10-Q 1 icpw10q051317.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

	For the quarterly period ended March 31, 2017

[ ]	Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the transition period from to .

Commission file number 0-51536

IRONCLAD PERFORMANCE WEAR CORPORATION

(Exact name of registrant as specified in its charter)

Nevada

98-0434104

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1920 Hutton Court, Suite 300

Farmers Branch, TX 75234

(Address of principal executive offices, zip code)

(972) 996 -5664

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one);

Large accelerated filer [ ]	Accelerated filer	[ ]
Non-accelerated filer [ ](Do not check if smaller reporting company)	Smaller reporting company	[X]
	Emerging growth company	[ ]

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, 2017, the registrant had 85,646,354 shares of common stock issued and outstanding.

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			Page
PART I	Financial Information		1

Item 1.	Financial Statements

	a.	Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016	1

	b.	Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2017 and March 31, 2016	2

	c.	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2017 and March 31, 2016	3

	d.	Notes to Condensed Consolidated Financial Statements	4 – 17

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25

Item 4.	Controls and Procedures		25

PART II	Other Information		27


Item 6.	Exhibits		27

PART I

ITEM 1. FINANCIAL STATEMENTS

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2017 AND DECEMBER 31, 2016

	March 31, 2017 (unaudited)			December 31, 2016

ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	290,311		$	299,904
Accounts receivable, net of allowance for doubtful accounts of $30,000 and $30,000		5,555,550			7,968,513
Inventory, net of reserve of $197,549 and $197,549		7,959,774			8,733,315
Deposits on inventory		108,597			108,597
Prepaid and other		801,418			575,403
Total current assets		14,715,650			17,685,732

PROPERTY AND EQUIPMENT
Computer equipment and software		321,320			294,117
Office equipment and furniture		379,752			343,499
Leasehold improvements		140,717			140,718
Less: accumulated depreciation		(407,734	)		(357,204	)
Total property and equipment, net		434,055			421,130

Trademarks and patents, net of accumulated amortization of $85,441 and $81,260		231,557			235,738
Deposits and other assets		739,680			451,582
Total other assets		971,237			687,320

Total Assets	$	16,120,942		$	18,794,182

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	2,295,436		$	4,674,106
Line of credit		4,484,446			4,248,070
Total current liabilities		6,779,882			8,922,176

Deferred Tax Liability		26,292			—
Total Liabilities		6,806,174			8,922,176

STOCKHOLDERS’ EQUITY
Common stock, $.001 par value; 172,744,750 shares authorized; 85,646,354 and 84,500,454 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively		85,646			84,500
Additional paid-in capital		21,491,424			21,282,588
Accumulated deficit		(12,262,302	)		(11,495,082	)
Total Stockholders’ Equity		9,314,768			9,872,006
Total Liabilities and Stockholders’ Equity	$	16,120,942		$	18,794,182

See Notes to Condensed Consolidated Financial Statements.

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IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended March 31,			Three Months Ended March 31,
	2017			2016
REVENUES
Net sales	$	4,458,843		$	5,046,783

COST OF SALES
Cost of sales		2,903,247			3,225,842

GROSS PROFIT		1,555,596			1,820,941

OPERATING EXPENSES
General and administrative		783,064			892,148
Sales and marketing		946,789			722,222
Research and development		147,305			162,752
Purchasing, warehousing and distribution		316,216			326,246
Depreciation and amortization		54,710			40,326

Total operating expenses		2,248,084			2,143,694

LOSS FROM OPERATIONS		(692,488	)		(322,753	)

OTHER INCOME (EXPENSE)

Interest expense		(48,480	)		(36,187	)
Interest income		37			—
Total other expense		(48,443	)		(36,187	)

LOSS BEFORE BENEFIT FROM INCOME TAXES		(740,931	)		(358,940	)
(PROVISION FOR) BENEFIT FROM INCOME TAXES		(26,292	)		670

NET LOSS	$	(767,223	)		(358,270	)

NET LOSS PER COMMON SHARE
Basic	$	(0.01	)		(0.00	)
Diluted	$	(0.01	)		(0.00	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		85,017,430			83,011,751
Diluted		85,017,430			83,011,751

See Notes to Condensed Consolidated Financial Statements.

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IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(767,223	)	$	(358,270	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		50,530			37,234
Amortization		4,180			3,092
Inventory reserve		—			(98,362	)
Stock option expense		111,141			104,753
Deferred income taxes		26,292			—
Changes in operating assets and liabilities:
Accounts receivable		2,412,966			547,333
Inventory		773,541			(2,522,161	)
Deposits on inventory		—			62,996
Prepaid and other		(514,113	)		(410,494	)
Accounts payable and accrued expenses		(2,378,670	)		60,834
Net cash flows used in operating activities		(281,356	)		(2,573,045	)

CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment purchased		(63,454	)		(100,819	)
Investment in trademarks		—			(42,182	)
Net cash flows used in investing activities		(63,454	)		(143,001	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock		98,841			14,517
Proceeds from bank line of credit		4,983,336			5,748,652
Payments to bank line of credit		(4,746,960	)		(3,047,116	)
Net cash flows provided by financing activities		335,217			2,716,053

NET (DECREASE) INCREASE IN CASH		(9,593	)		7
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD		299,904			276,981
CASH AND CASH EQUIVALENTS END OF PERIOD	$	290,311		$	276,988

SUPPLEMENTAL DISCLOSURES
Interest paid in cash	$	48,480		$	36,187

See Notes to Condensed Consolidated Financial Statements.

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IRONCLAD PERFORMANCE WEAR CORPORATION

Notes to Condensed Consolidated Financial Statements

1. Description of Business and Liquidity

Ironclad Performance Wear Corporation (“Ironclad”, the “Company”, “we”, “us” or “our”) was incorporated in Nevada on May 26, 2004 and engages in the business of design and manufacture of branded performance work wear including task-specific gloves 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 automotive and sporting goods retailers. The Company has received 13 U.S. patents and 11 international patents and has 5 U.S. and 9 international patents pending for design and technological innovations incorporated in its performance work gloves. The Company has 52 registered U.S. trademarks, 6 in-use U.S. trademarks, 13 U.S. trademark pending registration, 39 registered international trademarks and 43pending international trademarks. We also have 7 copyright marks.

The Company reported net losses of $0.8 million and $0.4 million for the three months ended March 31, 2017 and March 31, 2016, respectively. At March 31, 2017 and 2016, the Company had an accumulated deficit of $12.3 million and $8.9 million, respectively. As of March 31, 2017, the Company has a line of credit originally due on February 28, 2017 amounting to $4.5 million and the Company’s cash resources may not be sufficient to fund the payment of the line of credit. The combination of these two events raised substantial doubt on the Company’s ability to continue as a going concern.

On April 11, 2017, Capital One, N.A. granted the Company an extension of the maturity date from February 28, 2017 to April 17, 2018 and replaced the Minimum Debt Service Coverage Ratio covenants calculated as of March 31, 2017, June 30, 2017 and September 30, 2017, with a twelve month trailing adjusted EBITDAS covenant and reset the debt service charge covenant for September 30, 2017. Effective October 1, 2017, Capital One, N.A. will reduce the cap on the line of credit to $5,000,000.

On May 10, 2017, Capital One, N.A. granted the Company an extension of the maturity date from April 17, 2018 to July 18, 2018.

Based on management forecasts, the Company believes it is probable that it will be able to perform above the required covenant levels and continue to operate within the line of credit agreement and will have sufficient resources for the measurement period one year from the date of issuance of the financials which will alleviate the substantial doubt of the Company’s ability to continue as a going concern. The Company’s ability to meet the forecasts is due to new sales commitments that had not existed in 2016 and reduced selling, general and administrative costs based on probable non-recurring expenses in 2016 and numerous cost cutting measures that the Company has identified and already put in place.

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, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on April 17, 2017.

Basis of Consolidation

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

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Use of Estimates

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

Cash and Cash Equivalents

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

Accounts Receivable

Accounts Receivable	March 31, 2017			December 31, 2016

Accounts receivable	$	5,580,550		$	7,998,513
Less - allowance for doubtful accounts		(30,000	)		(30,000	)

Net accounts receivable	$	5,555,550		$	7,968,513

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

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our current customers consist of large national, regional and smaller independent customers with good payment histories with us. We perform periodic credit evaluations of our customers and maintain allowances for potential credit losses based on management’s evaluation of historical experience and current industry trends. If the financial condition of our customers were to deteriorate, resulting in the impairment of their ability to make payments, additional allowances may be required. New customers are evaluated by us for credit worthiness before terms are established. Although we expect to collect all amounts due, actual collections may differ.

Inventory

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

We review the inventory level of all products quarterly. For most glove products that have been in the market for one year or greater, we consider inventory levels of greater than one year’s sales to be excess. Due to limited market penetration for our apparel products we have decided to provide a 50% allowance against this line of products. Products that are no longer part of the current product offering are considered obsolete. The potential for re-sale of slow-moving and obsolete inventories is based upon our assumptions about future demand and market conditions. The recorded cost of obsolete inventories is then reduced to zero and a reserve is established for slow moving products. Both the write down and reserve adjustments are recorded as charges to cost of goods sold. For the three months ended March 31, 2017 and March 31, 2016 we decreased our inventory reserve by $0 and $98,362 with the corresponding adjustments in cost of goods sold, respectively, and reported an obsolescence reserve balance of $197,549 as of March 31, 2017 and $197,549 as of December 31, 2016. 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.

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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 five years. Leasehold improvements are depreciated over fifteen years or the lease term, whichever is shorter. Maintenance and repairs are charged to expense as incurred.

Trademarks

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

Long-Lived Asset Impairment

The Company periodically evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that the asset should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flows over the remaining life of the asset in measuring whether the asset is recoverable. Based upon the anticipated future income and cash flow from operations and other factors, relevant in the opinion of the Company’s management, there has been no impairment. The Company retired $575,368 of fully depreciated fixed assets during the quarter ended March 31, 2016.

Revenue Recognition

A customer is obligated to pay for products sold to it within a specified number of days from the date that title to the products is transferred to the customer. The Company’s standard terms are typically net 30 days from the transfer of title to the products to the customer, however we have negotiated special terms with certain customers and industries. The Company typically collects payment from a customer within 30 to 60 days from the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership 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 shipped or delivered to customers, based on terms of agreement with the customers. All transactions are conducted in United States Dollars and therefore there are no transaction gains or losses incurred on transactions with foreign customers.

In June 2016 and March 2017, the Company entered into barter agreements whereby it delivered $307,837 and $302,083, respectively, of its inventory in exchange for future advertising credits and other items. The credits, which expire in March 2022, are valued at the lower of the Company’s cost or market value of the inventory transferred. The Company has recorded barter credits of $609,920 in “Other Assets - Non-current” at March 31, 2017. Under the terms of the barter agreements, the Company is required to pay cash equal to a negotiated amount of the bartered advertising, or other items, and use the barter credits to pay the balance. These credits are charged to expense as they are used. During the three months ended March 31, 2017 $0 was charged to expense for barter credits used.

During 2016, the Company entered into patent licensing agreements with multiple companies. The licenses are for a fixed fee and are non-cancellable by the licensee. The Company has no significant continuing obligation with regards to the use of the patent and the license arrangements are treated as an outright sale. The total value of these agreements was $383,500. The payment terms for these licenses varied by licensee and, in one case, payments extend over a period of five years. The Company has recorded $41,980 in “Prepaid expenses and other current assets” at March 31, 2017, representing the amounts that are due and payable within twelve months of March 31, 2017. At March 31, 2017, “Other Assets - Non-current” includes $94,935 of amounts that are due and payable in periods after March 31, 2018.

Revenue Disclosures

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

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	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Domestic	$	3,644,350	$	3,748,157
International		814,493		1,298,626
Total	$	4,458,843	$	5,046,783

Cost of Goods Sold

Our cost of goods sold includes the Free on Board cost of the product plus landed costs. Landed costs include freight-in, insurance, duties and administrative costs to deliver the finished goods to our distribution warehouse. Cost of goods sold does not include purchasing costs, warehousing or distribution costs. These costs are captured as incurred on a separate line in operating expenses. Our gross profit may not be comparable to other entities that may include some or all of these costs in the calculation of gross profit.

Product Returns, Allowances and Adjustments

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

Warranty Returns - We have a warranty policy that covers defects in workmanship. It allows customers to return damaged or defective products to us following a customary return merchandise authorization process for a period of one year from the date of purchase.

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

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

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

Our current estimated future sales return rate is approximately 1.0% of the trailing twelve months’ net sales. As noted above, our return rate is based upon our past history of actual returns and we estimate amounts for product returns for a given period by applying this historical return rate and reducing actual gross sales for that period by a corresponding amount. We believe that using a trailing 12-month return rate provides us with a sufficient period of time to establish recent historical trends in product returns for two primary reasons: (i) our products’ useful life is approximately 3-4 months and (ii) we are able to quickly correct any significant quality issues as we learn about them. If an unusual circumstance exists, such as a product that has begun to show materially different actual return rates as compared to our average 12-month return rates, we will make appropriate adjustments to our estimated return rates. Factors that could cause materially different actual return rates as compared to the 12-month return rates include a new product line, a change in materials or product being supplied by a new factory. Although we have no specific statistical data on this matter, we believe that our practices are reasonable and consistent with those of our industry. Our warranty terms under our arrangements with our suppliers do not provide for individual products returned by retailers or retail customers to be returned to the vendor.

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Reserve for Product Returns, Allowances and Adjustments

Reserve Balance 12/31/16	$	75,000
Payments Recorded During the Period		(86,061	)
		(11,061	)
Accrual for New Liabilities During the Reporting Period		86,061
Reserve Balance 3/31/17	$	75,000

Advertising and Marketing

Advertising and marketing costs are expensed as incurred. Advertising expenses for the three months ended March 31, 2017 and 2016 were $140,015 and $62,928, 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

Two customers accounted for approximately $2,077,000 or 46.6% of net sales for the quarter ended March 31, 2017. Three customers accounted for approximately $2,802,000 or 55.5% of net sales for the three months ended March 31, 2016. No other customers accounted for more than 10% of net sales during the periods.

Supplier Concentrations

Four suppliers, who are located overseas, accounted for approximately 73% of total purchases for the three months ended March 31, 2017. Three suppliers, who are located overseas, accounted for approximately 58% of total purchases for the three months ended March 31, 2016. All transactions are conducted in United States Dollars and therefore there are no transaction gains or losses incurred on transactions with foreign suppliers.

Stock Based Compensation

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

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Earnings (Loss) Per Share

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

As a result of the net loss for the three months ended March 31, 2017 and 2016, the Company calculated diluted loss per share using weighted average basic shares outstanding only, as using diluted shares would be anti-dilutive to loss per share.

The following table sets forth the calculation of the numerators and denominators of the basic and diluted per share computations for the three months ended March 31, 2017 and 2016 if diluted shares were to be included:

	2017			2016
Numerator: Net Loss	$	(767,223	)	$	(358,270	)
Denominator: Basic and Diluted EPS
Common shares outstanding, beginning of period		84,500,454			82,937,309
Weighted average common shares issued during the period		516,976			74,442
Denominator for basic earnings per common share		85,017,430			83,011,751
Denominator: Diluted EPS
Common shares outstanding, beginning of period		84,500,454			82,937,309
Weighted average common shares issued during the period		516,976			74,442
Denominator for diluted earnings per common share		85,017,430			83,011,751

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

	Three Months
	Ended March 31,
	2017		2016
Options outstanding under the Company’s stock option plans		10,260,131		11,846,509
Common Stock Warrants		43,146		43,146

Income Taxes

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

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

Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

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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, 2017 and December 31, 2016, cash, accounts receivable, accounts payable and short term line of credit debt, due to their short maturities, and liquidity, are carried at amounts which reasonably approximate fair value.

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

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

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

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

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

Level 3 — Uses inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

There were no items measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 replaces most existing revenue recognition guidance, and requires companies to recognize revenue based upon the transfer of promised goods and/or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and/or services. In addition, the new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. ASU 2014-09 is effective, as amended, for annual and interim periods beginning on or after December 15, 2017, applied retrospectively to each prior period presented or retrospectively with a cumulative effect adjustment recognized as of the adoption date. We expect to adopt the new standard on January 1, 2018, and have not yet selected a transition method. We are currently evaluating the overall impact this guidance will have on our consolidated financial statements. Based on our preliminary assessment, we do not expect the adoption of ASU 2014-09 to materially change the timing of revenue recognition and classification of transactions within our consolidated financial statements and related disclosures. We are, however, continuing our assessment, which may identify potential impacts.

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

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

In February 2016, the FASB issued ASU No. 2016-02 amending the accounting for leases. The new guidance requires the recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to those currently recorded, on our consolidated balance sheets. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact the ASU will have on our financial position and results of operations.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This guidance will change how companies account for certain aspects of share-based payments to employees. Companies will be required to recognize the difference between the estimated and the actual tax impact of awards within the income statement when the awards vest or are settled, and additional paid-in capital (“APIC”) pools will be eliminated. This ASU also impacts the classification of awards as either equity or liabilities and the classification of share-based transactions within the statement of cash flows. ASU 2016-09 is effective for annual and interim reporting periods beginning after December 15, 2016, and early adoption is permitted. The adoption of this standard did not have a material impact on our financial position and results of operations.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of Emerging Issues Task Force), ("ASU 2016-15") to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other topics. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. Entities will have to apply the guidance retrospectively, but if it is impracticable to do so for an issue, the amendments related to that issue would be applied prospectively. We are currently evaluating the impact this ASU will have on our financial position and results of operations.

3. Inventory

At March 31, 2017 and December 31, 2016 the Company had one class of inventory - finished goods. Inventory is shown net of a provision of $197,549 as of March 31, 2017 and $197,549 as of December 31, 2016.

March 31,

2017

December 31,

2016

Finished goods, net

7,959,774

8,733,315

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4. Property and Equipment

Property and equipment consisted of the following:

	March 31, 2017			December 31, 2016

Computer equipment and software	$	321,320		$	294,117
Office furniture and equipment		379,752			343,499
Leasehold improvements		140,717			140,718

		841,789			778,334
Less: Accumulated depreciation		(407,734	)		(357,204	)
Property and equipment, net	$	434,055		$	421,130

Depreciation expense for the three months ended March 31, 2017 and 2016 was $50,530 and $37,234, respectively.

5. Trademarks and Patents

Trademarks and patents consisted of the following:

	March 31,			December 31,
	2017			2016

Trademarks and patents	$	316,998		$	316,998
Less: Accumulated amortization		(85,441	)		(81,260	)
Trademarks and Patents, net	$	231,557		$	235,738

Trademarks and patents consist of definite-lived trademarks and patents of $239,667 and $239,667 and indefinite-lived trademarks and patents of $77,331 and $77,331 at March 31, 2017 and December 31, 2016, respectively. All trademark and patent costs have been generated by the Company, and consist of legal and filing fees.

Amortization expense for the three months ended March 31, 2017 and 2016 was $4,180 and $3,092, respectively.

6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following at March 31, 2017 and December 31, 2016:

	March 31, 2017		December 31, 2016
Accounts payable	$	1,399,049	$	3,528,762
Accrued rebates and co-op		407,326		540,265
Accrued returns reserve		75,000		75,000
Accrued expenses – other		414,061		530,079

Total accounts payable and accrued expenses	$	2,295,436	$	4,674,106

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7. Bank Lines of Credit

Bank Revolving Loan

On November 28, 2014 we entered into a Revolving Loan and Security Agreement with Capital One, N.A. which currently provides a revolving loan of up to $8,000,000. The loan was due to expire on November 30, 2016. On September 16, 2015, pursuant to the terms of the agreement, we increased the line limit from $6,000,000 to $8,000,000. All advances, up to the line limit of $8,000,000, are subject to a Borrowing Base report. The term Borrowing Base means an amount equal to (a) 80% of the net amount of all eligible accounts receivable plus, (b) 50% of the value of eligible landed inventory, plus (c) 35% of eligible in-transit inventory. In addition, the outstanding principal amount of all advances against eligible inventory shall not exceed 50% of the total line limit. All of our assets secure amounts borrowed under the terms of this agreement. Interest on borrowed funds accrued at LIBOR plus 2.80% until such time as the Company’s trailing twelve month EBITDAS (Earnings Before Interest, Taxes, Depreciation, Amortization and Stock compensation expense) exceeded $1,000,000 at which time the rate decreased to LIBOR plus 2.50%. The interest rate at March 31, 2017 was 4.28%. This agreement contained a Minimum Debt Service Coverage Ratio covenant and contains a Tangible Net Worth covenant. On March 16, 2016, the Company modified its Revolving Loan and Security Agreement with Capital One, N.A. which allowed the Company to add certain legal expenses of up to $325,000 in the calculation of EBITDAS for the trailing twelve month periods ending March 31, June 30, September 30 and December 31, 2016 and permit including certain receivables of up to $300,000 in the definition of eligible accounts receivable in determining the Borrowing Base.

On August 9, 2016 and November 7, 2016 Capital One, N.A. also elected to waive the Minimum Debt Service Coverage Ratio covenant, calculated as of June 30, 2016 and September 30, 2016, respectively, in accordance with Section 7.15(a) of the Loan and Security Agreement. On November 7, 2016, Capital One, N.A. granted the Company a 90-day extension of the maturity date from November 30, 2016 to February 28, 2017.

On April 11, 2017, Capital One, N.A. granted the Company an extension of the maturity date from February 28, 2017 to April 17, 2018 and elected to waive the Minimum Debt Service Coverage Ratio covenant calculated as of December 31, 2016. Capital One, N.A. also replaced the Minimum Debt Service Coverage Ratio covenants calculated as of March 31, 2017, June 30, 2017 and September 30, 2017, with a twelve month trailing adjusted EBITDAS covenant and reset the debt service charge covenant for September 30, 2017. Effective October 1, 2017, Capital One, N.A. will reduce the cap on the line of credit to $5,000,000.

On May 10, 2017, Capital One, N.A. granted the Company an extension of the maturity date from April 17, 2018 to July 18, 2018.

Although we were able to obtain waivers for our previous loan covenant violations and the Company met its March 31, 2017 loan covenants, we do not guarantee that we will meet the requirements of our covenants throughout the end of the extension period of the loan.

At March 31, 2017, the Company had unused credit available under our current facility of approximately $3,515,554. As of March 31, 2017 and December 31, 2016, the total amounts due to Capital One, N.A. were $4,484,446 and $4,248,070, respectively.

8. Equity Transactions

Common Stock

On January 25, 2017 the Company issued 100,000 shares of common stock upon the exercise of stock options at an exercise price of $0.095.

On February 17, 2017 the Company issued 595,900 shares of common stock upon the exercise of stock options at an exercise price range of $0.09 to $0.095.

On February 23, 2017 the Company issued 75,000 shares of common stock upon the exercise of stock options at an exercise price of $0.095.

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On February 27, 2017 the Company issued 150,000 shares of common stock upon the exercise of stock options at an exercise price of $0.095.

On March 27, 2017 the Company issued 125,000 shares of common stock upon the exercise of stock options at an exercise price of $0.095.

There were 85,646,354 shares of common stock of the Company outstanding at March 31, 2017.

Warrant Activity

A summary of warrant activity is as follows:

	Number of Shares		Weighted Average Exercise Price
Warrants outstanding at December 31, 2016		43,146		0.19
Warrants exercised		—
Warrants outstanding at March 31, 2017		43,146		0.19

Stock Based Compensation

Effective May 18, 2006, the Company reserved 4,250,000 shares of its common stock for issuance to employees, directors and consultants under its 2006 Stock Incentive Plan (the “2006 Plan”). In June, 2009, the stockholders of the Company approved an increase in the number of shares of common stock reserved under the 2006 Plan to 11,000,000 shares. In April, 2011, the stockholders of the Company approved a further increase in the number of shares of common stock reserved under the 2006 Plan to 13,000,000 shares. In May, 2013, the stockholders of the Company approved a further increase in the number of shares of common stock reserved under the 2006 Plan to 16,000,000 shares. In April, 2014, the stockholders of the Company approved a further increase in the number of shares of common stock reserved under the 2006 Plan to 21,000,000 shares. Under the 2006 Plan, options may be granted at prices not less than the fair market value of the Company’s common stock at the grant date. Options generally have a ten-year term and shall be exercisable as determined by the Board of Directors. The 2006 Plan terminated on May 18, 2016.

The fair value of each stock option granted under the 2006 Plan is estimated on the date of the grant using the Black-Scholes Model. The Black-Scholes Model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the options and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on historical market prices of the Company’s common stock. The expected life of an option grant is based on management’s estimate. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a straight line basis.

For stock options issued during the three months ended March 31, 2017 and March 31, 2016, the fair value of these options amounting to $148,960 and $262,800, respectively, was estimated at the date of the grant using a Black-Scholes option pricing model with the following range of assumptions:

	March 31, 2017		March 31, 2016
Risk free interest rate		1.90% - 1.94%		1.705	%
Dividends		—		—
Volatility factor		89.19% - 90.50%		101.0	%
Expected life		6.25 years		6.25 years

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A summary of stock option activity is as follows:

	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2015		10,130,720		$	0.16
Granted		1,600,000		$	0.23
Exercised		(1,063,145	)	$	0.13
Cancelled/Expired		(250,750	)	$	0.23
Outstanding at December 31, 2016		10,416,825		$	0.17
Granted		600,000		$	0.272
Exercised		(1,045,900	)	$	0.097
Cancelled/Expired		(310,794	)	$	0.255
Outstanding at March 31, 2017		9,660,131		$	0.18
Exercisable at March 31, 2017		6,983,047		$	0.165

The following table summarizes information about stock options outstanding at March 31, 2017:

Range of Exercise

Price

Number

Outstanding

Weighted Average

Remaining Contractual

Life (Years)

Weighted Average

Exercise Price

Intrinsic Value

Outstanding Shares

0.09 - $0.27

9,660,131

6.16

0.17

651,370

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

Range of Exercise

Price

Number

Exercisable

Weighted Average

Remaining Contractual

Life (Years)

Weighted Average

Exercise Price

Intrinsic Value

Exercisable Shares

0.09 - $0.27

6,983,047

6.45

0.17

1,291,201

The following table summarizes information about non-vested stock options at March 31, 2017:

	Number of Shares		Weighted Average Grant Date Fair Value
Non-Vested at December 31, 2015		2,615,422	$	0.16
Granted		1,200,000	$	0.27
Vested		(303,224)	$	0.116
Forfeited		(56,253)	$	0.22
Non-Vested at December 31, 2016		2,872,924	$	0.18
Granted		600,000	$	0.27
Vested		(566,671)	$	0.139
Forfeited		(229,169)	$	0.26
Non-Vested at March 31, 2017		2,677,084	$	0.202

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From time to time, we issue awards of restricted common stock to our board members. Generally, the awards vest over a period of one year after the date of grant contingent upon the continued service of the recipients. Awards are valued based on the market value of the common stock at grant date and compensation expense is recognized over the vesting period. The Company granted 500,000 and 733,333 restricted common stock awards in 2016 and 2015, respectively.

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

	Number of Shares		Weighted Average Grant Date Fair Value
Non-Vested at December 31, 2015		366,665	$	0.23
Granted		500,000	$	0.24
Vested		(616,665)	$	0.26
Non-Vested at December 31, 2016		250,000	$	0.24
Granted		100,000	$	0.26
Vested		(200,000)	$	0.25
Non-Vested at March 31, 2017		150,000	$	0.24

In accordance with ASC 718, the Company recorded $111,141 and $104,753 of compensation expense for employee stock options and awards during the three months ended March 31, 2017 and 2016. There was a total of $468,629 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan outstanding at March 31, 2017. This cost is expected to be recognized over a weighted average period of 2.4 years. The total fair value of shares vested during the three months ended March 31, 2016 was $128,264.

9. Income Taxes

The Company adopted FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” as of January 1, 2007. FASB ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax position taken or expected to be taken on a tax return. Additionally, FASB ASC 740-10 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. No adjustments were required upon adoption of FASB ASC 740-10.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the fiscal years 2012 through 2015. The Company’s state tax returns are open to audit under the statute of limitations for the fiscal years 2011 through 2015. The Company’s 2016 tax returns are currently on extension.

The components of the provision for (benefit from) income taxes for the three months ended March 31, 2017 and 2016 was $26,292 and ($670) pertaining to an additional allowance for tax assets relating to indefinite lived intangibles that are not expected to reverse and a tax refund received, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not be able to realize any of the benefits of these deductible differences.

As of March 31, 2017, the Company had unused federal and states net operating loss carryforwards available to offset future taxable income of approximately $4,885,000 and $5,701,000, respectively, that expire between 2017 and 2028.

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10. Commitments and Contingencies

On June 11, 2014, the Company entered into a 42 month lease for a new corporate office facility in Farmers Branch, Texas, commencing in the third quarter of 2014. The Company relocated its corporate headquarters to Texas in the third quarter of 2014. This new facility is approximately 13,026 square feet and the Company has negotiated six months of rent abatement. The monthly base rent is $7,653 plus $3,449 for common area operating expenses. A security deposit of one month’s rent has been made in the amount of $11,102. As part of this process, we were granted $60,000 for tenant improvements. Rent expense attributable to this facility for the three months ended March 31, 2017 and March 31, 2016 was $27,770 and 27,799, respectively.

On November 10, 2015, the Company entered into a 24 month lease for a new international sourcing office in Jakarta, Indonesia, commencing on January 1, 2016. The monthly base rent is approximately $1,200 during the first year of the lease with an increase to approximately $1,325 per month for the second year of the lease. A security deposit of three month’s rent has been made in the amount of $3,730. Rent expense attributable to this facility for the three months ended March 31, 2017 and March 31, 2016 was $5,126 and 4,197, respectively.

The Company has various non-cancelable operating leases for office equipment expiring through October, 2019. Equipment lease expense charged to operations under these leases was $4,280 and $7,485 for the three months ended March 31, 2017 and 2016, respectively.

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

Year	Facilities		Equipment		Total
2017		84,689		8,095		92,784
2018		16,175		7,329		23,504
2019		-		1,295		1,295

	$	100,864	$	16,719	$	117,583

11. Legal Proceedings

None

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

This discussion summarizes the significant factors affecting our operating results, financial condition and liquidity and cash flows for the three months ended March 31, 2017 and 2016. The following discussion of our results of operations and financial condition should be read together with the condensed consolidated financial statements and the notes to those statements included elsewhere in this report. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Our actual results could differ materially from the results anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors,” in our Annual Report on Form 10-K filed with the SEC on April 17, 2017.

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

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

We believe that our products have international appeal. In 2005, we began selling products in Australia and Japan through independent distributors, which accounted for approximately 10% of total sales for the quarter presented. From 2006 through 2015 we entered the Canadian and European markets through distributors. International sales represented approximately 21% of total sales in fiscal year 2016. We plan to continue to increase sales internationally by expanding our distribution into Europe and other international markets during the fiscal year ending December 31, 2017.

General

Net sales are comprised of gross sales less returns and discounts. Our operating results are seasonal, with a greater percentage of net sales being earned in the third and fourth quarters of our fiscal year due to the fall and winter selling seasons.

Our cost of goods sold includes the FOB cost of the product plus landed costs and a reserve for slow-moving inventory. Landed costs include freight-in, insurance, duties and administrative costs to deliver the finished goods to our distribution warehouse. Cost of goods sold does not include purchasing, warehousing or distribution costs. These costs are captured as incurred on a separate line in operating expenses. Our gross margins may not be comparable to other entities that may include some or all of these costs in the calculation of gross margin.

Our operating expenses consist primarily of payroll and related costs, marketing costs, corporate infrastructure costs and our purchasing, warehousing and distribution costs.

Historically, we have funded our working capital needs through a combination of our existing asset-based credit facility along with subordinated debt and equity financing transactions.

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On May 10, 2017, Capital One, N.A. granted the Company an extension of the maturity date from April 17, 2018 to July 18, 2018.

At March 31, 2017, the Company had unused credit available under our current facility of approximately $3,515,554.

Critical Accounting Policies, Judgments and Estimates

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations and contingencies and litigation. Management bases its estimates and judgments 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.

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Revenue Recognition

Under our sales model, a customer is obligated to pay us for products sold to it within a specified number of days from the date that title to the products is transferred to the customer. Our standard terms are typically net 30 days from the transfer of title to the products to a customer, however we have negotiated special terms with certain customers and industries. We typically collect payment from a customer within 30 to 60 days from the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery, depending on the terms of our agreement with a particular customer. The sale price of our products is substantially fixed or determinable at the date of sale based on purchase orders generated by a customer and accepted by us. A customer’s obligation to pay us for products sold to it is not contingent upon the resale of those products. We recognize revenue at the time title is transferred to a customer.

Revenue Disclosures

Our revenues are derived from the sale of our core line of task specific work gloves, available to all of our customers, both domestically and internationally. Below is a table outlining this breakdown for the comparative periods:

		Three Months Ended March 31, 2017		Three Months Ended March 31, 2016
Domestic	$	3,644,350	$	3,748,157
International		814,493		1,298,626
Total	$	4,458,843	$	5,046,783

Inventory Obsolescence Allowance

We review the inventory level of all products quarterly. For most glove products that have been in the market for one year or greater, we consider inventory levels of greater than one year’s sales to be excess. Due to limited market penetration for our apparel products we have decided to provide a 50% allowance against this line of products. Products that are no longer part of the current product offering are considered obsolete. The potential for re-sale of slow-moving and obsolete inventories is based upon our assumptions about future demand and market conditions. The recorded cost of obsolete inventories is then reduced to zero and a reserve is established for slow moving products. Both the write down and reserve adjustments are recorded as charges to cost of goods sold. For the three months ended March 31, 2017 and March 31, 2016 we adjusted our inventory reserve by $0 and $98,362 with the corresponding adjustments in cost of goods sold, respectively, and reported an obsolescence reserve balance of $197,549 as of March 31, 2017 and $197,549 as of December 31, 2016. 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

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Product Returns, Allowances and Adjustments

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

Our current estimated future sales return rate is approximately 1.0% of the trailing twelve months net sales. As noted above, our return rate is based upon our past history of actual returns and we estimate amounts for product returns for a given period by applying this historical return rate and reducing actual gross sales for that period by a corresponding amount. We believe that using a trailing 12-month return rate provides us with a sufficient period of time to establish recent historical trends in product returns for two primary reasons: (i) our products’ useful life is approximately 3-4 months and (ii) we are able to quickly correct any significant quality issues as we learn about them. If an unusual circumstance exists, such as a product that has begun to show materially different actual return rates as compared to our average 12-month return rates, we will make appropriate adjustments to our estimated return rates. Factors that could cause materially different actual return rates as compared to the 12-month return rates include a new product line, a change in materials or product being supplied by a new factory. Although we have no specific statistical data on this matter, we believe that our practices are reasonable and consistent with those of our industry. Our warranty terms under our arrangements with our suppliers do not provide for individual products returned by retailers or retail customers to be returned to the vendor.

Reserve for Product Returns, Allowances and Adjustments

Reserve Balance 12/31/16	$	75,000
Payments Recorded During the Period		(86,061	)
		(11,061	)
Accrual for New Liabilities During the Reporting Period		86,061
Reserve Balance 3/31/17	$	75,000

Stock Based Compensation

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

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Income Taxes

Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates as of the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be effectively sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. During 2016, we reviewed current profitability and forecasted future results and concluded that it was more likely than not that we would not be able to realize any of our deferred tax assets. In recognition of this risk, we provided a full valuation allowance on the deferred taxes as of December 31, 2016. As of March 31, 2017, we maintained our position to provide a full allowance on our net deferred tax assets. We will continue to evaluate if it is more likely than not that we will realize the future benefits from current and future deferred tax assets.

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

Results of Operations

Comparison of Three Months Ended March 31, 2017 and 2016

Net Sales decreased $587,940, or 11.6%, to $4,458,843 in the quarter ended March 31, 2017 from $5,046,783 for the corresponding period in 2016. Two customers accounted for 46.6% of Net Sales during the quarter ended March 31, 2017 and three customers accounted for 55.5% of Net Sales during the quarter ended March 31, 2016. The Company saw increased sales in our retail segment of approximately $445,000, offset by reduced sales in our industrial, international and private label segments of approximately $1,032,000 in total. The sales increase in our retail segment was primarily due to our increased business with in the do-it-yourself (or DIY) channel. The decreased sales in the industrial and international segments is primarily due to reduced sales to ORR Safety and reduced sales to our Australian distributor. The decrease in sales to our Australian distributor is primarily due to a delay in purchases attributable on an upcoming line review with their largest customer. Due to this line review, they will be holding off on all purchases until the third and fourth quarters of 2017. This customer is contractually obligated to purchase a minimum required amount of product in 2017. If they do not purchase the required amount of product, they must compensate the Company for the lost gross margin on the sale. We continue to focus our sales efforts on those areas where we see growth opportunities, the industrial and safety markets and job specific and specialty glove styles.

Gross Profit decreased $265,345, or 14.6%, to $1,555,596 for the quarter ended March 31, 2017 from $1,820,941 for the corresponding period in 2016. Gross profit, as a percentage of net sales, or gross margin, decreased to 34.9% in the first quarter of 2017 from 36.1% in the same quarter of 2016. The decrease in gross profit percentage points of 1.2% for the first quarter was primarily due to the mix of sales during the quarter.

Operating Expenses increased by $104,390, or 4.9%, to $2,248,084 in the first quarter of 2017 from $2,143,694 in the first quarter of 2016. As a percentage of net sales, operating expenses increased to 50.4% in the first quarter of 2017 from 42.5% in the same period of 2016. The increased spending for the first three months of 2017 was primarily driven by two factors. The majority of the increase is driven by increased wages, benefits and sales related travel due to an increase in our number of field sales people and increase in headcount required to service the Grainger business and generate new business.

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Loss from Operations increased by $369,735, or 115%, to a loss of $692,488 in the first quarter of 2017, from a loss of $322,753 in the first quarter of 2016. Loss from operations as a percentage of net sales increased to 15.5% in the first quarter of 2017 from 6.4% in the first quarter of 2016. The increase in loss from operations in the three month period was primarily due to the reduction in net sales and increase in operating expenses.

Interest Expense increased $12,293 to $48,480 in the first quarter of 2017 from $36,187 in the same period of 2016. This increase is due to greater borrowings under our bank line of credit agreement which were utilized to fund our working capital needs.

Net Loss increased by $408,953, or 114%, to a loss of $767,223 in the first quarter of 2017 from a loss of $358,270 in the first quarter of 2016. This increased loss was primarily the result of the decreased net sales and the increase in operating expenses.

Seasonality and Quarterly Results

Our glove business generally shows an increase in sales during the third and fourth quarters due primarily to an increase in the sale of our winter glove line during this period and fall promotions. We typically generate 55% - 65% of our glove net sales during these months. The first and second quarters of the year are generally considered our slower season. Even though the overall economy continues to exhibit moderate and uneven growth, which affects some of our channels, we have been experiencing some mixed growth in certain channels, international and private label, which helps offset declines in other areas.

Our working capital, at any particular time, reflects the seasonality of our glove business and plans to expand product lines and enter new markets.

Liquidity and Capital Resources

Our cash requirements are principally for working capital. Our need for working capital is seasonal, with the greatest requirements from June through the end of October each year as a result of our inventory build-up during this period for the fall and winter selling seasons. Historically, our main sources of liquidity have been borrowings under our existing revolving credit facility, the issuance of subordinated debt and the sale of equity. In the short term we monitor our credit issuances and cash collections to maximize cash flows and investigate opportunities to reduce our current inventories to convert these assets into cash. Over the past several years, and continuing in the near and longer term we are focused on controlling our operating costs, managing margins and improving operating procedures to generate sustained profitability.

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On May 10, 2017, Capital One, N.A. granted the Company an extension of the maturity date from April 17, 2018 to July 18, 2018.

At March 31, 2017, the Company had unused credit available under our current facility of approximately $3,515,554.

The Company utilized cash flow from operations of $281,356 in the first quarter of 2017. The cash flow used in operations is primarily the result of the net loss increases in prepaid expenses and a decrease in accounts payable and accrued expenses, offset by decreases in accounts receivable and inventory.

The Company provided approximately $335,000, net, of cash flow in financing activities through borrowings on the line of credit.

The Company reported net losses of $0.8 million and $0.4 million for the three months ended March 31, 2017 and March 31, 2016, respectively. At March 31, 2017 and 2016, the Company had an accumulated deficit of $12.3 million and $8.9 million, respectively. As of March 31, 2017, the Company has a line of credit originally due on February 23, 2017 amounting to $4.5 million and the Company’s cash resources may not be sufficient to fund the payment of the line of credit. The combination of these two events raised substantial doubt on the Company’s ability to continue as a going concern.

The Company does not have sufficient funds to pay down the credit line at its current due date, however, Capital One, N.A. has extended the maturity date of the line and is working with the Company to facilitate an orderly exit from the line. On May 10, 2017, Capital One, N.A. granted the Company an extension of the maturity date from April 17, 2017 to July 17, 2018 and, as noted above, on April 11, 2017 replaced the Minimum Debt Service Coverage Ratio covenants calculated as of March 31, 2017, June 30, 2017 and September 30, 2017, with a twelve month trailing adjusted EBITDAS covenant, and reset the debt service charge covenant for September 30, 2017. Effective October 1, 2017, Capital One, N.A. will reduce the cap on the line of credit to $5,000,000. The Company worked diligently in modeling the impact of these changes and it is probable that we will be able to perform above the required covenant levels. In addition, the Company believes that it will generate adequate funds to finance its operating needs and it will continue to operate within the line of credit agreement.

The Company believes that it will meet the forecasts provided to Capital One, N.A. due to new sales commitments that had not existed in 2016 and reduced selling, general and administrative costs based on the non-recurrence of the litigation and bad debt expenses in 2016 and numerous cost cutting measures that the Company has identified and already put in place. The management plan indicates that it is probable that the Company will be able to meet the bank covenants and will have sufficient resources for the measurement period one year from the date of issuance of the financials.

Management believes that it is capable of renewing this type of loan based on the value of its accounts receivable and inventory and the strength of its business going forward. The Company also intends to commence talks to refinance the line of credit with another funding source and intends to close on a new line prior to the expiration of the current Capital One N.A. extension. However, we cannot guarantee that we would be able to successfully execute our strategies described above, or obtain alternative financing, if necessary, on commercially reasonable terms or at all, or that implementing these strategies would allow us to meet our debt obligations and capital requirements.

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Management believes the successful execution of the Company’s business plan does not depend on the ability to raise additional capital. However, to the extent that existing capital resources and sales growth are not sufficient to fund future activities, we may need to raise additional funds through private equity offerings, debt financing and public financing, as well as monitoring and controlling our expenditures to limit cash outflows. Additional funds may not be available on terms favorable to us or at all. Failure to raise additional capital, if and when needed, could have a material adverse effect on our financial position, results of operations, and cash flows.

Off Balance Sheet Arrangements

At March 31, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.

As of March 31, 2017, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, has identified material weaknesses in our internal control over financial reporting. As a result of these material weaknesses, management has concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our internal control over financial reporting was not effective.

Changes in Internal Controls

During the last fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in the Internal Control-Integrated Framework (2013). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In management’s assessment of internal controls, it concluded that deficiencies exist in several key areas that, individually or in combination with one another, may not reasonably and timely detect or prevent a material misstatement in our financial reporting. Management’s findings of material weaknesses are summarized below.

Controls over Revenue Recognition

We have implemented design changes to our process and controls to address deficiencies over revenue recognition that contributed to our material weakness identified as of December 31, 2016. Management is still in the process of testing and evaluating the effectiveness of those changes which are expected to be completed in the third quarter of 2017.

Remediation of the Material Weakness in Internal Control over Financial Reporting

In response to the identified material weaknesses, management, with Audit Committee oversight, is continuing to dedicate resources and effort to improve the effectiveness of our revenue recognition controls to prevent recurrence of identified process failures. Management, with Audit Committee oversight, has implemented a remediation program for the remainder of 2017. To properly align the remediation process, the annual risk assessment will include a more focused attention on transaction processing and reporting.

Management believes the foregoing efforts will effectively remediate the material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, management may take additional measures to address the material weaknesses or modify the remediation plan and will continue to review and make necessary changes to the overall design of its internal controls.

Internal Control Over Financial Reporting

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PART II: OTHER INFORMATION

ITEM 6.

EXHIBITS

Exhibit Index

Exhibit Number	Exhibit Title


31.1	Certification by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1*	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance.
101.SCH	XBRL Taxonomy Extension Schema.
101.CAL	XBRL Taxonomy Extension Calculation.
101.DEF	XBRL Taxonomy Extension Definition.
101.LAB	XBRL Taxonomy Extension Labels.
101.PRE	XBRL Taxonomy Extension Presentation.

* Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	IRONCLAD PERFORMANCE WEAR CORPORATION

Date: May 15, 2017	By:	/s/ William Aisenberg
		William Aisenberg, EVP, Chief Financial Officer

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