expense charged
to operations under these leases for the quarter ended March 31, 2009 was
$1,493.




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




Year
                      
                      Facility
                      
                      Equipment
                      
                      Total2009
                      
                      
                      174,720
                      
                      
                      6,949
                      
                      
                      181,6692010
                      
                      
                      175,146
                      
                      
                      5,959
                      
                      
                      181,1052011
                      
                      
                      82,614
                      
                      
                      5,959
                      
                      
                      88,5732012
                      
                      
                      -
                      
                      
                      5,959
                      
                      
                      5,9592013
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Thereafter
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -$
                      432,480
                      
                      $
                      24,826
                      
                      $
                      457,306




Ironclad
California executed a Separation Agreement with Eduard Jaeger effective in April
2004. Pursuant to the terms of the Separation Agreement, if Ironclad terminates
Mr. Jaeger’s employment with Ironclad California at any time other than for
Cause, then Ironclad California must pay Mr. Jaeger (a) all accrued and unpaid
salary and other compensation payable by the Company for services rendered
through the termination date, payable in a lump sum payment on the termination
date; and (b) a cash amount equal to Two Hundred Thousand Dollars ($200,000),
payable in installments throughout the one (1) year period following the
termination date in the same manner as Ironclad California pays salaries to its
other executive officers. The Separation Agreement requires Mr. Jaeger to sign a
general release and non-competition agreement in order to receive the lump sum
payment. For the purposes of the Separation Agreement, termination for “Cause”
means termination by reason of: (i) any act or omission knowingly undertaken or
omitted by Executive with the intent of causing damage to Ironclad California,
its properties, assets or business or its stockholders, officers, directors or
employees; (ii) any improper act of Mr. Jaeger involving a material personal
profit to him, including, without limitation, any fraud, misappropriation or
embezzlement, involving properties, assets or funds of Ironclad or any of its
subsidiaries; (iii) any consistent failure by Mr. Jaeger to perform his normal
duties as directed by the Chairman of the Board, in the sole discretion of the
Board; (iv) any conviction of, or pleading nolo contendere to, (A) any crime or
offense involving monies or other property of Ironclad; (B) any felony offense;
or (C) any crime of moral turpitude; or (v) the chronic or habitual use or
consumption of drugs or alcoholic beverages.





11.          Subsequent
Events


In May
2009, our Board of Directors approved an amendment to Ironclad Performance Wear
Corporation’s 2006 Stock Incentive Plan, or 2006 Plan, to increase from
4,250,000 to 11,000,000 the number of shares of our common stock available for
issuance pursuant to equity awards granted under the 2006 Plan.  As a
result of recent equity capital raises, the 2006 Plan’s percentage of total
outstanding shares has been significantly reduced.  Accordingly, to
ensure that we may continue to attract key employees and directors who are
expected to contribute to our success, our Board of Directors approved an
amendment to the 2006 Plan to increase the number of shares available for
issuance pursuant to awards granted thereunder.


16


In May
2009, our Board of Directors adopted an option re-pricing program (the
“Program”). Pursuant to the terms of the Program all issued and outstanding
options under the Company’s 2000 Stock Incentive Plan and 2006 Stock Incentive
Plan would be re-priced at $0.09 per share, which represents an amount equal to
$0.02 above the average closing price of the Company’s common stock over the
prior 30-day period.  Under the Program, an aggregate of 5,401,141
options with prices ranging from $0.06 to $1.05 will be re-priced.  In
connection with its decision to adopt the Program, the Company engaged an
independent valuation firm to determine the expense to be incurred under
Statement of Financial Accounting Standards No. 123 (“FAS 123(R)”) over the
remaining life of the options, utilizing the Black-Sholes pricing
model.  The Company, in consultation with valuation firm determined
that total expense to be incurred by the Company under FAS 123(R) will be an
aggregate of $2,022 beginning in 2009 and ending in 2011.




12.           Legal
Proceedings




On
February 13, 2009, Ansell Protective Products, Inc. filed a suit against the
Company in the United States District Court in the District of New Jersey,
alleging infringement of a trademark last used by the Company over three years
ago.  Since the Company no longer uses the subject trademark, the
Company is engaged in settlement discussions with Ansell Protective Products,
Inc. to quickly resolve this matter.




13.           Related
Party Transactions




Mr.
Alderton, an Ironclad Board member since August 2002, is a partner of the law
firm, Stubbs, Alderton and Markiles, LLP (“SAM”) which is Ironclad’s attorney of
record. SAM rendered services to Ironclad California as its primary legal firm
since 2002, and became our primary legal counsel upon closing of the merger with
Ironclad California on May 9, 2006.




Prior to
Dr. Frank’s appointment to the our Board of Directors, Dr. and Mrs. Frank
purchased 2,000,000 shares of the Company’s common stock on December 8, 2008, at
$0.05 per share for an aggregate purchase price of $100,000. Further, Dr. Frank
and Mrs. Frank purchased an additional 2,000,000 shares of the Company common
stock on January 30, 2009, at $0.05 per share for an aggregate purchase price of
$100,000. Dr. Frank is the father-in- law of Mr. Eduard Jaeger, the Company’s
Founder and Chief Marketing Officer of the Company.





14.           Gain/Loss
Contingency





Earlier
this year the Company became aware that competitors have been importing gloves
similar to many of its products under a federal legislation classifying them at
a lower duty rate.  This lower duty rate of 2.8% is significantly less
than the 10.4% rate the Company had been paying.  The Company filed
retroactive, formal protests with the U.S. Customs Department for refund of paid
duties for previous entries totaling approximately $165,000.  In late
January, 2008, with the concurrence of the local U.S. Customs Department office
at the Port of Los Angeles, the Company began receiving new entries under the
lower duty rate.  In June, 2008 the Company started receiving
approvals for specific prior entries, along with refund checks totaling
approximately $24,000.




In July,
2008, the Company received a written denial ruling on its formal protest from
the U.S. Customs Department in Washington, DC.  The Company is
continuing to contest this denial ruling, but has nevertheless started receiving
its products under the old duty rate of 10.4% going forward.




During
the period from January to July, 2008, the Company paid duties, calculated at
the lower duty rate, of approximately $36,000.  Had those entries been
calculated at the higher duty rate the Company would have incurred additional
duties of approximately $134,000.  The Company has paid the
approximately $134,000 of the additional duties due for the entries received at
the lower rate in the first half of the year.




In
summary, the outcome of the Company’s challenge to the classification of its
products for the purpose of determining the appropriate duty rate is still in
question at this time.  We have received successful rulings lowering
duties on specific styles of gloves, and we have modified the wrist closure on
some of our gloves to conform with the current classification, where
feasible.  The Company continues to protest all entries still in the
Customs Department and remains reasonably confident that its products do qualify
for the reduced duty rate classification, but the ultimate outcome may be
determined by a technical interpretation of the law.




Should
the Company prevail in its protest, the Company could receive refunds for
previously approved and then denied protests, plus any additional excess duties
paid for entries subject to our continuing protests.  That amount
changes with each entry and is indeterminable until this situation is
resolved.


17


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





This
discussion summarizes the significant factors affecting the operating results,
financial condition and liquidity and cash flows of the Company for the three
months ended March 31, 2009 and 2008. The following discussion of our results of
operations and financial condition should be read together with the condensed
consolidated financial statements and the notes to those statements included
elsewhere in this report. Except for historical information, the matters
discussed in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations are forward looking statements that involve risks and
uncertainties and are based upon judgments concerning various factors that are
beyond our control. Our actual results could differ materially from the results
anticipated in any forward-looking statements as a result of a variety of
factors, including those discussed in “Risk Factors.”





Overview




We are a
leading designer and manufacturer of branded performance work wear. Founded in
1998, we have grown and leveraged our proprietary technologies to produce
task-specific gloves and performance apparel that are designed to significantly
improve the wearer’s ability to safely, efficiently and comfortably perform
general to highly specific job functions. We have built and continue to augment
our reputation among professionals in the construction and industrial service
markets, and do-it-yourself and sporting goods consumers with products
specifically designed for individual tasks or task types. We believe that our
dedication to quality and durability and focus on our client needs has created a
high level of brand loyalty and has solidified substantial brand
equity.





We plan
to increase our domestic revenues by leveraging our relationships with existing
retailers and industrial distributors, including “Big Box” and sporting goods
retailers, increasing our product offerings in new and existing locations, and
introducing new products, developed and targeted for specific customers and/or
industries.




We
believe that our products have international appeal. In 2005, we began selling
products in Australia and Japan through independent distributors, which
accounted for approximately 4% of total sales. In 2006, we entered the Canadian
market through a distributor, and international sales represented approximately
7% of total sales. In 2007 we entered the European market through distributors
and international sales represented approximately 11% of total sales. We plan to
continue to increase sales internationally by expanding our distribution in
Europe and into other international markets during the fiscal year ending
December 31, 2009.




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.


18


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 September 15, 2006 we entered into a factoring agreement
whereby we assigned certain of our accounts receivables with full recourse. This
facility allows us to borrow 75% against eligible accounts receivable and 40%
against eligible inventory, up to $750,000, with an aggregate limit of up to
$2,500,000. On November 30, 2008, the Company entered into an amendment to this
factoring agreement under the same terms except for an increase in the lending
rate to Prime plus 2%.  This facility had an outstanding balance of
$1,362,391 at March 31, 2009.  In the third quarter of 2008 we also
entered into a Master Agreement with EPK Financial Corporation (“EPK”) whereby
we financed purchase orders for three customer’s special
promotions.  As of March 31, 2009, all of these EPK financed purchase
orders totaling approximately $987,000 have been paid and cleared.





Critical Accounting Policies and
Estimates




Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations section discusses our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. To prepare these financial statements, we must make estimates and
assumptions that affect the reported amounts of assets and liabilities. These
estimates also affect our reported revenues and expenses. On an ongoing basis,
management evaluates its estimates and judgment, including those related to
revenue recognition, accrued expenses, financing operations and contingencies
and litigation. Management bases its estimates and judgment on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The following represents a summary of our
critical accounting policies, defined as those policies that we believe are the
most important to the portrayal of our financial condition and results of
operations and that require management’s most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effects of
matters that are inherently uncertain.





Revenue Recognition




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




Revenue Disclosures





The
Company’s revenues are derived from the sale of our core line of task specific
work gloves plus our new line of workwear apparel products, available to all of
our customers, both domestically and internationally.  Below is a
table outlining this breakdown for the comparative periods:


Three
      Months Ended March 31, 2009
                                                            
                                                            
                                                            Three
      Months Ended March 31, 2008Net
      Sales
                                                            
                                                            Gloves
                                                            
                                                            
                                                            Apparel
                                                            
                                                            
                                                            Total
                                                            
                                                            
                                                            Gloves
                                                            
                                                            
                                                            Apparel
                                                            
                                                            
                                                            TotalDomestic
                                                            
                                                            $
                                                            1,973,128
                                                            
                                                            
                                                            $
                                                            114,073
                                                            
                                                            
                                                            $
                                                            2,087,201
                                                            
                                                            
                                                            $
                                                            1,611,089
                                                            
                                                            
                                                            $
                                                            167,577
                                                            
                                                            
                                                            $
                                                            1,778,666International
                                                            
                                                            
                                                            427,819
                                                            
                                                            
                                                            
                                                            2,155
                                                            
                                                            
                                                            
                                                            429,974
                                                            
                                                            
                                                            
                                                            53,852
                                                            
                                                            
                                                            
                                                            18,585
                                                            
                                                            
                                                            
                                                            72,437Total
                                                            
                                                            $
                                                            2,400,947
                                                            
                                                            
                                                            $
                                                            116,228
                                                            
                                                            
                                                            $
                                                            2,517,175
                                                            
                                                            
                                                            $
                                                            1,664,941
                                                            
                                                            
                                                            $
                                                            186,162
                                                            
                                                            
                                                            $
                                                            1,851,103




19


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. Since apparel products are a
relatively new line, we are using a two year horizon to allow for market
penetration.  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, 2009, our inventory reserve remained unchanged with
a current balance of $112,000. For the three months ended March 31, 2008, our
inventory reserve remained unchanged with a current balance of $84,000. All
adjustments for obsolete inventory establish a new cost basis for that inventory
as we believe such reductions are permanent declines in the market price of our
products. Generally, obsolete inventory is sold to companies that specialize in
the liquidation of these items or contributed to charities, while we continue to
market slow-moving inventories until they are sold or become obsolete. As
obsolete or slow-moving inventory is sold or disposed of, we reduce the
reserve.





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. Since we have not experienced any
significant payment defaults with any of our current customers, our allowance
for doubtful accounts is generally minimal. 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.




Product
Returns, Allowances and Adjustments




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





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





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





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





For both
warranty and saleable product returns we utilize actual historical return rates
to determine our allowance for returns in each period, adjusted for unique,
one-time events. Gross sales is reduced by estimated returns. We record a
corresponding accrual for the estimated liability associated with the estimated
returns which is based on the historical gross sales of the products
corresponding to the estimated returns. This accrual is offset each period by
actual product returns.


20


Our
current estimated future warranty product return rate is approximately 2.0% and
our current estimated future stock adjustment return rate is approximately 0.5%.
As noted above, our return rate is based upon our past history of actual returns
and we estimate amounts for product returns for a given period by applying this
historical return rate and reducing actual gross sales for that period by a
corresponding amount. We believe that using a trailing 12-month return rate
provides us with a sufficient period of time to establish recent historical
trends in product returns for two primary reasons:  (i) our products’
useful life is approximately 3-4 months and (ii) we are able to quickly correct
any significant quality issues as we learn about them. If an unusual
circumstance exists, such as a product that has begun to show materially
different actual return rates as compared to our average 12-month return rates,
we will make appropriate adjustments to our estimated return rates. Factors that
could cause materially different actual return rates as compared to the 12-month
return rates include a new product line, a change in materials or product being
supplied by a new factory. Although we have no specific statistical data on this
matter, we believe that our practices are reasonable and consistent with those
of our industry. Our warranty terms under our arrangements with our suppliers do
not provide for individual products returned by retailers or retail customers to
be returned to the vendor.




Reserve
      for Product Returns, Allowances and AdjustmentsReserve
      Balance 12/31/08
                      
                      
                      137,000Payments
      Recorded During the Period
                      
                      
                      (52,891
                      )84,109Adjustment
      to Reserve for Pre-existing Liabilities
                      
                      
                      4,000Accrual
      for New Liabilities During the Reporting
Period
                      
                      
                      52,891Reserve
      Balance 3/31/09
                      
                      $
                      141,000





Stock
Based Compensation




On
January 1, 2006, we adopted the provisions of Financial Accounting Standards
Board Statement 123R, Share-Based Payment (“SFAS
123R”). This statement establishes standards surrounding the accounting for
transactions in which an entity exchanges its equity instruments for goods and
services. The statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions,
such as the options issued under the Company’s Stock Option Plans. The statement
provides for, and we have elected to adopt the standard using the modified
prospective application under which compensation cost is recognized on or after
the required effective date for the fair value of all future share based award
grants and the portion of outstanding awards at the date of adoption of this
statement for which the requisite service has not been rendered, based on the
grant-date fair value of those awards calculated under Statement 123 for pro
forma disclosures.




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.


21


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. Since we have reported losses for 2003, 2004,
2005, 2006, 2007 and 2008, we have taken the conservative approach, and fully
reserved the deferred tax assets.





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





Valuation
of Derivative Instruments




SFAS No.
133 “Accounting for Derivative
Instruments and Hedging Activities” requires that embedded derivative
instruments be bifurcated and assessed, along with free-standing derivative
instruments such as warrants, on their issuance date in accordance with EITF
00-19 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” to determine whether they should
be considered a derivative liability and measured at their fair value for
accounting purposes. In determining the appropriate fair value, the Company uses
the Black Scholes Model.  At each period end, or when circumstances
indicate that the Company reevaluate the accounting for the derivative
liability, derivative liabilities are adjusted to reflect changes in fair value,
with any increase or decrease in the fair value being recorded in results of
operations as Adjustments to Fair Value of Derivatives.





Results
of Operations




Comparison
of Three Months Ended March 31, 2009 and 2008




Net Sales increased $666,072
or 36.0%, to $2,517,175
in the quarter ended March 31, 2009 from $1,851,103 for the corresponding period
in 2008. Three customers accounted for 52.2% of net sales during the quarter
ended March 31, 2009 and one customer accounted for 21.9% of net sales for the
quarter ended March 31, 2008.  While net sales increased for the first
quarter ended March 31, 2009, we have noticed a softening of demand for our
products in light of the general downturn in the economy, particularly in those
sectors tied to housing and construction, as well as a tightening in the credit
markets making it more difficult for us to finance the production of
inventory.  We continue to focus our sales efforts on those areas
where we see continued growth, the industrial channel, international and safety
markets and job specific glove styles.  In addition, we have secured
an ongoing purchase order financing arrangement to augment our ability to
finance the production of inventory.




Gross Profit increased
$114,119 to $908,116 for the quarter ended March 31, 2009 from $793,997 for the
corresponding period in 2008. Gross profit, as a percentage of net sales, or
gross margin, decreased to 36.1% in the first quarter of 2009 from 42.9% in the
same quarter of 2008.  The decrease in gross profit for the quarter of
6.8% was principally due to two factors, (i) the prior year quarter included
several one-time credit adjustments that increased gross margin by approximately
3.4%, and (ii) unforeseen rebate adjustments in 2009 pertaining to 2008 sales
contracts and a pricing discrepancy adjustment on a 2008 customer invoice, both
of which decreased gross margin by approximately 2.6%.  The remaining
difference, 0.8%, reflects increased air freight charges as we replenished our
inventory in 2009, plus product and customer mix of sales during the current
quarter.


22


Operating Expenses decreased
by $516,297, or 26.9%, to $1,402,892 in the first quarter of 2009 from
$1,919,189 in the first quarter of 2008. As a percentage of net sales, operating
expenses decreased to 55.7% in the first quarter of 2009 from 103.7% in the same
period of 2008.  The decreased spending for the first three months of
2009 was due to a cost reduction program we implemented in response to the
slowing economy, and our previously announced objective to achieve
profitability.  These measures resulted in decreased salaries and
benefits expenses of $108,000; decreased marketing and trade show activity of
$218,000; decreased travel and entertainment expenses of $46,000 and decreased
Financial Accounting Standards No. 123R options expense of $64,000; decreased
office operating expenses of $54,000; decreased outside services, primarily
warehousing, of $36,000.  We are continuing our efforts to identify
and capitalize on cost saving measures and opportunities in these and other
areas.  Our number of employees decreased to 22 at March 31, 2009 from
23 at March 31, 2008.





Loss from Operations
decreased $630,416 or 56.0%, to ($494,776) in the first quarter of 2009 from
($1,125,192) in first quarter of 2008. Loss from operations as a percentage of
net sales decreased to (19.7%) in the first quarter of 2009 from (60.8%) in the
first quarter of 2008.  The decrease in loss from operations in the
three month period was primarily the result of the cost cutting measures and
commensurate decrease in operating expenses, as discussed above, plus the
increase in sales.




Interest Expense decreased
$11,224 to $23,793 in the first quarter of 2009 from $35,017 in the same period
of 2008 due to reduced borrowing under our bank factoring
agreement.





Interest Income decreased
$3,013 in the first quarter of 2009 to $222 from $3,235 in the first quarter of
2008.Interest income
is a result of investment of funds from prior private equity
funding.




Other Income (Expense) net
was ($1,682) in the first quarter of 2009 as compared with $5,924 in the first
quarter of 2008.  Change in the fair value of warrant liability was
($1,951) in the first quarter of 2009 as compared to $-0- for the first quarter
of 2008. This change represented the difference in the fair value of warrants
recorded as liabilities at their issue date on November 10, 2008. This warrant
is revalued at the end of each reporting period until the terms of the agreement
for the warrants issued, that resulted in liability accounting, are
satisfied.




Net Loss decreased $630,365
to ($521,495) in the first quarter of 2009 from ($1,151,860) in the first
quarter of 2008.  This decreased loss is the result of the combination
of each of the factors discussed above, principally the reduction in operating
expenses and increased sales.




Seasonality
and Quarterly Results




Our glove
business generally shows an increase in sales during the third and fourth
quarters due primarily to an increase in the sale of our winter glove line
during this period.  We typically generate 55% - 65% of our glove net
sales during these months.  The first and second quarters of the year
are generally considered our slower season.  Even though the overall
economy continues to experience a significant slow-down, which also affects the
Company, this was mitigated by the successful introduction of a new product
designed specifically for the oil and gas industries.




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, accounts payable and accrued expenses to be higher in the
third and fourth quarters for these reasons.


23


Liquidity
and Capital Resources




Our cash
requirements are principally for working capital. Our need for working capital
is seasonal, with the greatest requirements from July through the end of October
each year as a result of our inventory build-up during this period for the fall
and winter selling seasons. Historically, our main sources of liquidity have
been borrowings under our existing revolving credit facility, the issuance of
subordinated debt and the sale of equity.  We anticipate greater
difficulty in procuring debt financing in light of the general tightening of
credit, making it more difficult for us to finance the production of our planned
inventory needs.  In the short term we are monitoring our credit
issuances and cash collections to maximize cash flows and investigating
opportunities to quickly reduce our current inventories to convert these assets
into cash.  Over the past year, and continuing in the near and longer
term we are focused on reducing our operating costs, increasing margins and
improving operating procedures to generate sustained profitability.




On
September 15, 2006 we entered into a new factoring agreement, whereby it
assigned certain of its accounts receivable with full recourse. This facility
allows us to borrow the lesser of (a) $2,500,000 or (b) the sum of (i)
seventy-five percent (75%) of the net amount of eligible accounts receivable and
(ii) 40% of the value of eligible inventory, which amount shall not exceed the
lesser of $750,000 and the net amount of eligible accounts
receivable.  On November 30, 2008, the Company entered into an
amendment to this factoring agreement under the same terms except for an
increase in the lending rate to Prime plus 2%.





In July
2008 we entered into a Master Agreement with EPK Financial Corporation (“EPK”)
whereby we financed purchase orders for three customer’s special promotions.
This facility remains available to us.





In
February 2009, we completed a private placement transaction with trusts and
other high net worth individuals.  Pursuant to its subscription
agreements with these investors, we sold 30,147,698 shares of common stock, at
$0.05 per share.  We received net proceeds of approximately $1.51
million in the private placement.




Off
Balance Sheet Arrangements





At March
31, 2009, 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.




Recent
Accounting Pronouncements




In
February, 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial
Assets and Liabilities - Including an Amendment of FASB Statement No.
115” (“SFAS 159”).  SFAS 159 permits entities to choose to
measure certain financial assets and liabilities at fair value. Unrealized gains
and losses, arising subsequent to adoption, are reported in earnings. SFAS 159
is effective for fiscal years beginning after November 15, 2007.  The
Company has adopted SFAS 159 and determined that it has no effect on its
condensed consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
160”).  SFAS 160 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  As such, the Company is required to adopt these provisions at
the beginning of the fiscal year ended December 31, 2009.  The Company
is currently evaluating the impact of SFAS 160 on its condensed consolidated
financial statements but does not expect it to have a material
effect.


24


In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB
110”).  SAB 110 permits companies to continue to use the simplified
method, under certain circumstances, in estimating the expected term of “plain
vanilla” options beyond December 31, 2007.  SAB 110 updates guidance
provided in SAB 107 that previously stated that the Staff would not expect a
company to use the simplified method for share option grants after December 31,
2007.  The Company will continue to use the simplified method until it
has sufficient historical exercise data to provide a reasonable basis upon which
to estimate the expected term of its options.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133” (“SFAS 161”).  SFAS 161 requires enhanced disclosures
about an entity’s derivative and hedging activities.  SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 with early application
encouraged.  The Company has adopted SFAS 161 and determined that it
has no effect on its condensed consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”).  SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States.  SFAS 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles.  The Company is currently evaluating the impact
of SFAS 162 on its condensed consolidated financial statements but does not
expect it to have a material effect.





In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60” (“SFAS
163”).  SFAS 163 interprets Statement 60 and amends existing
accounting pronouncements to clarify their application to the financial
guarantee insurance contracts included within the scope of that
Statement.  SFAS 163 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and all interim periods within
those fiscal years.  As such, the Company is required to adopt these
provisions at the beginning of the fiscal year ended December 31,
2009.  The Company is currently evaluating the impact of SFAS 163 on
its condensed consolidated financial statements but does not expect it to have a
material effect.





Risk
Factors





Investing
in our common stock involves a high degree of risk. You should carefully
consider the following risk factors and all other information contained in this
report before purchasing our common stock. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties that
we are unaware of, or that we currently deem immaterial, also may become
important factors that affect us. If any of the following risks occur, our
business, financial condition or results of operations could be materially and
adversely affected. In that case, the trading price of our common stock could
decline, and you may lose some or all of the money you paid to purchase our
common stock.


25


RISKS
RELATING TO OUR BUSINESS




We will need additional funding to support our
operations and capital expenditures.  Our inability to obtain such
funding could adversely affect our business.




We have
funded our operations and capital expenditures from limited cash flow from
operations, our cash on hand, the net proceeds of the private placements
completed on May 9, 2006, September 21, 2007, April 22, 2008 and February 5,
2009, and the factoring agreement entered into on September 15,
2006.  As part of our planned growth, we will be required to make
expenditures necessary to expand and improve our operating and management
infrastructure.




While
capital resources have historically been insufficient to support the continued
growth of our operations, we believe that the proceeds from our February 5, 2009
financing transaction, our cash flows from operations and borrowings available
to us under our senior secured credit facility, the availability of purchase
order financing and our continuing cost containment measures will be adequate to
meet our liquidity needs and capital expenditure requirements for at least the
next 12 months.  In the event that our working capital needs exceed
our cash sources we will need to raise additional funds.  There can be
no assurance that any financing arrangements will be available in amounts or on
terms acceptable to us, if at all.  Furthermore, if we are able to
raise additional capital through the sale of equity or convertible debt
securities it may result in additional dilution to our existing
shareholders.  If adequate additional funds are not available, we may
be required to delay, reduce the scope of, or eliminate material parts of the
implementation of our business strategy.  This limitation could
substantially harm our business, results of operations and financial
condition.




Our
operating results may fluctuate significantly and our stock price could decline
or fluctuate if our results do not meet the expectation of analysts or
investors.




Management
expects that we will experience substantial variations in our net sales and
operating results from quarter to quarter. We believe that the factors which
influence this variability of quarterly results include:





·
            the
      timing of our introduction of new product lines, particularly our
      specialty apparel;




·
            the
      level of consumer acceptance of each new product
  line;




·
            general
      economic and industry conditions that affect consumer spending and
      retailer purchasing;




·
            the
      availability of manufacturing
capacity;




·
            the
      seasonality of the markets in which we
  participate;




·
            the
      timing of trade shows;




·
            the
      product mix of customer orders;




·
            the
      timing of the placement or cancellation of customer
  orders;




·
            the
      weather;




·
            transportation
      delays;




·
            quotas
      and other regulatory matters; and




·
            the
      timing of expenditures in anticipation of increased sales and actions of
      competitors.




As a
result of fluctuations in our revenue and operating expenses that may occur,
management believes that period-to-period comparisons of our results of
operations are not a good indication of our future performance. It is possible
that in some future quarter or quarters, our operating results will be below the
expectations of securities analysts or investors. In that case, our common stock
price could fluctuate significantly or decline.


26


We
have a history of operating losses and there can be no assurance that we can
achieve or maintain profitability.




We have a
history of operating losses and may not achieve or sustain profitability. We
cannot guarantee that we will become profitable. Even if we achieve
profitability, given the competitive and evolving nature of the industry in
which we operate, we may be unable to sustain or increase profitability and our
failure to do so would adversely affect our business, including our ability to
raise additional funds.




We
may be unable to effectively manage our growth.




Our
strategy envisions growing our business. Any growth in or expansion of our
business is likely to continue to place a strain on our financial, managerial
and other administrative resources, infrastructure and systems. We have
historically been undercapitalized to effectively manage and sustain our
growth.  As with other growing businesses, we expect that we will need
to continually restructure and expand our business development capabilities, our
systems and processes and our access to financing sources. We also will need to
hire, train, supervise and manage new employees. These processes are time
consuming and expensive, will increase management responsibilities and will
divert management attention. We cannot assure you that we will be able
to:





·
            expand
      our systems effectively or efficiently or in a timely
    manner;




·
            allocate
      our human resources optimally;




·
            meet
      our capital needs;




·
            identify
      and hire qualified employees or retain valued employees;
  or




·
            incorporate
      effectively the components of any business or product line that we may
      acquire in our effort to achieve
growth.




Our
inability or failure to manage our growth and expansion effectively could harm
our business and materially and adversely affect our operating results and
financial condition.





Substantially all of our revenues have been
derived from a relatively limited product line consisting of task-specific
gloves and performance apparel, and our future success depends on our ability to
expand our product line and achieve broader market acceptance of our company and
our products.




To date, our products have consisted
mainly of task-specific gloves and performance apparel, targeted primarily to
the construction, do-it-yourself, industrial and sporting goods
markets.  Our success and the planned growth and expansion of our
business depend on us achieving greater and broader acceptance in our existing
market segments as well as in new segments.  We may be required to
enter into new arrangements and relationships with vendors, suppliers and others
to achieve broader acceptance of our products, but cannot guarantee that we will
be able to enter into such relationships.  We also may be required to
undertake new types of risks or obligations that we may be unable to
manage.  There can be no assurance that consumers will purchase our
products or that retail outlets will stock our products.  Though we
plan to continue to expend resources on promoting, marketing and advertising to
increase product awareness, we cannot guarantee that any expenses we incur in
such efforts will generate the desired product awareness or commensurate
increase in sales of our products.  If we are unable to expand into
new market segments, we may be unable to grow and expand our business or
implement our business strategy as described in this report.  This
could materially impair our ability to increase sales and revenue and materially
and adversely affect our margins, which could harm our business and cause our
stock price to decline.


27


We
may be unable to compete successfully against existing and future competitors,
which could decrease our revenue and margins and harm our business.




The
performance task specific glove and apparel industries are highly competitive.
There are several other companies that provide similar products, many of which
are larger and have greater financial resources than us.  Our future
growth and financial success depend on our ability to further penetrate and
expand our existing distribution channels and to increase the size of our
average annual net sales per account in these channels, as well as our ability
to penetrate and expand other distribution channels. For example, we encounter
competition in our existing glove and workwear distribution channels from a
number of competitors. Unknown or unforeseen new entrants into our distribution
channels, particularly low-cost overseas producers, will further increase the
level of competition in these channels. There can be no assurance that we will
be able to maintain our growth rate or increase our market share in our
distribution channels at the expense of existing competitors and other apparel
manufacturers choosing to enter the market segments in which we compete. In
addition, there can be no assurance that we will be able to enter and achieve
significant growth in other distribution channels.




Failure
to expand into new distribution channels and new international markets could
materially and adversely impact our growth plan and profitability.




Our sales
growth depends in part on our ability to expand from the hardware and lumber
retail channels and industrial distributors that we have focused on for the past
eight years into new distribution channels, particularly “Big Box” home centers
and work wear and sporting goods retailers. Failure to expand into these
mass-market channels could severely limit our growth.




Our
business plan also depends in part on our ability to expand into international
markets. We have begun the distribution of our products in Japan, Australia,
Canada and Europe and we are in the process of establishing additional
distribution in Europe and other international markets. Failure to expand
international sales through these and other markets could limit our growth
capability and leave us vulnerable solely to United States market
conditions.





Our dependence on independent
manufacturers reduces our ability to control the manufacturing process, which
could harm our sales, reputation and overall
profitability.




We depend
on independent contract manufacturers to maintain sufficient manufacturing and
shipping capacity in an environment characterized by declining prices, labor
shortages, continuing cost pressure and increased demands for product innovation
and speed-to-market. This dependence could subject us to difficulty in obtaining
timely delivery of products of acceptable quality. In addition, a contractor's
failure to ship products to us in a timely manner or to meet the required
quality standards could cause us to miss the delivery date requirements of our
customers. The failure to make timely deliveries may cause our customers to
cancel orders, refuse to accept deliveries, impose non-compliance charges
through invoice deductions or other charge-backs, demand reduced prices or
reduce future orders, any of which could harm our sales, reputation and overall
profitability.




We do not
have long-term contracts with any of our independent contractors and any of
these contractors may unilaterally terminate their relationship with us at any
time. While management believes that there exists an adequate supply of
contractors to provide products and services to us, to the extent we are not
able to secure or maintain relationships with independent contractors that are
able to fulfill our requirements, our business would be harmed.




We have
initiated standards for our suppliers, and monitor our independent contractors'
compliance with applicable labor laws, but we do not control our contractors or
their labor practices. The violation of federal, state or foreign labor laws by
one of our contractors could result in us being subject to fines and our goods
that are manufactured in violation of such laws being seized or their sale in
interstate commerce being prohibited. To date, we have not been subject to any
sanctions that, individually or in the aggregate, have had a material adverse
effect on our business, and we are not aware of any facts on which any such
sanctions could be based. There can be no assurance, however, that in the future
we will not be subject to sanctions as a result of violations of applicable
labor laws by our contractors, or that such sanctions will not have a material
adverse effect on our business and results of operations.


28


Our
dependence on a single provider for all warehouse and fulfillment functions
reduces our ability to control the warehousing and fulfillment processes, which
could harm our sales, reputation, and overall business.





We have entered into an agreement to
outsource most of our warehouse and fulfillment functions to a single provider
where we will consolidate most of our inventory at one site, which is managed by
an independent contractor who will then perform most of our warehousing,
assembly, packaging and fulfillment services.  We depend on our
independent contractor fulfiller to properly fulfill customer orders in a timely
manner and to properly protect our inventories.  The contractor’s
failure to ship products to customers in a timely manner, to meet the required
quality standards, to correctly fulfill orders, to maintain
appropriate levels of inventory, or to provide adequate security
measures and protections against excess shrinkage could cause us to miss
delivery date requirements of our customers or incur increased expense to
replace or replenish lost or damaged inventory or inventory
shortfall.  The failure to make timely and proper deliveries may
cause our customers to cancel orders, refuse to accept deliveries, impose
non-compliance charges through invoice deductions or other charge-backs, demand
reduced prices or reduce future orders, any of which could harm our sales,
reputation and overall profitability.




Trade
matters may disrupt our supply chain, which could result in increased expenses
and decreased sales.





We cannot
predict whether any of the countries in which our merchandise currently is
manufactured or may be manufactured in the future will be subject to additional
trade restrictions imposed by the U.S. and other foreign governments, including
the likelihood, type or effect of any such restrictions. Trade restrictions,
including increased tariffs or quotas, embargoes, safeguards and customs
restrictions, against apparel items, as well as U.S. or foreign labor strikes,
work stoppages or boycotts, could increase the cost or reduce the supply of
apparel available to us and adversely affect our business, financial condition
and results of operations. Although the quota system established by the
Agreement on Textiles and Clothing was completely phased out for World Trade
Organization countries effective January 1, 2005, there can be no assurances
that restrictions will not be reestablished for certain categories in specific
countries. We are unable to determine the impact of the changes to the quota
system on our sourcing operations, particularly in China. Our sourcing
operations may be adversely affected by trade limits or political and financial
instability resulting in the disruption of trade from exporting countries,
significant fluctuation in the value of the U.S. dollar against foreign
currencies, restrictions on the transfer of funds and/or other trade
disruptions.





Our
international operations and the operations of our manufacturers and suppliers
in China are subject to additional risks that are beyond our control and that
could harm our business.





Our glove
products are manufactured by 3 manufacturers operating in China, Hong Kong and
Indonesia. Our performance apparel products are currently manufactured in
Taiwan, Vietnam, Mexico and the Dominican Republic.  We may in the
future use offshore manufacturers for all or some of these
products.  In addition, approximately 9% of our fiscal 2008 net
revenues were generated through international sales and we plan to increase our
sales to international markets in the future.  As a result of our
international manufacturing and sales, we are subject to additional risks
associated with doing business abroad, including:




·
            political
      unrest, terrorism and economic instability resulting in the disruption of
      trade from foreign countries in which our products are
      manufactured;




·
            difficulties
      in managing foreign operations, including difficulties associated with
      inventory management and collection on foreign accounts
      receivable;




·
            dependence
      on foreign distributors and distribution
  networks;




·
            currency
      exchange fluctuations and the ability of our Chinese manufacturers to
      change the prices they charge us based on fluctuations in the value of the
      U.S. dollar relative to that of the Chinese
  Yuan;




·
            the
      imposition of new laws and regulations, including those relating to labor
      conditions, quality and safety standards as well as restrictions on the
      transfer of funds;




29


·
            disruptions
      or delays in shipments;




·
            changes
      in local economic and non-economic conditions and standards in which our
      manufacturers, suppliers or customers are located;
  and




·
            reduced
      protection for intellectual property rights in jurisdictions outside the
      United States.




These and other factors beyond our
control could interrupt our manufacturers’ production in offshore facilities,
influence the ability of our manufacturers to export our products
cost-effectively or at all, inhibit our and our unaffiliated manufacturer’s
ability to produce certain materials and influence our ability to sell our
products in international markets, any of which could have an adverse effect on
our business, financial conditions and operations.




We
may be unable to adequately protect our intellectual property
rights.




We rely
in part on patent, trade secret, trade dress and trademark law to protect our
rights to certain aspects of our products, including product designs,
proprietary manufacturing processes and technologies, product research and
concepts and recognized trademarks, all of which we believe are important to the
success of our products and our competitive position. There can be no assurance
that any of our pending patent or trademark applications will result in the
issuance of a registered patent or trademark, or that any patent or trademark
granted will be effective in thwarting competition or be held valid if
subsequently challenged. In addition, there can be no assurance that the actions
taken by us to protect our proprietary rights will be adequate to prevent
imitation of our products, that our proprietary information will not become
known to competitors, that we can meaningfully protect our rights to unpatented
proprietary information or that others will not independently develop
substantially equivalent or better products that do not infringe on our
intellectual property rights. We could be required to devote substantial
resources to enforce our patent and protect our intellectual property, which
could divert our resources and result in increased expenses. In addition, an
adverse determination in litigation could subject us to the loss of our rights
to a particular patent or other intellectual property, could require us to grant
licenses to third parties, could prevent us from manufacturing, selling or using
certain aspects of our products or could subject us to substantial liability,
any of which could harm our business.





We may become subject to litigation
for infringing the intellectual property rights of others.




Others
may initiate claims against us for infringing on their intellectual property
rights. We may be subject to costly litigation relating to such infringement
claims and we may be required to pay compensatory and punitive damages or
license fees if we settle or are found culpable in such litigation, we may be
required to pay damages, including punitive damages. In addition, we may be
precluded from offering products that rely on intellectual property that is
found to have been infringed by us. We also may be required to cease offering
the affected products while a determination as to infringement is considered.
These developments could cause a decrease in our operating income and reduce our
available cash flow, which could harm our business and cause our stock price to
decline.




We
may be unable to attract and retain qualified, experienced, highly skilled
personnel, which could adversely affect the implementation of our business
plan.




Our
success depends to a significant degree upon our ability to attract, retain and
motivate skilled and qualified personnel. If we fail to attract, train and
retain sufficient numbers of these qualified people, our prospects, business,
financial condition and results of operations will be materially and adversely
affected. In particular, we are heavily dependent on the continued services of
Eduard Jaeger and the other members of our senior management team. We do not
have long-term employment agreements with any of the members of our senior
management team, each of whom may voluntarily terminate his employment with us
at any time. Following any termination of employment, these employees would not
be subject to any non-competition covenants. The loss of any key employee,
including members of our senior management team, and our inability to attract
highly skilled personnel with sufficient experience in our industries could harm
our business.


30


Our
senior management’s limited recent experience managing a publicly traded company
may divert management’s attention from operations and harm our
business.




Our
management team has relatively limited recent experience managing a publicly
traded company and complying with federal securities laws, including compliance
with recently adopted disclosure requirements on a timely basis. Our management
will be required to design and implement appropriate programs and policies in
responding to increased legal, regulatory compliance and reporting requirements,
and any failure to do so could lead to the imposition of fines and penalties and
harm our business.





Adverse
conditions in the economy and disruption of financial markets could negatively
impact us and our customers and therefore our results of
operations.





A further
economic downturn in the businesses or geographic areas in which we sell our
products could reduce demand for these products and result in a decrease in
sales volume that could have a negative impact on our results of operations.
Volatility and disruption of financial markets could limit our ability, as well
as our customers’ ability, to obtain adequate financing or credit to purchase
and pay for our products in a timely manner, or to maintain operations, and
result in a decrease in sales volume that could have a negative impact on our
results of operations.





If
we are unable to adequately fund our operations, we may be forced to voluntarily
file for deregistration of our common stock with the U.S. Securities and
Exchange Commission.





Compliance
with the periodic reporting requirements required by the U.S. Securities and
Exchange Commission (or SEC) consumes a considerable amount of both internal, as
well external, resources and represents a significant cost for us.  If
we are unable to continue to devote adequate funding and the resources needed to
maintain such compliance, while continuing our operations, we may be forced to
deregister with the SEC.  If we file for deregistration, our common
stock will no longer be listed on NASDAQ’s OTC Bulletin Board (or OTCBB), and it
may suffer a decrease in or absence of liquidity as after the deregistration
process is complete, our common stock will only be tradable on the “Pink
Sheets.”  As a result of such deregistration, non-affiliates will no
longer have access to information regarding our results of
operations.  Without the availability of such information, our lenders
may be forced to increase their monitoring of our operations which may result in
higher costs to us when borrowing money which could have a negative impact and
harm our business.




RISKS
RELATING TO OUR INDUSTRY




If
we are unable to respond to the adoption of technological innovation in our
industry and changes in consumer demand, our products will cease to be
competitive, which could result in a decrease in revenue and harm our
business.




Our
future success will depend, in part, on our ability to keep up with changes in
consumer tastes and our continued ability to differentiate our products through
implementation of new technologies, such as new materials and
fabrics.  We may not, however, be able to successfully do so, and our
competitors may be able to produce designs that are more appealing, implement
new technologies or innovations in their design, or manufacture their products
at a much lower cost.  These types of developments could render our
products less competitive and possibly eliminate any differentiating advantage
in design and materials that we might hold at the present time.




We
are susceptible to general economic conditions, and a downturn in our industries
or a reduction in spending by consumers could adversely affect our operating
results.




The
apparel industry in general has historically been characterized by a high degree
of volatility and subject to substantial cyclical variations.  Our
operating results will be subject to fluctuations based on general economic
conditions, in particular conditions that impact consumer spending and
construction and industrial activity.  A downturn in the construction,
industrial or housing sectors could be expected to directly and negatively
impact sales of protective gear to workers in these sectors, which could cause a
decrease in revenue and harm our sales.


31


Difficult
economic conditions could also increase the risk of extending credit to our
retailers.  In the event we enter into a factoring relationship, a
customer’s financial problems would limit the amount of customer receivables
that we could assign to such factor on the receivables, and could cause us to
assume more credit risk relating to those assigned receivables or to curtail
business with that customer.




Changes
in international treaties or governmental regulatory schemes could adversely
impact our business.




Any
negative changes to international treaties and regulations such as the North
American Free Trade Agreement (or NAFTA) and to the effects of international
trade agreements and embargoes imposed by such entities such as the World Trade
Organization which could result in a rise in trade quotas, duties, taxes and
similar impositions or which could limit the countries from whom we can purchase
our fabric or other component materials, or which could limit the countries
where we might market and sell our products, could have an adverse effect on our
business.




Any
changes in regulation by the Federal Trade Commission (or FTC) with respect to
labeling and advertising of our products could have an adverse affect on our
business.  The FTC requires apparel companies to provide a label
clearly stating the country of origin of manufacture and the company’s apparel
registration number and a second label stating washing instructions for the
product.  A change in these requirements could add additional cost to
the production of our products, though we do not believe that this additional
cost would be material, especially in relation to the cost of producing our
products.




RISKS
RELATING TO OUR COMMON STOCK




There
is a limited trading market for our common stock and a market for our stock may
not be sustained, which will adversely affect the liquidity of our common stock
and could cause our market price to decline.




Although
prices for our shares of common stock are quoted on the OTCBB (under the symbol
ICPW.OB), there is a limited public trading market for our common stock, and no
assurance can be given that a public trading market will be
sustained.




Active
trading markets generally result in lower price volatility and more efficient
execution of buy and sell orders.  The absence of an active trading
market reduces the liquidity of our common stock.  As a result of the
lack of trading activity, the quoted price for our common stock on the OTC
Bulletin Board is not necessarily a reliable indicator of its fair market
value.  Further, if we cease to be quoted, holders of our common stock
would find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of, our common stock, and the market value of our common
stock would likely decline.




The
market price of our common stock is likely to be highly volatile and subject to
wide fluctuations, and you may be unable to resell your shares at or above the
offering price.




The
market price of our common stock is likely to be highly volatile and could be
subject to wide fluctuations in response to a number of factors that are beyond
our control, including announcements of new products or services by our
competitors.  In addition, the market price of our common stock could
be subject to wide fluctuations in response to a variety of factors,
including:




·
            quarterly
      variations in our revenues and operating
  expenses;




·
            developments
      in the financial markets, apparel industry and the worldwide or regional
      economies;




·
            announcements
      of innovations or new products or services by us or our
      competitors;




·
            announcements
      by the government that affect international trade
  treaties;




·
            fluctuations
      in interest rates and/or the asset backed securities
    market;




·
            significant
      sales of our common stock or other securities in the open
      market;




·
            variations
      in interest rates; and




·
            changes
      in accounting principles.




32


In the
past, stockholders have often instituted securities class action litigation
after periods of volatility in the market price of a company’s
securities.  If a stockholder were to file any such class action suit
against us, we would incur substantial legal fees and our management’s attention
and resources would be diverted from operating our business to respond to the
litigation, which could harm our business.




Substantial
future sales of our common stock in the public market could cause our stock
price to fall.




We
completed private placements on May 9, 2006, September 21, 2007, April 22, 2008
and February 5, 2009 relating to the sale of 9,761,593, 5,250,000, 7,075,000 and
30,147,698 shares of our common stock, respectively.  The sale of
these shares could further depress the market price of our common
stock.  Sales of a significant number of shares of our common stock in
the open market could cause additional harm to the market price of our common
stock.  Further reduction in the market price for our shares could
make it more difficult to raise funds through future equity
offerings.




Moreover,
as additional shares of our common stock become available for resale in the open
market (including shares issued upon the exercise of our outstanding warrants),
the supply of our publicly traded shares will increase, which could decrease its
price.




Some of
our shares may also be offered from time-to-time in the open market pursuant to
Rule 144, and these sales may have a depressive effect on the market for our
shares.  In general, a non-affiliate who has held restricted shares
for a period of six months may sell an unrestricted number of shares of our
common stock into the market.  The resale of these shares under Rule
144 may cause our stock price to decline.




The
sale of securities by us in any equity or debt financing could result in
dilution to our existing stockholders and have a material adverse effect on our
earnings.




Any sale
of common stock by us in a future private placement offering could result in
dilution to the existing stockholders as a direct result of our issuance of
additional shares of our capital stock.  In addition, our business
strategy may include expansion through internal growth, by acquiring
complementary businesses, by acquiring or licensing additional brands, or by
establishing strategic relationships with targeted customers and
suppliers.  In order to do so, or to finance the cost of our other
activities, we may issue additional equity securities that could dilute our
stockholders’ stock ownership.  We may also assume additional debt and
incur impairment losses related to goodwill and other tangible assets if we
acquire another company and this could negatively impact our earnings and
results of operations.




The
trading of our common stock on the OTCBB and the potential designation of our
common stock as a “penny stock” could impact the trading market for our common
stock.




Our
securities, as traded on the OTCBB, may be subject to SEC rules that impose
special sales practice requirements on broker-dealers who sell these securities
to persons other than established customers or accredited
investors.  For the purposes of the rule, the phrase “accredited
investors” means, in general terms, institutions with assets in excess of
$5,000,000, or individuals having a net worth in excess of $1,000,000 or having
an annual income that exceeds $200,000 (or that, when combined with a spouse’s
income, exceeds $300,000).  For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser’s written agreement to the transaction before the
sale.  Consequently, the rule may affect the ability of broker-dealers
to sell our securities and also may affect the ability of purchasers to sell
their securities in any market that might develop therefor.




In
addition, the SEC has adopted a number of rules to regulate “penny stock” that
restrict transactions involving these securities.  Such rules include
Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under
the Securities Exchange Act of 1934, as amended.  These rules may have
the effect of reducing the liquidity of penny stocks.  “Penny stocks”
generally are equity securities with a price of less than $5.00 per share (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ Stock Market if current price and volume information with respect to
transactions in such securities is provided by the exchange or
system).  Because our securities may constitute “penny stock” within
the meaning of the rules, the rules would apply to us and to our
securities.


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Shareholders should be aware that, according to
the SEC, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse.  Such patterns include:  (i) control of
the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) “boiler room” practices involving high-pressure sales tactics
and unrealistic price projections by inexperienced sales persons; (iv) excessive
and undisclosed bid-ask differentials and markups by selling broker-dealers; and
(v) the wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, resulting in investor
losses.  Our management is aware of the abuses that have occurred
historically in the penny stock market.  Although we do not expect to
be in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities.




We
have not paid dividends in the past and do not expect to pay dividends for the
foreseeable future, and any return on investment may be limited to potential
future appreciation on the value of our common stock.




We
currently intend to retain any future earnings to support the development and
expansion of our business and do not anticipate paying cash dividends in the
foreseeable future.  Our payment of any future dividends will be at
the discretion of our board of directors after taking into account various
factors, including without limitation, our financial condition, operating
results, cash needs, growth plans and the terms of any credit agreements that we
may be a party to at the time.  To the extent we do not pay dividends,
our stock may be less valuable because a return on investment will only occur if
and to the extent our stock price appreciates, which may never
occur.  In addition, investors must rely on sales of their common
stock after price appreciation as the only way to realize their investment, and
if the price of our stock does not appreciate, then there will be no return on
investment.  Investors seeking cash dividends should not purchase our
common stock.




Our
officers, directors and principal stockholders can exert significant influence
over us and may make decisions that are not in the best interests of all
stockholders.




Our
officers, directors and principal stockholders (greater than 5% stockholders)
collectively control approximately 44% of our outstanding common
stock.  As a result, these stockholders will be able to affect the
outcome of, or exert significant influence over, all matters requiring
stockholder approval, including the election and removal of directors and any
change in control.  In particular, this concentration of ownership of
our common stock could have the effect of delaying or preventing a change of
control of us or otherwise discouraging or preventing a potential acquirer from
attempting to obtain control of us.  This, in turn, could have a
negative effect on the market price of our common stock.  It could
also prevent our stockholders from realizing a premium over the market prices
for their shares of common stock.  Moreover, the interests of this
concentration of ownership may not always coincide with our interests or the
interests of other stockholders, and accordingly, they could cause us to enter
into transactions or agreements that we would not otherwise
consider.




Anti-takeover provisions may limit the ability of
another party to acquire us, which could cause our stock price to
decline.




Our
Articles of Incorporation, as amended, our by-laws and Nevada law contain
provisions that could discourage, delay or prevent a third party from acquiring
us, even if doing so may be beneficial to our stockholders.  In
addition, these provisions could limit the price investors would be willing to
pay in the future for shares of our common stock.


34




ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not
applicable.






ITEM
4.                      CONTROLS
AND PROCEDURES





Controls
and Procedures




Based
upon an evaluation at the end of the period covered by this report, the
Company’s Chief Executive Officer and Principal Accounting Officer concluded
that the Company’s disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Company in
the reports that it files or submits under the Securities and Exchange Act of
1934 is (i) recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and (ii) accumulated and communicated to
the Company’s management, including its principal executive and principal
accounting officers, or person’s performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.  There have been
no changes in the Company’s internal controls over financial reporting that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect the Company’s internal controls
over financial reporting.





The
Company’s 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 the Company’s resources and nature of the
Company’s business operations.  The Company’s 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




There
were no changes in our internal control over financial reporting or in other
factors identified in connection with the evaluation required by paragraph (d)
of Exchange Act Rules 13a-15 or 15d-15 that occurred during the three months
ended March 31, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





35


PART
II




ITEM
6.                      EXHIBITS





Exhibit
Index





Exhibit
              Number
            
            Exhibit Title10.1
            
            Exclusive
      License and Distributorship Agreement, dated January 6, 2009, by and
      between the Company and ORR Safety Corporation.*10.2
            
            Form
      of Subscription Agreement.31.1
            
            Certification
      by Chief 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 Chief 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 Chief 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


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







36


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 CORPORATIONDate:
      May 15, 2009
                By:
                /s/
      Thomas KreigThomas
      Kreig,
                  Principal
      Accounting Officer










37