**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

 

**or**

 

 

**Commission file number 0-51536**

** **

**IRONCLAD PERFORMANCE WEAR CORPORATION**

**(Exact name of registrant as specified inits charter)**

** **

 

**1920 Hutton Court, Suite 300**

**Farmers Branch, TX 75234**

**(Address of principal executive offices,zip code)**

 

**(972) 996 -5664**

**(Registrant’s telephone number, includingarea code)**

 

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes [x] No [ ]

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

 

Indicate by check mark whether the registrantis 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-2of the Exchange Act (Check one);

 

 

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

 

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

**TABLE OF CONTENTS**

 

**PART I**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**IRONCLAD PERFORMANCE WEAR CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**AS OF MARCH 31, 2015 AND DECEMBER 31, 2014** 

 

See Notes to Condensed Consolidated FinancialStatements.

**IRONCLAD PERFORMANCE WEAR CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 

 

See Notes to Condensed Consolidated FinancialStatements. 

**IRONCLAD PERFORMANCE WEAR CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(unaudited)**

 

 

See Notes to Condensed Consolidated Financial Statements.

**IRONCLAD PERFORMANCE WEAR CORPORATION**

**Notes to Condensed Consolidated FinancialStatements**

 

**1. Description of Business**

 

Ironclad Performance Wear Corporation (“Ironclad”,the “Company”, “we”, “us” or “our”) was incorporated in Nevada on May 26, 2004and engages in the business of design and manufacture of branded performance work wear including task-specific gloves and performanceapparel designed to significantly improve the wearer’s ability to safely, efficiently and comfortably perform general tohighly specific job functions. Its customers are primarily industrial distributors, hardware, lumber and automotive retailers,“Big Box” home centers and sporting goods retailers. The Company has received six U.S. patents, one internationalpatent and four U.S. patents pending for design and technological innovations incorporated in its performance work gloves. TheCompany has 57 registered U.S. trademarks, 9 in-use U.S. trademarks, 4 U.S. trademark pending registration, 21 registered internationaltrademarks, 3 international trademarks pending and 7 copyright marks.

 

**2. Accounting Policies**

 

Basis of Presentation

 

The accompanying interim condensed consolidatedfinancial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the UnitedStates of America (“GAAP”) including those for interim financial information and with the instructions for Form 10-Qand Article 8 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do notinclude 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 reflectedin these interim financial statements. These financial statements should be read in conjunction with the audited financial statementsand notes for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC onMarch 16, 2015.

 

Basis of Consolidation

 

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

 

Use of Estimates

 

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

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with originalmaturities of three months or less when purchased to be cash equivalents. The Company places its cash with high credit qualityinstitutions. The Federal Deposit Insurance Company (FDIC) insures cash amounts at each institution for up to $250,000 and theSecurities Investor Protection Corporation (SIPC) also insures cash amounts at each institution up to $250,000.  Inaddition, supplemental insurance is in place to cover balances in excess of these limits. The Company maintains cash in excessof the FDIC and SIPC limits.

Accounts Receivable

 

 

The allowance for doubtful accounts is basedon management’s regular evaluation of individual customer’s receivables and consideration of a customer’s financialcondition and credit history. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previouslywritten off are recorded when received. Interest is not charged on past due accounts.

 

Inventory

 

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

   

Property and Equipment

 

Property and equipment are recorded at costless accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of therelated assets, which range from three to seven years. Leasehold improvements are depreciated over fifteen years or the leaseterm, 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 arecapitalized and reviewed monthly for active status.

 

Long-Lived Asset Impairment

 

The Company periodically evaluates whether eventsand circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision orthat 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 theasset is recoverable. Based upon the anticipated future income and cash flow from operations and other factors, relevant in theopinion of the Company’s management, there has been no impairment.

 

Operating Segment Reporting

 

The Company has two product lines, “gloves”and “apparel,” both of which have similar characteristics.  They each provide functional protection andcomfort to workers in the form of work wear for various parts of the body; their production processes are similar; they are bothsold to the same type of class of customers, typically on the same purchase order; and they are warehoused and distributed fromthe same warehouse facility.  In addition, the “apparel” segment currently comprises less than 2% of theCompany’s revenues.  The Company believes that the aggregation criteria of Financial Accounting Standards Board(“FASB”) Accounting Standards Codification (“ASC”) 280, paragraph 17 applies and will accordingly aggregatethese two segments.

Revenue Recognition

 

A customer is obligated to pay for productssold to it within a specified number of days from the date that title to the products is transferred to the customer. The Company’sstandard terms are typically net 30 days from the transfer of title to the products to the customer, however we have negotiatedspecial terms with certain customers and industries. The Company typically collects payment from a customer within 30 to 60 daysfrom the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership generally passes to acustomer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale priceof the Company’s products is substantially fixed or determinable at the date of sale based on purchase orders generatedby a customer and accepted by the Company. A customer’s obligation to pay the Company for products sold to it is not contingentupon the resale of those products. The Company recognizes revenues when products are delivered, or shipped to customers, basedon terms of agreement with the customers. All transactions are conducted in United States Dollars and therefore there are no transactiongains or losses incurred on transactions with foreign customers.

 

Revenue Disclosures

 

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

 

 

Cost of Goods Sold

 

Cost of goods sold includes all of the costsassociated with producing the product by independent, third party factories (FOB costs), plus the costs of transporting, inspectingand delivering the product to our distribution warehouse in California (landed costs). Landed costs consist primarily of ocean/airfreight, transport insurance, import duties, administrative charges and local trucking charges from the port to our warehouse.Cost of goods sold for the three months ended March 31, 2015 and 2014 were $2,801,086 and $3,607,189, respectively.

 

Purchasing, warehousing and distribution costsare reported in operating expenses on the line item entitled “Purchasing, warehousing and distribution” and for thethree months ended March 31, 2015 and 2014 were $282,998 and $327,797, respectively.

 

Product Returns, Allowances and Adjustments

 

Product returns, allowances and adjustmentsis 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 warrantypolicy that covers defects in workmanship. It allows customers to return damaged or defective products to us following a customaryreturn merchandise authorization process. Warranty returns for the three months ended March 31, 2015 and 2014 were approximately$6,700 or 0.1% and $19,700 or 0.4%, respectively.

Saleable Product Returns - the Company may allow from time to time, depending on thecustomer 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 thecustomary return merchandise authorization process. In addition the Company may allow from time to time other saleable productreturns from customers for other business reasons, for example, in settlement of an outstanding accounts receivable, from a discontinueddistributor customer or other customer service purpose. Saleable product returns for the three months ended March 31, 2015 and2014 were approximately $126,000 or 2.7% and $43,300 or 0.8%, respectively.

 

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

 

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

 

** **

Advertising and Marketing

 

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

 

Shipping and Handling Costs

 

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

 

Customer Concentrations

 

Three customers accounted for approximately$2,468,000 or 54.0% of net sales for the quarter ended March 31, 2015.   Four customers accounted for approximately$3,070,000 or 60.5% of net sales for the three months ended March 31, 2014.  No other customers accounted for more than10% of net sales during the periods.  

 

Supplier Concentrations

 

Four suppliers, who are located overseas, accountedfor approximately 74% of total purchases for the three months ended March 31, 2015.  Three suppliers, who are located overseas,accounted for approximately 85% of total purchases for the three months ended March 31, 2014.  All transactions are conductedin United States Dollars and therefore there are no transaction gains or losses incurred on transactions with foreign suppliers.

Stock Based Compensation

 

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

 

Earnings (Loss) Per Share

 

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

 

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

 

The following table sets forth the calculationof the numerators and denominators of the basic and diluted per share computations for the three months ended March 31, 2015 and2014 if diluted shares were to be included:

 

 

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

 

Income Taxes

 

The Company adopted the provisions of FASB ASC740-10 effective January 1, 2007. The implementation of FASB ASC 740-10 has not caused the Company to recognize any changes inits identified tax positions. Interest and penalties associated with unrecognized tax benefits would be classified as additionalincome taxes in the statement of operations.

 

Income taxes are provided for the tax effectsof the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarilyto the difference between the basis of the allowance for doubtful accounts, accumulated depreciation and amortization, accruedpayroll and net operating loss carryforwards for financial and income tax reporting. The deferred tax assets and liabilities representthe future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilitiesare recovered or settled.

 

Deferred tax assets and liabilities are reflectedat 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 incometaxes. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowanceis recognized.

 

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

 

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

 

Fair Value of Financial Instruments

 

The fair value of the Company’s financialinstruments is determined by using available market information and appropriate valuation methodologies. The Company’s principalfinancial instruments are cash, accounts receivable, accounts payable and short term line of credit debt. At March 31, 2015 andDecember 31, 2014, cash, accounts receivable, accounts payable and short term line of credit debt, due to their short maturities,and liquidity, are carried at amounts which reasonably approximate fair value.

 

The Company measures the fair value of its financialinstruments using the procedures set forth below for all assets and liabilities measured at fair value that were previously carriedat fair value pursuant to other accounting guidelines.

 

Under FASB ASC 820, “*Fair Value Measurements*”fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) inthe principal or most advantageous market for the asset or liability in an orderly transaction between market participants onthe measurement date.

 

FASB ASC 820 establishes a three-level hierarchyfor disclosure to show the extent and level of judgment used to estimate fair value measurements.

 

*Level 1 — *Uses unadjustedquoted prices that are available in active markets for identical assets or liabilities as of the reporting date. Active marketsare those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing informationon an ongoing basis.

*Level 2 — *Uses inputs, other than Level 1, that are either directlyor indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assetsand liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilitiesthat are valued using models or other pricing methodologies that do not require significant judgment since the input assumptionsused in the models, such as interest rates and volatility factors, are corroborated by readily observable data. Instruments inthis category include non-exchange-traded derivatives, including interest rate swaps.

 

*Level 3 — *Uses inputsthat 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 marketparticipant assumptions.

 

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

 

Recent Accounting Pronouncements 

 

In February 2015, the FASB issued ASU Update2015-02, “Consolidation” (“ASU 2015-02”).  This Update was issued to address concerns about the currentaccounting for consolidation by changing the analysis that a reporting entity must perform to determine whether it should consolidatecertain types of legal entities.  All legal entities are subject to reevaluation under the revised consolidation model. The amendments in this Update: 1) Modify the evaluation of whether limited partnerships and similar legal entities are variableinterest entities (VIEs) or voting interest entities; 2) Eliminate the presumption that a general partner should consolidate alimited partnership; 3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly thosethat have fee arrangements and related party relationships; and 4) Provide a scope exception from consolidation guidance for reportingentities with interests in legal entities that are required to comply with or operate in accordance with requirements that aresimilar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.  The amendments inASU 2015-02 are effective for the Company beginning in 2016.  Early adoption is permitted and both retrospective and modifiedretrospective application is permitted.  We currently intend to adopt ASU 2015-02 on January 1, 2016.  We don’tanticipate that our adoption of ASU 2015-02 will have a material impact on the Company’s financial statements or relateddisclosures as we are not currently involved with the types of legal entities to which the amendments apply. 

 

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

 

**3. Inventory**

 

At March 31, 2015 and December 31, 2014 theCompany had one class of inventory - finished goods.  Inventory is shown net of a provision of $547,800 for both March31, 2015 and December 31, 2014.