10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2016

or

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

Commission file number 0-51536

IRONCLAD PERFORMANCE WEAR CORPORATION

(Exact name of registrant as specified in its charter)

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

1920 Hutton Court, Suite 300

Farmers Branch, TX 75234

(Address of principal executive offices, zip code)

(972) 996 -5664

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]  No  [ ]

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    

Yes  [ ]    No  [X]

As of November 7, 2016, the registrant had 84,500,454 shares of common stock issued and outstanding.

TABLE OF CONTENTS

			Page
PART I	Financial Information		1
Item 1.	Financial Statements
	a.	Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	1
	b.	Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2016 and September 30, 2015	2
	c.	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and September 30, 2015	3
	d.	Notes to Condensed Consolidated Financial Statements	4 – 18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4.	Controls and Procedures		27
PART II	Other Information		28
Item 6.	Exhibits		29

PART I

ITEM 1. FINANCIAL STATEMENTS

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2016 AND DECEMBER 31, 2015

	September 30, 2016 (unaudited)			December 31, 2015
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	282,368		$	276,981
Accounts receivable, net of allowance for doubtful accounts of $459,540 and $30,000		7,762,628			8,857,768
Inventory, net of reserve of $247,549 and $547,800		8,422,548			6,681,715
Deposits on inventory		108,597			171,593
Prepaid and other assets		860,999			610,417
Total current assets		17,437,140			16,598,474
PROPERTY AND EQUIPMENT
Computer equipment and software		255,010			622,264
Office equipment and furniture		295,394			308,398
Leasehold improvements		140,718			174,298
Less: accumulated depreciation		(310,670	)		(767,047	)
Total property and equipment, net		380,452			337,913
Other assets – non-current		414,762			—
Trademarks and patents, net of accumulated amortization of $77,738 and $68,094		179,584			125,895
Deposits		36,820			21,306
Deferred tax assets – long term		—			1,832,000
Total other assets		631,166			1,979,201
Total Assets	$	18,448,758		$	18,915,588
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	3,394,219		$	3,358,724
Line of credit		5,457,908			3,224,780
Total current liabilities		8,852,127			6,583,504
Total Liabilities		8,852,127			6,583,504
STOCKHOLDERS’ EQUITY
Common stock, $.001 par value; 172,744,750 shares authorized; 84,500,454 and 82,937,309 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		84,500			82,937
Additional paid-in capital		21,194,693			20,776,012
Accumulated deficit		(11,682,562	)		(8,526,865	)
Total Stockholders’ Equity		9,596,631			12,332,084
Total Liabilities and Stockholders’ Equity	$	18,448,758		$	18,915,588

See Notes to Condensed Consolidated Financial Statements.

Table Of Contents  1

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months  Ended September 30,			Three Months  Ended September 30,			Nine Months Ended September 30,			Nine Months  Ended September 30,
	2016			2015			2016			2015
REVENUES
Net sales	$	6,454,723		$	5,420,511		$	16,897,920		$	15,160,159
COST OF SALES
Cost of sales		4,190,496			3,504,078			10,863,237			9,700,524
GROSS PROFIT		2,264,227			1,916,433			6,034,683			5,459,635
OPERATING EXPENSES
General and administrative		911,347			804,143			2,854,385			2,243,963
Sales and marketing		988,082			807,168			2,568,481			2,239,471
Research and development		158,698			166,368			484,809			479,967
Purchasing, warehousing and distribution		472,104			280,810			1,193,117			805,340
Depreciation and amortization		44,672			33,039			128,636			99,867
Total operating expenses		2,574,903			2,091,528			7,229,428			5,868,608
LOSS FROM OPERATIONS		(310,676	)		(175,095	)		(1,194,745	)		(408,973	)
OTHER INCOME (EXPENSE)
Interest expense		(45,992	)		(30,693	)		(129,672	)		(65,635	)
Interest income		25			7			50			21
Total other income (expense)		(45,967	)		(30,686	)		(129,622	)		(65,614	)
NET LOSS BEFORE PROVISION FOR INCOME TAXES		(356,643	)		(205,781	)		(1,324,367	)		(474,587	)
DEFERRED INCOME TAX EXPENSE		(1,832,000	)		—			(1,832,000	)		—
BENEFIT FROM INCOME TAXES		—			—			670			—
NET LOSS	$	(2,188,643	)	$	(205,781	)	$	(3,155,697	)	$	(474,587	)
NET LOSS PER COMMON SHARE
Basic	$	(0.03	)	$	(0.00	)	$	(0.04	)	$	(0.01	)
Diluted	$	(0.03	)	$	(0.00	)	$	(0.04	)	$	(0.01	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		84,245,019			82,292,247			83,571,312			81,443,216
Diluted		84,245,019			82,292,247			83,571,312			81,443,216

See Notes to Condensed Consolidated Financial Statements

Table Of Contents  2

IRONCLAD PERFORMANCE WEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months  Ended  September 30, 2016			Nine Months  Ended  September 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(3,155,697	)	$	(474,587	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		118,991			92,716
Amortization		9,645			7,151
Inventory obsolescence reversal		(300,251	)		—
Bad debt expense		429,540			—
Deferred tax expense		1,832,000			—
Stock option expense		285,610			265,202
Changes in operating assets and liabilities:
Accounts receivable		665,600			107,128
Inventory		(1,440,582	)		(431,776	)
Deposits on inventory		62,996			510,080
Prepaid and other		(266,096	)		(193,561	)
Other assets - non-current		(414,762	)		—
Accounts payable and accrued expenses		35,495			(582,646	)
Net cash flows used by operating activities		(2,137,511	)		(700,293	)
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment purchased		(161,530	)		(135,999	)
Trademarks and patents		(63,333	)		(366	)
Net cash flows used in investing activities		(224,863	)		(136,365	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock		134,633			129,453
Proceeds from bank line of credit		13,174,505			10,142,935
Payments to bank line of credit		(10,941,377	)		(9,499,666	)
Net cash flows provided by financing activities		2,367,761			772,722
NET INCREASE (DECREASE) IN CASH		5,387			(63,936	)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD		276,981			340,904
CASH AND CASH EQUIVALENTS END OF PERIOD	$	282,368		$	276,968
SUPPLEMENTAL DISCLOSURES
Interest paid in cash	$	129,672		$	65,635
Income taxes paid in cash	$	—		$	—

See Notes to Condensed Consolidated Financial Statements. 

Table Of Contents  3

IRONCLAD PERFORMANCE WEAR CORPORATION

Notes to Condensed Consolidated Financial Statements

1. Description of Business

Ironclad Performance Wear Corporation (“Ironclad”, the “Company”, “we”, “us” or “our”) was incorporated in Nevada on May 26, 2004 and engages in the business of design and manufacture of branded performance work wear including task-specific gloves and performance apparel designed to significantly improve the wearer’s ability to safely, efficiently and comfortably perform general to highly specific job functions. Its customers are primarily industrial distributors, hardware, lumber and automotive retailers, “Big Box” home centers and sporting goods retailers. The Company has received nine U.S. patents, 11 international patents and five U.S. patents and nine foreign patents pending for design and technological innovations incorporated in its performance work gloves. The Company has 51 registered U.S. trademarks, 6 in-use U.S. trademarks, 17 U.S. trademark pending registration, 34 registered international trademarks, 44 international trademarks pending and 7 copyright marks.

2. Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) including those for interim financial information and with the instructions for Form 10-Q and Article 8 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. These financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2016.

Basis of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

Accounts Receivable

Accounts Receivable	September 30, 2016			December 31, 2015
Accounts receivable	$	8,222,168		$	8,887,768
Less - allowance for doubtful accounts		(459,540	)		(30,000	)
Net accounts receivable	$	7,762,628		$	8,857,768

Table Of Contents  4

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. In the third quarter of 2016 we increased our allowance for doubtful accounts by $489,000 to provide for the estimate of uncollectible 2015 receivables net of inventories expected to be returned from our former Canadian distributor. This return was accepted in order to allow us to refocus and rebuild our Canadian distribution network to enable us to service our major customers in Canada and due to the distributor’s inability to meet its financial obligations to us.

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 nine months ended September 30, 2016 and September 30, 2015 we decreased our inventory reserve by $300,251 and $0 with the corresponding adjustments in cost of goods sold, respectively, and reported an obsolescence reserve balance of $247,549 as of September 30, 2016 and $547,800 as of December 31, 2015. All adjustments for obsolete inventory establish a new cost basis for that inventory as we believe such reductions are permanent declines in the market price of our products. Generally, obsolete inventory is sold to companies that specialize in the liquidation of these items or contributed to charities, while we continue to market slow-moving inventories until they are sold or become obsolete. As obsolete or slow-moving inventory is sold or disposed of, we reduce the reserve.

Property and Equipment

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

Trademarks

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

Long-Lived Asset Impairment

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

Table Of Contents  5

Revenue Recognition

A customer is obligated to pay for products sold to it within a specified number of days from the date that title to the products is transferred to the customer. The Company’s standard terms are typically net 30 days from the transfer of title to the products to the customer, however we have negotiated special terms with certain customers and industries. The Company typically collects payment from a customer within 30 to 60 days from the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership generally passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale price of the Company’s products is substantially fixed or determinable at the date of sale based on purchase orders generated by a customer and accepted by the Company. A customer’s obligation to pay the Company for products sold to it is not contingent upon the resale of those products. The Company recognizes revenues when products are delivered, or shipped to customers, based on terms of agreement with the customers and collection is reasonably assured. 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, the Company entered into a barter agreement whereby it delivered $307,837 of its inventory in exchange for future advertising credits and other items. The credits, which expire in June 2019, are valued at the lower of the Company’s cost or market value of the inventory transferred. The Company has recorded barter credits of $307,837 in ‘‘Other Assets - Non-current’’ at September 30, 2016. Under the terms of the barter agreement, 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 nine months ended September 30, 2016 $0 was charged to expense for barter credits used.

In Q2 and Q3 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 $365,000. 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 September 30, 2016, representing the amounts that are due and payable within twelve months of September 30, 2016. At September 30, 2016, ‘‘Other Assets - Non-current’’ includes $106,925 of amounts that are due and payable in periods after September 30, 2017.

Revenue Disclosures

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

	Three Months Ended September 30, 2016		Three Months Ended September 30, 2015
Domestic	$	5,098,656	$	4,273,607
International		1,356,067		1,146,904
Total	$	6,454,723	$	5,420,511
		Nine Months Ended September 30, 2016		Nine Months Ended September 30, 2015
Domestic	$	13,581,504	$	11,190,725
International		3,316,416		3,969,434
Total	$	16,897,920	$	15,160,159

Table Of Contents  6

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.

Table Of Contents  7

Reserve for Product Returns, Allowances and Adjustments
Reserve Balance 12/31/15	$	75,000
Payments Recorded During the Period		(87,480	)
		(12,480	)
Accrual for New Liabilities During the Reporting Period		87,480
Reserve Balance 3/31/16		75,000
Payments Recorded During the Period		(141,955	)
		(66,955	)
Accrual for New Liabilities During the Reporting Period		141,955
Reserve Balance 6/30/16		75,000
Payments Recorded During the Period		(4,599	)
		70,401
Accrual for New Liabilities During the Reporting Period		4,599
Reserve Balance 9/30/16	$	75,000

Advertising and Marketing

Advertising and marketing costs are expensed as incurred. Advertising expenses for the three and nine months ended September 30, 2016 and 2015 were $150,629 and $68,961 and $335,848 and $238,674, 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 $2,129,000 or 33.0% of net sales for the three months ended September 30, 2016.   One customer accounted for approximately $1,328,000 or 24.5% of net sales for the three months ended September 30, 2015.  Two customers accounted for approximately $5,782,000 or 34.2% of net sales for the nine months ended September 30, 2016.   Three customers accounted for approximately $6,807,000 or 44.9% of net sales for the nine months ended September 30, 2015. No other customers accounted for more than 10% of net sales during the periods.  

Supplier Concentrations

Two suppliers, who are located overseas, accounted for approximately 38% of total purchases for the three months ended September 30, 2016.  Three suppliers, who are located overseas, accounted for approximately 61% of total purchases for the three months ended September 30, 2015.  Three suppliers, who are located overseas, accounted for approximately 50% of total purchases for the nine months ended September 30, 2016.  Two suppliers, who are located overseas, accounted for approximately 51% of total purchases for the nine months ended September 30, 2015. All transactions are conducted in United States Dollars and therefore there are no transaction gains or losses incurred on transactions with foreign suppliers.

Table Of Contents  8

Stock Based Compensation

The Company follows the provisions of the 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.

Earnings (Loss) Per Share

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

As a result of the net loss for the nine months ended September 30, 2016 and 2015, the Company calculated diluted earnings per share using weighted average basic shares outstanding only, as using diluted shares would be anti-dilutive to loss per share.

The following table sets forth the calculation of the numerators and denominators of the basic and diluted per share computations for the three and nine months ended September 30, 2016 and 2015 if diluted shares were to be included:

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Numerator: Net Loss	$	(2,188,643	)	$	(205,781	)	$	(3,155,697	)	$	(474,597	)
Denominator: Basic and Diluted EPS
Common shares outstanding, beginning of period		84,000,454			81,132,811			82,937,309			80,808,629
Weighted average common shares issued during the period		244,565			1,159,436			634,003			634,587
Denominator for basic earnings per common share		84,245,019			82,292,247			83,571,312			81,443,216

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

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2016		2015		2016		2015
Options outstanding under the Company’s stock option plans		10,955,075		11,030,721		10,955,075		11,030,721
Common Stock Warrants		43,146		43,146		43,146		43,146

Table Of Contents  9

Income Taxes

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

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

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

The components of the provision for income taxes for the nine months ended September 30, 2016 and 2015 was deferred income tax expense of $1,832,000 and $0, respectively.  As of September 30, 2016, we reviewed current profitability and forecasted future results and concluded that it is more likely than not that we will not be able to realize any of our deferred tax assets. In recognition of this risk, we increased our valuation allowance by $1,832,000 on the deferred taxes for the period ended September 30, 2016. We will continue to evaluate if it is more likely than not that we will realize the future benefits from current and future deferred tax assets. These deferred tax benefits are recorded on the balance sheet as long term deferred tax assets of $0 and $1,832,000 as of September 30, 2016 and December 31, 2015.

Fair Value of Financial Instruments

The fair value of the Company’s financial instruments is determined by using available market information and appropriate valuation methodologies. The Company’s principal financial instruments are cash, accounts receivable, accounts payable and short term line of credit debt. At September 30, 2016 and December 31, 2015, cash, accounts receivable, accounts payable and short term line of credit debt, due to their short maturities, and liquidity, are carried at amounts which reasonably approximate fair value.

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

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

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

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

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

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

There were no items measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015.

Recent Accounting Pronouncements 

In April 2016, the FASB issued ASU 2016-10, an amendment to ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services and expands related disclosure requirements. ASU 2016-10 clarifies ASU 2014-09 to address the potential for diversity in practice at the adoption. ASU 2016-10 is effective for annual and interim reporting periods beginning after December 15, 2017, and early application is permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements as well as the expected adoption method.

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

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

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

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. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

3. Inventory

At September 30, 2016 and December 31, 2015 the Company had one class of inventory - finished goods.  Inventory is shown net of a provision for obsolescence of $247,549 as of September 30, 2016 and $547,800 as of December 31, 2015.

	September 30, 2016		December 31,  2015
Finished goods, net	$	8,422,548	$	6,681,715

4. Property and Equipment

Property and equipment consisted of the following:

	September 30, 2016			December 31, 2015
Computer equipment and software	$	255,010		$	622,264
Office furniture and equipment		295,394			308,398
Leasehold improvements		140,718			174,298
		691,122			1,104,960
Less: Accumulated depreciation		(310,670	)		(767,047	)
Property and equipment, net	$	380,452		$	337,913

Depreciation expense for the three months ended September 30, 2016 and 2015 was $41,359 and $30,656, respectively. Depreciation expense for the nine months ended September 30, 2016 and 2015 was $118,991 and $92,716, respectively.

5. Trademarks and Patents

Trademarks and patents consisted of the following:

	September30,			December 31,
	2016			2015
Trademarks and patents	$	257,322		$	193,989
Less: Accumulated amortization		(77,738	)		(68,094	)
Trademarks and Patents, net	$	179,584		$	125,895

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Trademarks and patents consist of definite-lived trademarks and patents of $182,698 and $126,890 and indefinite-lived trademarks and patents of $74,624 and $67,099 at September 30, 2016 and December 31, 2015, respectively. All trademark and patent costs have been generated by the Company, and consist of legal and filing fees.

Amortization expense for the three months ended September 30, 2016 and 2015 was $3,313 and $2,383, respectively. Amortization expense for the nine months ended September 30, 2016 and 2015 was $9,645 and $7,151, respectively.

6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following at September 30, 2016 and December 31, 2015:

	September 30,  2016		December 31, 2015
Accounts payable	$	2,471,232	$	2,468,847
Accrued rebates and co-op		389,455		159,227
Customer deposits		—		7,222
Accrued returns reserve		75,000		75,000
Accrued expenses – other		458,532		647,928
Total accounts payable and accrued expenses	$	3,394,219	$	3,358,724

7. Bank Lines of Credit

Bank Revolving Loan

On November 28, 2014 we entered into a Revolving Loan and Security Agreement with Capital One, N.A. which currently provides a revolving loan of up to $8,000,000. The loan 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 September 30, 2016 was 3.023%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. On March 16, 2016, the Company modified its Revolving Loan and Security Agreement with Capital One, N.A. which allowed the Company to add certain legal expenses of up to $325,000 in the calculation of EBITDAS for the trailing twelve month periods ending March 31, June 30, September 30 and December 31, 2016 and permit including certain receivables of up to $300,000 in the definition of eligible accounts receivable in determining the Borrowing Base.

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 November 7, 2016 and August 9, 2016, Capital One, N.A. also elected to waive the Minimum Debt Service Coverage Ratio, calculated as of September 30, 2016 and June 30, 2016, respectively, in accordance with Section 7.15(a) of the Loan and Security Agreement.

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As of September 30, 2016 and December 31, 2015, the total amounts due to Capital One, N.A. were $5,457,908 and $3,224,780, respectively.

8. Equity Transactions

Common Stock

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

On May 3, 2016 the Company issued 2,000 shares of common stock upon the exercise of stock options at an exercise price of $0.09.

On May 16, 2016 the Company issued 115,000 shares of common stock upon the exercise of stock options at an exercise price of $0.09.

On May 18, 2016 the Company issued 531,854 shares of common stock upon the exercise of stock options at an exercise price of $0.09.

On June 15, 2016 the Company issued 253,000 shares of common stock upon the exercise of stock options at a range of exercise prices from of $0.24 to $0.25.

On August 16, 2016 the Company issued 500,000 shares of restricted common stock with a fair value of $0.24, vesting over a period of one year.

There were 84,500,454 shares of common stock of the Company outstanding at September 30, 2016.

Warrant Activity

A summary of warrant activity is as follows:

	Number of Shares		Weighted Average Exercise Price
Warrants outstanding at December 31, 2015		43,146		0.19
Warrants exercised		—
Warrants outstanding at September 30, 2016		43,146		0.19

Stock Based Compensation

Ironclad California reserved 3,020,187 shares of its common stock for issuance to employees, directors and consultants under the 2000 Stock Incentive Plan, which the Company assumed in the merger (the “2000 Plan”). Under the 2000 Plan, options may be granted at prices not less than the fair market value of the Company’s common stock at the grant date. Options generally have a ten-year term and shall be exercisable as determined by the Board of Directors.

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

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The fair value of each stock option granted under either the 2000 Plan or 2006 Plan is estimated on the date of the grant using the Black-Scholes Model.  The Black-Scholes Model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the options and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on historical market prices of the Company’s common stock. The expected life of an option grant is based on management’s estimate. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a straight line basis.

For stock options issued during the three months and nine months ended September 30, 2016 and 2015, the fair value of these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following range of assumptions:

	Three Months Ended	Three Months Ended	Nine Months Ended	Nine Months Ended
	September 30, 2016	September 30, 2015	September 30, 2016	September 30, 2015
Risk free interest rate	0.51% - 1.13%	-	0.51% - 1.705%	1.54%
Dividends	-	-	-	-
Volatility factor	70.47% - 93.01%	-	70.47% - 101.0%	133.9%
Expected life	6.25 years	-	6.25 years	6.25 years

A summary of stock option activity is as follows:

	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2015		10,130,720		$	0.160
Granted		1,200,000		$	0.270
Exercised		(161,291	)	$	0.090
Cancelled/Expired		(56,253	)	$	0.220
Outstanding at March 31, 2016		11,113,176		$	0.180
Granted		-		$	-
Exercised		(901,854	)	$	0.133
Cancelled/Expired		(56,247	)	$	0.191
Outstanding at June 30, 2016		10,155,075		$	0.181
Granted		400,000		$	0.250
Exercised		-		$	-
Cancelled/Expired		(100,000)		$	0.270
Outstanding at September 30, 2016		10,455,075		$	0.161
Exercisable at September 30, 2016		7,413,400		$	0.163

The following table summarizes information about stock options outstanding at September 30, 2016:

Range of Exercise  Price		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Intrinsic Value Outstanding Shares
$	0.09 - $0.27		10,455,075		6.01	$	0.165	$	1,036,052

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The following table summarizes information about stock options exercisable at September 30, 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		7,413,400		5.26	$	0.163	$	707,068

The following table summarizes information about non-vested stock options at September 30, 2016:

	Number of Shares			Weighted Average Grant Date Fair Value
Non-Vested at December 31, 2015		2,615,422		$	0.160
Granted		1,200,000		$	0.270
Vested		(303,224	)	$	0.116
Forfeited		(56,253	)	$	0.220
Non-Vested at March 31, 2016		3,455,945		$	0.193
Granted		-		$	-
Vested		(295,519	)	$	0.114
Forfeited		-		$	-
Non-Vested at June 30, 2016		3,160,426		$	0.215
Granted		400,000		$	0.250
Vested		(293,751	)	$	0.114
Forfeited		(100,000	)	$	0.130
Non-Vested at September 30, 2016		3,166,675		$	0.169

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 restricted common stock awards in 2016 and 733,333 restricted stock awards in 2015.

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		$	0.28
Granted		-		$	-
Vested		(183,333	)	$	0.28
Non-Vested at March 31, 2016		183,332		$	0.28
Granted		-		$	-
Vested		(183,332	)	$	0.28
Non-Vested at June 30, 2016		-		$	-
Granted		500,000		$	0.24
Vested		(125,000	)	$	0.24
Non-Vested at September 30, 2016		375,000		$	0.24

In accordance with ASC 718, the Company recorded $94,009 and $90,487 of compensation expense for employee stock options during the three months ended September 30, 2016 and 2015. The Company recorded $285,610 and $265,202 of compensation expense for employee stock options during the nine months ended September 30, 2016 and 2015. There was a total of $567,247 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan outstanding at September 30, 2016. This cost is expected to be recognized over a weighted average period of 2.19 years. The total fair value of shares vested during the nine months ended September 30, 2016 was $254,251.

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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 2013 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 provision for income taxes differs from the amount that would result from applying the federal statutory rate for the periods ended September 30, 2016 and 2015 as follows:  

	September 30,  2016			September 30,  2015
Statutory regular federal income benefit rate		34.0	%		34.0	%
State income taxes, net of federal benefit		2.9	%		2.7	%
Change in valuation allowance		(175.2	%)		(36.7	%)
Total		(138.3	%)		0	%

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. The Company’s glove business generally shows an increase in sales during the third and fourth quarters due primarily to an increase in the sale of the winter glove line during this period. The Company typically generates 55% - 65% of the glove net sales during these months. The change in valuation allowance is affected by the seasonality of the business. As of September 30, 2016, we reviewed current profitability and forecasted future results and concluded that it is more likely than not that we will not be able to realize any of our deferred tax assets. In recognition of this risk, we have increased the valuation allowance by $1,832,000 on the deferred taxes for the period ended September 30, 2016.

As of September 30, 2016, the Company had unused federal and states net operating loss carryforwards available to offset future taxable income of approximately $4,104,000 and $5,384,000, respectively, that expire between 2016 and 2027.

10. Commitments and Contingencies

The Company entered into a five-year lease with one option to renew for an additional five years for a corporate office and warehouse lease commencing in July 2006. The Company exercised its five year option to renew this lease commencing in July 2011. The facility is located in El Segundo, California. As part of this renewal process we reduced our square footage by approximately 1,700 square feet of unneeded warehouse space in exchange for six months of rent concessions and approximately $40,000 for tenant improvements. The Company has sublet this facility for the remainder of its lease term as the Company relocated to Texas. Accordingly, rent expense for this facility for the three months and nine months ended September 30, 2016 was $0 and $0, respectively. Rent expense for the three months and nine months ended September 30, 2015 was $2,032 and $4,063, respectively.

On June 11, 2014, the Company entered into a 42 month lease for a new corporate office facility in Farmers Branch, Texas, commencing in the third quarter of 2014. The Company relocated its corporate headquarters to Texas in the third quarter of 2014. This new facility is approximately 13,026 square feet and the Company has negotiated six months of rent abatement. The monthly base rent is $7,653 plus $3,449 for common area operating expenses. A security deposit of one month’s rent has been made in the amount of $11,102. As part of this process, we were granted $60,000 for tenant improvements. Rent expense attributable to this facility for the three months and nine months ended September 30, 2016 was $27,468 and $81,778, respectively. Rent expense for the three months and nine months ended September 30, 2015 was $24,263 and $72,788, respectively.

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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 and nine months ended September 30, 2016 was $4,343 and $13,346, respectively. No rent expense was recognized during 2015.

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 $3,863 and $3,626 for the three months ended September 30, 2016 and 2015, respectively. Equipment lease expense charged to operations under these leases was $15,895 and $11,468 for the nine months ended September 30, 2016 and 2015, respectively.

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

Year	Facilities		Equipment		Total
2016		27,869		2,698		30,567
2017		112,919		10,794		123,713
2018		16,175		7,329		23,504
2019		-		1,295		1,295
	$	156,963	$	22,116	$	179,079

11. Legal Proceedings

On September 28, 2015 Ironclad Performance Wear Corporation filed a Petition in the District Court of Dallas County, Texas, 193rd Judicial District, Cause No. DC-15-11878, against Orr Safety Corporation (“Orr”), a significant customer of the Company.  The Petition alleged that Orr had materially breached an Exclusive License and Distributorship Agreement with Ironclad by, inter alia, failing to use its best efforts to actively promote, market and sell the KONG® brand of gloves manufactured by Ironclad, and selling gloves that were similar to, or competitive with, the KONG® brand.  The Petition also alleged that Orr materially breached other agreements between the parties, and provided notice that Ironclad was terminating the Exclusive License and Distributorship Agreement due to Orr’s material breaches.  The Petition sought damages, declaratory relief regarding Ironclad’s rights and obligations under the relevant agreements, and all other available relief.  On October 23, 2015, Orr filed an Answer and Counterclaim in the Dallas County action, and concurrently removed the case to the United States District Court for the Northern District of Texas, Case No. 3:15-cv-03453-D.  Orr’s Counterclaim alleged that Ironclad breached the Exclusive License and Distributorship Agreement, as well as a Sub-Distributorship Agreement between the parties by, inter alia, infringing upon Orr’s exclusive rights under the agreements, failing to pay appropriate royalties to Orr, and failing to protect the intellectual property of the KONG® brand of glove.  The Counterclaim also alleged that Ironclad engaged in selling “counterfeit” KONG® products in violation of the parties’ agreement.  Ironclad filed an Answer to the Counterclaim on November 27, 2015 denying all material allegations.  On December 7, 2015, Orr filed an Amended Answer to Ironclad’s Petition responding to each of the allegations pursuant to the pleading standards in federal court.  On December 3, 2015, the Court entered a Scheduling Order setting deadlines for discovery and dispositive motions.  On July 13, 2016, the Company filed a motion for summary judgement. 

On August 26, 2016, the Company executed a settlement agreement to settle the lawsuit. The terms of this agreement are confidential. Orr will continue to be an important distributor of the Company’s products, but the Company can also sell KONG® through other distribution channels.

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

This discussion summarizes the significant factors affecting our operating results, financial condition and liquidity and cash flows for the three and nine months ended September 30, 2016 and 2015. The following discussion of our results of operations and financial condition should be read together with the condensed consolidated financial statements and the notes to those statements included elsewhere in this report. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Our actual results could differ materially from the results anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 23, 2016.

Overview

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

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

We believe that our products have international appeal. In 2005, we began selling products in Australia and Japan through independent distributors, which accounted for approximately 10% of total sales for the quarter presented. From 2006 through 2015 we entered the Canadian and European markets through distributors. International sales represented approximately 30% of total sales in fiscal year 2015. We plan to continue to increase sales internationally by expanding our distribution into Europe and other international markets during the fiscal year ending December 31, 2016.

General

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

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

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

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

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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 September 30, 2016 was 3.023%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. On March 16, 2016, the Company modified its Revolving Loan and Security Agreement with Capital One, N.A. which allowed the Company to add certain legal expenses of up to $325,000 in the calculation of EBITDAS for the trailing twelve month periods ending March 31, June 30, September 30 and December 31, 2016 and permit including certain receivables of up to $300,000 in the definition of eligible accounts receivable in determining the Borrowing Base.

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. Capital One, N.A. has also stated that additional extensions and/or renewals will be considered, as necessary. During this extension, the Company’s intent is to renew the line with Capital One, N.A. and has already commenced talks with them to begin the process. We cannot assure that we would be able to successfully renew or replace the line of credit described above that would allow us to meet our debt obligations.

On November 7, 2016 and August 9, 2016, Capital One, N.A. also elected to waive the Minimum Debt Service Coverage Ratio, calculated as of September 30, 2016 and June 30, 2016, respectively, in accordance with Section 7.15(a) of the Loan and Security Agreement. Although we were able to obtain waivers for our loan covenants violations we may not meet the requirements of our covenants throughout the end of the extension period of the loan. At September 30, 2016, we had unused credit available under our current facility of approximately $2,542,092.

Critical Accounting Policies, Judgments and Estimates

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

Revenue Recognition

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

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In the second and third quarters of 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 $365,000.

Revenue Disclosures

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

		Three Months Ended September 30, 2016		Three Months Ended September 30, 2015
Domestic	$	5,098,656	$	4,273,607
International		1,356,067		1,146,904
Total	$	6,454,723	$	5,420,511
		Nine Months Ended September 30, 2016		Nine Months Ended September 30, 2015
Domestic	$	13,581,504	$	11,190,725
International		3,316,416		3,969,434
Total	$	16,897,920	$	15,160,159

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 nine months ended September 30, 2016 and September 30, 2015 we decreased our inventory reserve by $300,251 and $0 with the corresponding adjustments in cost of goods sold, respectively, and reported an obsolescence reserve balance of $247,549 as of September 30, 2016 and $547,800 as of December 31, 2015. The reduction in the inventory obsolescence allowance of $300,251 over the nine month period ended September 30, 2016 is due to the sale of a portion of the glove and apparel inventory that we had previously reserved. All adjustments for obsolete inventory establish a new cost basis for that inventory as we believe such reductions are permanent declines in the market price of our products. Generally, obsolete inventory is sold to companies that specialize in the liquidation of these items or contributed to charities, while we continue to market slow-moving inventories until they are sold or become obsolete. As obsolete or slow-moving inventory is sold or disposed of, we reduce the reserve.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our current customers consist primarily of large national, regional and smaller independent customers with good payment histories with us. We perform periodic credit evaluations of our customers and maintain allowances for potential credit losses based on management’s evaluation of historical experience and current industry trends. If the financial condition of our customers were to deteriorate, resulting in the impairment of their ability to make payments, additional allowances may be required. New customers are evaluated for credit worthiness before terms are established. Although we expect to collect all amounts due, actual collections may differ.  In the third quarter of 2016 we increased our allowance for doubtful accounts by $489,000 to provide for the estimate of uncollectible 2015 receivables net of inventories expected to be returned from our former Canadian distributor. This return was accepted in order to allow us to refocus and rebuild our Canadian distribution to enable us to service our major customers in Canada and due to the distributor’s inability to meet its financial obligations to us.

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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 is reduced by estimated returns. We record a corresponding accrual for the estimated liability associated with the estimated returns which is based on the historical gross sales of the products corresponding to the estimated returns. This accrual is offset each period by actual product returns.

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

Reserve for Product Returns, Allowances and Adjustments
Reserve Balance 12/31/15	$	75,000
Payments Recorded During the Period		(87,480	)
		(12,480	)
Accrual for New Liabilities During the Reporting Period		87,480
Reserve Balance 3/31/16		75,000
Payments Recorded During the Period		(141,955	)
		(66,955	)
Accrual for New Liabilities During the Reporting Period		141,955
Reserve Balance 6/30/16		75,000
Payments Recorded During the Period		(4,599	)
		70,401
Accrual for New Liabilities During the Reporting Period		4,599
Reserve Balance 9/30/16	$	75,000

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Stock Based Compensation

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

Income Taxes

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

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be effectively sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  As of September 30, 2016, we reviewed current profitability and forecasted future results and concluded that it is more likely than not that we will not be able to realize any of our deferred tax assets. In recognition of this risk, we increased the valuation allowance by $1,832,000 on the deferred taxes for the period ended September 30, 2016. We will continue to evaluate if it is more likely than not that we will realize the future benefits from current and future deferred tax assets. These deferred tax benefits are recorded on the balance sheet as long term deferred tax assets of $0 and $1,832,000 as of September 30, 2016 and December 31, 2015.

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

Results of Operations

Comparison of Three Months Ended September 30, 2016 and 2015

Net Sales increased $1,034,212 or 19.1%, to $6,454,723 in the quarter ended September 30, 2016 from $5,420,511 for the corresponding period in 2015. Two customers accounted for 33.0% of Net Sales during the quarter ended September 30, 2016 and one customer accounted for 24.5% of Net Sales during the quarter ended September 30, 2015. The Net Sales increase for the quarter is due to increases in our industrial, international and retail sales and the increase in the patent licensing fees. Patent licensing fees earned during the three month period ended September 30, 2016 was $116,103. This is partially offset by a decrease in the private label sales.  The sales increase in our industrial sales was primarily due to our increased business with Grainger.

Gross Profit increased $347,794 to $2,264,227 for the quarter ended September 30, 2016 from $1,916,433 for the corresponding period in 2015. Gross Profit, as a percentage of net sales, or gross margin, represented 35.1% for the third quarter of 2016 and 35.4% for the third quarter of 2015. The increase in gross profit dollars is primarily driven by the impact of 19% higher net sales and the patent license fees. This decrease in gross margin is primarily due to ramp-up costs of initiating our new program with Grainger. This includes expediting product from the factories to Grainger and certain start-up costs in distribution and operations.

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Operating Expenses increased $483,384 to $2,574,903 in the three month period ending September 30, 2016 from $2,091,519 for the three month period ended September 30, 2015. As a percentage of net sales, Operating Expenses represented 39.9% for the three months ended September 30, 2016, compared to 38.6% of net sales for the same period in 2015. The majority of the increase is driven by approximately $489,000 of bad debt expense related to the discontinuance of our relationship with our Canadian distributor and increases in wages and benefit costs to service the Grainger business and generate new business, offset by the recovery realized from the settlement of the litigation with ORR.

Loss from Operations increased by $135,590, to a loss of $310,676 in the third quarter of 2016, from a loss of $175,086 in the third quarter of 2015. Loss from operations as a percentage of net sales increased to 4.8% in the third quarter of 2016 from 3.2% in the third quarter of 2015.  The increase in loss from operations in the third quarter was primarily due to increased operating expenses.

Interest Expense increased $15,299 to $45,992 in the third quarter of 2016 from $30,693 in the same period of 2015. This increase is due to greater borrowings under our bank line of credit agreement which were utilized to fund the increased accounts receivable and inventory levels.

Net Loss Before Provision for Income Taxes increased $150,871 to a loss of $356,643 in the third quarter of 2016 from a loss of $205,772 in the third quarter of 2015.   The increase in net loss is primarily attributable to higher operating expenses as outlined above.

Deferred Income Tax Expense increased $1,832,000 in the third quarter of 2016 from $0 in the third quarter of 2015.   The increase is due to the increase in the valuation allowance for the deferred tax asset during the quarter.

Net Loss increased $1,982,871 to a loss of $2,188,643 in the third quarter of 2016 from a loss of $205,772 in the third quarter of 2015.   The increase in net loss is primarily attributable to the deferred tax adjustment discussed above.

Comparison of Nine Months Ended September 30, 2016 and 2015

Net Sales increased $1,737,761 or 11.5%, to $16,897,920 in the nine months ended September 30, 2016 from $15,160,159 for the corresponding period in 2015. Two customers accounted for 34.2% of Net Sales during the nine months ended September 30, 2016 and three customers accounted for 44.9% of Net Sales for the nine months ended September 30, 2015.  The Net Sales increase for the nine month period is due to increases in industrial and retail sales and the increase in the patent licensing fees, offset in part by decreases in our international and private label sales. Patent licensing fees earned during the nine month period ended September 30, 2016 was $368,103. We continue to focus our sales efforts on those areas where we see growth opportunities, the industrial and safety markets and job specific and specialty glove styles.

Gross Profit increased $575,048 to $6,034,683 for the nine months ended September 30, 2016 from $5,459,635 in the prior year period. Gross Profit, as a percentage of net sales, or gross margin, decreased to 35.7% on a year-to-date basis from 36.0% for the same period of 2015. The decrease in gross profit percentage points of 0.3% was primarily due to ramp up costs of initiating our new program with Grainger. This includes expediting product from the factories to Grainger and certain start-up costs in distributions and operations.

Operating Expenses increased $1,360,820 to $7,229,428 for the nine months ended September 30, 2016, compared to $5,868,608 for the corresponding period in 2015. As a percentage of net sales, Operating Expenses represented 42.8% for the nine months ended September 30, 2016, compared to 38.7% of net sales for the same period in 2015. The majority of the increase is driven by approximately $489,000 of bad debt expense related to the discontinuation of business with our Canadian distributor. The balance of the variance is primarily due to an increase in wage and benefit costs. Part of this increase comes from additional headcount required to service the Grainger business and generate new business. The remainder of the wage and benefit increase is attributable to the year-over-year impact of post third quarter 2015 new hires. Our number of employees was 43 at September 30, 2016 and 38 at September 30, 2015.

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Loss from Operations increased by $785,772 to a loss of $1,194,745 for the nine months ended September 30, 2016, from a loss of $408,973 in the corresponding period of 2015. The increase in loss from operations in the nine month period was primarily due to increased operating expenses.

Interest Expense increased $64,037 to $129,672 in the first nine months of 2016 from $65,635 in the same period of 2015. This increase is due to greater borrowings under our bank line of credit agreement which were utilized to fund the increased accounts receivable and inventory levels.

Net Loss Before Provision for Income Taxes increased $849,780 to a loss of $1,324,367 for the nine months ended September 30, 2016 from a loss of $474,587 in the prior year period. This increased loss was primarily the result of increased operating expenses.

Deferred Income Tax Expense increased $1,832,000 for the nine month period ended September 30, 2016 from $0 in 2015.   The increase is due to the increase in the valuation allowance for the deferred tax asset.

Net Loss increased $2,681,110 to a loss of $3,155,697 for the nine months ended September 30, 2016 from a loss of $474,587 for the same period in 2015.   The increase in net loss is primarily attributable to the deferred tax adjustment discussed above 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 December 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, while at the same time, investing for the growth of the business, managing margins and improving operating procedures to generate sustained profitability.

On November 28, 2014 we entered into a Revolving Loan and Security Agreement with Capital One, N.A. which currently provides a revolving loan of up to $8,000,000. The loan 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 September 30, 2016 was 3.023%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. On March 16, 2016, the Company modified its Revolving Loan and Security Agreement with Capital One, N.A. which allowed the Company to add certain legal expenses of up to $325,000 in the calculation of EBITDAS for the trailing twelve month periods ending March 31, June 30, September 30 and December 31, 2016 and permit including certain receivables of up to $300,000 in the definition of eligible accounts receivable in determining the Borrowing Base.

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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. Capital One, N.A. has also stated that additional extensions and/or renewals will be considered, as necessary. During this extension, the Company’s intent is to renew the line with Capital One, N.A. and has already commenced talks with them to begin the process. We cannot assure that we would be able to successfully renew or replace the line of credit described above that would allow us to meet our debt obligations.

On November 7, 2016 and August 9, 2016, Capital One, N.A. also elected to waive the Minimum Debt Service Coverage Ratio, calculated as of September 30, 2016 and June 30, 2016, respectively, in accordance with Section 7.15(a) of the Loan and Security Agreement. Although we were able to obtain waivers for our loan covenants violations we may not meet the requirements of our covenants throughout the end of the extension period of the loan. At September 30, 2016, we had unused credit available under our current facility of approximately $2,542,092.

The Company utilized cash flow from operations of $2,137,511 in the first nine months of 2016. The cash flow utilized from operations is primarily the result of increases in inventory, prepaid expenses and other non-current assets, offset by decreases in accounts receivable and deposits on inventory and an increase in accounts payable and accrued expenses. The increase in inventory of $1,440,582 (net of change in allowance of inventory obsolescence of $300,251) from December 31, 2015 is attributable to the build-up of inventory to service our greatly expanded program with Grainger and the introduction of our new Vibram/IVE lines. It is projected that inventory levels will reduce during Q4 of 2016.

The Company generated approximately $2,367,761, net, of cash flow in financing activities primarily from borrowings against the line of credit.

We believe that our cash flows from operations and borrowings available to us under the revolving credit facility (which comes due in November 2016 and which we intend to either renew or replace with another line of credit), the availability of purchase order financing and our continuing cost containment measures will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.

Our ability to access these sources of liquidity may be negatively impacted by the non-renewal or replacement of our revolving credit facility, a decrease in demand for our products and/or the requirement that we meet certain borrowing conditions and debt covenants under our revolving credit facility.

Off Balance Sheet Arrangements

At September 30, 2016, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

As of September 30, 2016, the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934 Act, as amended. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective.  In making this assessment, our management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission under the 1992 Framework (COSO). The COSO Commission has recently adopted a revision of the Internal Control-Integrated Framework which became effective for us in December 2014. We expect to be in full compliance later this year.

Our disclosure controls and procedures, and internal controls over financial reporting, provide reasonable, but not absolute, assurance that all deficiencies in design and or operation of those control systems, or all instances of errors or fraud, will be prevented or detected.  Those control systems are designed to provide reasonable assurance of achieving the goals of those systems in light of our resources and nature of our business operations.  Our disclosure controls and procedures, and internal control over financial reporting, remain subject to risks of human error and the risk that controls can be circumvented for wrongful purposes by one or more individuals in management or non-management positions.

Internal Control Over Financial Reporting

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

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PART II:  OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit Index

Exhibit Number	Exhibit Title
10.1*	Settlement Agreement dated August 26, 2016, between Ironclad Performance Wear Corporation and ORR Safety Corporation.
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.

*       Confidential treatment requested.

**       Furnished herewith. 

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SIGNATURES

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

	IRONCLAD PERFORMANCE WEAR CORPORATION
Date: November 14, 2016	By:	/s/ William Aisenberg
		William Aisenberg, EVP, Chief Financial Officer

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EX-10.1

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. §§ 200.80(b)(4) AND 240.24B-2 FOR PORTIONS OF THIS DOCUMENT MARKED AS FOLLOWS: [***]. CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 

CONFIDENTIAL SETTLEMENT AGREEMENT

This CONFIDENTIAL SETTLEMENT AGREEMENT (“Agreement”) is made and entered into as of this 26th day of August, 2016 by and between IRONCLAD PERFORMANCE WEAR CORPORATION (“IRONCLAD”), a Nevada corporation having its principal place of business at 1920 Hutton Court, Suite 300, Farmers Branch, Texas 75234, and ORR SAFETY CORPORATION (“ORR SAFETY”), a Kentucky corporation having its principal place of business at 11601 Interchange Dr., Louisville, Kentucky 40229 (Ironclad and ORR Safety are each a “Party” and are collectively the “Parties”).

RECITALS:

A.       The Parties entered into that certain Exclusive License and Distributorship Agreement dated January 6, 2009, and amended on January 27, 2015 (the “Distributorship Agreement”);

B.       The Parties also entered into that certain Sub-Distributorship Agreement dated July 22, 2010, and amended on January 27, 2015 (the “Sub-Distributorship Agreement”);

C.       The Parties also entered into that certain Memorandum of Understanding dated December 11, 2013 relating to the Distributorship Agreement and the Sub-Distributorship Agreement (the “Memorandum of Understanding”) (collectively the Distributorship Agreement, the Sub-Distributorship Agreement and the Memorandum of Understanding are referred to herein as the “Distribution Agreements”);

D.       Ironclad filed suit against ORR Safety on September 28, 2015 in the District Court of Dallas County, Texas styled Ironclad Performance Wear Corporation v. ORR Safety Corporation, Cause No. DC-15-11878 seeking, among other things, damages based on alleged breaches of the Distributorship Agreement;

E.       On October 23, 2015 ORR Safety filed a counterclaim seeking damages based on alleged breaches of the Distributorship Agreement and the Sub-Distributorship Agreement, and alleged tort claims (the “Counterclaim”). On the same day, ORR Safety removed the case to the United States District Court for the Northern District of Texas, Dallas Division, and the case was subsequently styled Ironclad Performance Wear Corporation v. ORR Safety Corporation, Case No. 15-cv-03453-D (N.D. Tex.) (the “Litigation”);

F.       Each Party denies the claims brought against it in the Litigation; and

G.       The Parties entered into that certain Agreement in Principle to settle the Litigation on August 10, 2016 (the “Agreement in Principle”) which contemplates that the Parties enter into this Agreement.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. §§ 200.80(b)(4) AND 240.24B-2 FOR PORTIONS OF THIS DOCUMENT MARKED AS FOLLOWS: [***]. CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 

 AGREEMENT:

1.       NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

2.       [***]. Within five (5) business days of filing of the Stipulation of Dismissal With Prejudice of the Litigation, a copy of which is attached as Attachment A, [***] shall pay [***] to [***] in immediately available funds (“Settlement Proceeds”). Further, [***] shall be responsible for all federal, state, and local taxes related to its receipt of the Settlement Proceeds. [***] agrees to defend and indemnify the [***] Released Parties (as defined in Section [***]) for any tax liability or penalty assessed against any [***] Released Party as a result of the receipt by [***] of the payment of the Settlement Proceeds, and agrees that [***] shall bear any and all costs, including, but not limited to, penalties and attorneys' fees, related to any such assessment against any [***] Released Party, including any such costs incurred by any [***] Released Party.

3.       Delivery of Certain Gloves to [***]. Within thirty (30) business days of the dismissal of the Litigation, [***] shall deliver, DDP to [***] , what was shown on an inventory sheet on August 10, 2016 to be approximately [***] gloves in assorted sizes, an inventory of which is attached as Attachment B (the “[***] Gloves”). [***] shall receive the [***] Gloves “as is” without any rights of return or exchange; however, [***] represents and warrants that the [***] Gloves are merchantable, new, and in good condition, and that the [***] Gloves can be sold as the same.

4.       Termination of All Existing and Prior Written Agreements. The Distribution Agreements, and all other agreements between the parties, are and remain terminated, with no surviving provisions. Any rights under such Distribution Agreements are subject to the releases provided in this Agreement.

5.       Distribution Rights. ORR Safety has the non-exclusive right to distribute any “KONG” safety gloves (all sizes), and all other Ironclad gloves available generally for distribution to all Ironclad distributors, pursuant to the terms of the Non-Exclusive Distribution Agreement attached as Attachment C.

6.       The Patent. ORR Safety represents and warrants to Ironclad that, to the best of its knowledge, Attachment D constitutes a true and complete list of the manufacturers and catalogue styles of all gloves that it currently distributes, sells or offers for sale as of the date of the Agreement in Principle (the "Pipeline Gloves"). ORR Safety further represents and warrants to Ironclad that, to the best of its knowledge and other than certain non-engineered gloves made to specification for private label, all of the Pipeline Gloves are standard catalogue items of the respective manufacturers and that none of the Pipeline Gloves are specifically made as a “custom” style for distribution or sale by ORR Safety. Ironclad agrees that ORR Safety may continue to sell the Pipeline Gloves, irrespective of whether such Pipeline Gloves actually or allegedly infringe on the U.S. Patent No. 9,241,519 (filed Sept. 19, 2008) (the "Patent"). Further, Ironclad covenants not to sue ORR Safety or its Affiliates (as defined below), or any of their respective directors, managers, officers, employees, agents, attorneys, representatives, successors or assigns, nor any customer or distributor with respect to those Pipeline Gloves purchased from ORR Safety, nor any of their respective directors, managers, officers, employees, agents, attorneys, representatives, successors or assigns (collectively, “Downstream Acquirors”), based on any alleged infringement of the Patent with as a result of the purchase or sale of any of the Pipeline Gloves. For the sake of clarity, nothing in this Agreement shall prevent Ironclad from suing any manufacturer, distributor or any other third party who distributes or sells any Pipeline Gloves to ORR Safety, and ORR Safety expressly agrees to cooperate with and provide reasonable assistance to Ironclad in connection with any such suit. To the extent Ironclad reasonably believes ORR Safety is selling or distributing any gloves other than the Pipeline Gloves that allegedly infringe the Patent, Ironclad shall provide ORR Safety at least sixty (60) days’ prior written notice before Ironclad files any litigation alleging infringement of the Patent against ORR Safety or any party Ironclad actually knows to be a Downstream Acquiror. Said notice shall provide a description of the basis of Ironclad’s assertions in reasonable detail, and provide ORR Safety the opportunity to cure any alleged infringement or to discontinue selling (and/or cause any such Downstream Acquiror the opportunity to cure any alleged infringement or to discontinue selling) the gloves in question, without further recourse by Ironclad. Ironclad agrees that the list of Pipeline Gloves contained in Attachment D will be considered “Confidential” as that it is defined in the January 15, 2016 Agreed Protective Order (DN-25) (the “Protective Order”), and that Ironclad will not publish or disseminate the same.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. §§ 200.80(b)(4) AND 240.24B-2 FOR PORTIONS OF THIS DOCUMENT MARKED AS FOLLOWS: [***]. CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 

7.       Releases by Ironclad. [***], Ironclad, for itself and its successors and assigns, and for all other persons or entities claiming by, through or under any of them, hereby fully and forever remises, releases, acquits and discharges ORR Safety and its Affiliates and their respective directors, managers, officers, employees, agents, attorneys, distributors, representatives, successors, parent companies, subsidiary companies, and assigns (each an “ORR Safety Released Party” and collectively, the “ORR Safety Released Parties”), and each of them, of and from any and all manner of actions, causes of action, suits, sums of money, accounts, reckonings, covenants, controversies, agreements, promises, damages, judgments, proceedings, executions, debts, obligations, liabilities, liens, security interests, claims and demands of any nature whatsoever, whether at law, in equity or otherwise, whether in tort, contract or otherwise, whether pursuant to any statute, ordinance, regulation, rule of common law or otherwise, whether direct or indirect, whether punitive or compensatory, whether known or unknown, whether presently discoverable or undiscoverable, whether suspected or claimed, and whether fixed, contingent or otherwise (collectively, “Claims”), which Ironclad ever had, now has or may have against any ORR Safety Released Party, or which any Ironclad Released Party ever had, now has or may have against any ORR Safety Released Party, in either case based in whole or in part on any contract, agreement, arrangement, commitment, loan, advance, offer, facts, conduct, activities, omissions, transactions, events or circumstances, whether known or unknown, which may now exist or which may have existed, occurred, happened, arisen or transpired at any time prior to or on the date hereof, including without limitation, any Claims related to or arising from the Distribution Agreements, the Litigation, or any claims made by or which could have been made by any party in the Litigation. In connection with the releases granted in this Section 7 and in Section 8, the term “Affiliate” and “Affiliates” of a Party, means and refers to any other entity that, directly or indirectly, controls, is controlled by or is under common control with, that Party. For purposes of this definition, “control” (including, with correlative meaning, the terms “controlled by” and “under common control with”), as used with respect to any entity, shall mean the possession, directly or indirectly, of the power to direct and/or cause the direction of the management and policies of such entity, whether through the ownership of voting securities, by contract or otherwise.

8.       Releases by ORR Safety. Concurrently with the effectiveness of the release being given in Section 7, ORR Safety, for itself and its successors and assigns, and for all other persons or entities claiming by, through or under any of them, hereby fully and forever remises, releases, acquits and discharges Ironclad and its Affiliates (including Ironclad Nevada, Ironclad California, and Ironclad Performance Wear Corporation, Indonesia) and their respective directors, managers, officers, employees, agents, attorneys, distributors, representatives, heirs, personal representatives, successors, assigns and Vibram USA, Inc. and Vibram S.p.A., and each of their respective Affiliates (each an “Ironclad Released Party” and collectively, the “Ironclad Released Parties”), and each of them, of and from any and all Claims which ORR Safety ever had, now has or may have against any Ironclad Released Party, or which ORR Safety ever had, now has or may have against any Ironclad Released Party, in either case based in whole or in part on any contract, agreement, arrangement, commitment, loan, advance, offer, facts, conduct, activities, omissions, transactions, events or circumstances, whether known or unknown, which may now exist or which may have existed, occurred, happened, arisen or transpired at any time prior to or on the date hereof, including without limitation, any Claims related to or arising from the Distribution Agreements, the Litigation, or any claims made by or which could have been made by any party in the Litigation.

9.       Waiver and Relinquishment of Rights Under Civil Code Section 1542. The Parties hereby acknowledge that they may hereafter discover facts different from, or in addition to, those which they now claim or believe to be true with respect to the claims released herein, and agree that this Agreement shall be and remain effective in all respects notwithstanding the discovery of such different or additional facts. To the extent it applies, the Parties hereby acknowledges that it is knowingly and voluntarily waiving its rights under Section 1542 of the California Civil Code, which provides:

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. §§ 200.80(b)(4) AND 240.24B-2 FOR PORTIONS OF THIS DOCUMENT MARKED AS FOLLOWS: [***]. CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS STATEMENT WITH THE DEBTOR.

The Parties intend the releases contained in Sections 7, 8 and 9 to be general, unconditional releases in the broadest sense.

10.       Distributors and Resellers. The Parties acknowledge that certain claims in the Litigation revolved around Parties’ relationships with manufacturers, distributors, and resellers of gloves. For the avoidance of doubt, the releases given in Sections 7 and 8 release all claims by Ironclad and ORR Safety against the other for any alleged improper acts or omissions of the Parties that relate in any way to relationships with manufacturers, distributors, and resellers of gloves, including but not limited to Vibram USA, Inc. and Vibram S.p.A.

11.       Consultation with Legal Counsel, etc. The Parties acknowledge and agree that (a) the releases in Sections 7 and 8 of this Agreement have been specifically negotiated and are essential and material terms of this Agreement and a material part of the consideration for the execution and delivery of this Agreement, (b) the Parties have had the opportunity to consult with legal counsel of their own choosing prior to signing this Agreement and accepting the provisions of this Agreement, including but not limited to the releases set forth in Sections 7 and 8 of this Agreement, and the Parties voluntarily and knowingly have signed this Agreement and accept and agree to the provisions of this Agreement, including but not limited to the releases set forth in Sections 7 and 8 of this Agreement.

12.       Dismissal With Prejudice. Upon execution of this Agreement, the Parties shall file in the Litigation a Stipulation of Dismissal with Prejudice in the form substantially similar to that attached as Attachment A. Each Party shall bear its own attorneys’ fees in carrying out this provision.

13.       Amendments, etc. No waiver, termination, amendment or other modification of any provision of this Agreement, and no consent to any departure by the Parties from any provision of this Agreement, will in any event be effective unless the same shall be in writing and signed by the Parties (or any of their successors), and then such waiver of consent will be effective only in the specific instance and for the specific purpose for which it is given; provided that no waiver, termination, amendment, other modification or consent, will amend or otherwise modify Sections 7 or 8 of this Agreement.

14.       Entire Agreement. This Agreement constitutes the entire Agreement by and among Ironclad and ORR Safety with respect to the subject matter of this Agreement and supersedes all prior agreements, understandings and negotiations, both written and oral, by and between the Parties with respect to the subject matter of this Agreement, including without limitation, the Agreement in Principle. No representation, warranty, inducement, promise, understanding or condition which is not set forth in this Agreement has been made or relied upon by the Parties.

15.       No Waiver, Remedies Cumulative. No failure by any of the Parties to exercise, and no delay by any such Party in exercising any power, right or remedy under this Agreement will operate as a waiver of such power, right or remedy, and no single or partial exercise of any such power, right or remedy will preclude the further exercise of such power, right or remedy or any other power, right or remedy. The rights and remedies provided in this Agreement will be cumulative and not exclusive of any rights or remedies provided by law.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. §§ 200.80(b)(4) AND 240.24B-2 FOR PORTIONS OF THIS DOCUMENT MARKED AS FOLLOWS: [***]. CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 

16.       No Third Party Beneficiaries. No provision in this Agreement is intended or shall create any rights with respect to the subject matter of this Agreement in any third party, other than with respect to third parties that are expressly released pursuant to the terms of Sections 7 and 8.

17.       Costs and Expenses. All Parties shall pay their own costs and legal fees relating to this Agreement. The consideration and payments described herein shall be the total paid or provided, and neither Party may file a motion for attorneys’ fees with the United States District Court for the Northern District of Texas, Dallas Division.

18.       Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction will be ineffective, as to such jurisdiction, to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

19.       Captions. The headings of the Articles, Sections, Subsections, Paragraphs and other divisions of this Agreement are included for convenience of reference only, and will not in any way limit or affect the construction or interpretation of any provision of this Agreement.

20.       Governing Law. This Agreement will be governed by, and construed in all respects in accordance with, the laws of the State of New York without regard to the conflicts of law rules of any state.

21.       Notices. All notices, requests, demands, directions, consents and other communications to any party under or in connection with this Agreement will be in writing and will be sent via certified or registered mail, return receipt requested, via telephone facsimile transmission, via personal delivery, or via express courier or delivery service, addressed to such party at such party's address or telephone facsimile number as will be designated by such party in a written notice given to the other party complying as to delivery with the terms of this Section 21:

if to ORR Safety:

Jim Herr

ORR Safety Corporation

General Counsel

11601 Interchange Drive

Louisville, Kentucky 40229

jimh@orrcorp.com

with a copy to:

Benjamin C. Fultz

Fultz Maddox Dickens PLC

101 S. Fifth Street, 27th Floor

Louisville, Kentucky 40202

bfultz@fmdlegal.com

if to Ironclad:

William M. Aisenberg

Executive Vice President & Chief Financial Officer

Ironclad Performance Wear

1920 Hutton Court, Suite 300

Farmers Branch, Texas 75234

Bill.Aisenberg@ironclad.com

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. §§ 200.80(b)(4) AND 240.24B-2 FOR PORTIONS OF THIS DOCUMENT MARKED AS FOLLOWS: [***]. CONFIDENTIAL INFORMATION FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 

With a copy to:

Michael A. Sherman

Stubbs Alderton & Markiles, LLP

15260 Ventura Blvd., 20th Floor

Sherman Oaks, California 91403

masherman@stubbsalderton.com

All such notices, requests, demands, directions, consents and other communications will be deemed given when given and receipted for (or upon the date of attempted delivery when delivery is refused).

22.       Acknowledgement. Each of the Parties acknowledges that he, she or it has read this Agreement and that he, she or it fully knows, understands, and appreciates this Agreement and executes it voluntarily and of his, hers or its own free will. By executing this Agreement, each Party signifies his, hers or its assent to and willingness to be bound by its terms. The individual executing on behalf of any entity represents that he or she is authorized to execute this Agreement on its behalf.

23.       Confidentiality. The Parties agree that, subject to public reporting requirements, the terms of this Agreement shall be confidential and that the terms shall not be disclosed to any individual other than the Party’s employees, attorneys, consultants, or accountants. Ironclad agrees that it shall use all reasonable efforts and file all necessary papers with the Securities and Exchange Commission (the “SEC”) to treat this Agreement as confidential with respect to all items for which confidential treatment may be sought under the rules and regulations of the SEC.

24.       Public Statements. Each of the Parties agree that to the extent any Party makes any public statements about the Agreement, that Party shall state all or a combination of the following statements, and nothing more: a) that ORR Safety will continue to be an important distributor of the product but Ironclad can sell KONG gloves through any other distribution channel; b) that both Parties believe in the KONG brand; c) the KONG brand has significant value; d) the Parties will move forward together to sell products; e) both Parties are pleased with the terms of the settlement; and f) the remaining terms of this Agreement are confidential and cannot be disclosed.

25.       Litigation Documents. The Parties agree that any documents produced in the Litigation pursuant to the January 15, 2016 Agreed Protective Order (DN-25) (the “Protective Order”) shall be handled pursuant to Section 15 of the Protective Order.

26.       Execution by Counterpart. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.

27.       No Construction Against Drafter. No inference in favor of, or against, any party to this Agreement will be drawn from the fact that such party has drafted any portion of this Agreement.

Signature Page Follows

In witness whereof, the Parties have executed this Agreement on the date first written above.

Ironclad Performance Wear Corporation 

By: /s/ Jeff Cordes

Name: Jeff Cordes

Title: President & CEO

ORR Safety Corporation 

By: /s/ Jeffrey S. Sweedler

Name: Jeffrey S. Sweedler

Title: President

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey Cordes, certify that:

1. I have reviewed this report on Form 10-Q of Ironclad Performance Wear Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2016

/s/ Jeffrey Cordes
Jeffrey Cordes,
Principal Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William Aisenberg, certify that:

1. I have reviewed this report on Form 10-Q of Ironclad Performance Wear Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2016

/s/ William Aisenberg
William Aisenberg
Principal Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the report of Ironclad Performance Wear Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey Cordes, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s /Jeffrey Cordes

Jeffrey Cordes

Principal Executive Officer

November 14, 2016

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the report of Ironclad Performance Wear Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William Aisenberg, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William Aisenberg

William Aisenberg

Principal Financial Officer

November 14, 2016

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 07, 2016
Document And Entity Information
Entity Registrant Name	IRONCLAD PERFORMANCE WEAR CORP
Entity Central Index Key	0001301712
Document Type	10-Q
Document Period End Date	Sep. 30, 2016
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		84,500,454
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2016

XML

Balance Sheets - USD ($)	Sep. 30, 2016	Dec. 31, 2015
CURRENT ASSETS
Cash and cash equivalents	$ 282,368	$ 276,981
Accounts receivable, net of allowance for doubtful accounts of $459,540 and $30,000	7,762,628	8,857,768
Inventory, net of reserve of $247,549 and $547,800	8,422,548	6,681,715
Deposits on inventory	108,597	171,593
Prepaid and other assets	860,999	610,417
Total current assets	17,437,140	16,598,474
PROPERTY AND EQUIPMENT
Computer equipment and software	255,010	622,264
Office equipment and furniture	295,394	308,398
Leasehold improvements	140,718	174,298
Less: accumulated depreciation	(310,670)	(767,047)
Total property and equipment, net	380,452	337,913
OTHER ASSETS
Other Assets – Non-current	414,762
Trademarks and patents, net of accumulated amortization of $77,738 and $68,094	179,584	125,895
Deposits	36,820	21,306
Deferred tax assets – long term		1,832,000
Total other assets	631,166	1,979,201
Total Assets	18,448,758	18,915,588
CURRENT LIABILITIES
Accounts payable and accrued expenses	3,394,219	3,358,724
Line of credit	5,457,908	3,224,780
Total current liabilities	8,852,127	6,583,504
Total Liabilities	8,852,127	6,583,504
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; 172,744,750 shares authorized; 84,500,454 and 82,937,309 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	84,500	82,937
Additional paid-in capital	21,194,693	20,776,012
Accumulated deficit	(11,682,562)	(8,526,865)
Total Stockholders' Equity	9,596,631	12,332,084
Total Liabilities and Stockholders' Equity	$ 18,448,758	$ 18,915,588

XML

Balance Sheets (Parenthetical) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Statement of Financial Position [Abstract]
Allowance for doubtful accounts (in Dollars)	$ 459,540	$ 30,000
Inventory reserve (in Dollars)	247,549	547,800
Accumulated amortization, trademarks (in Dollars)	$ 77,738	$ 68,094
Common stock, par value (in Dollars per share)	$ 0.001	$ .001
Common stock, shares authorized	172,744,750	172,744,750
Common stock, shares issued	84,500,454	82,937,309

XML

Statements of Operations - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
REVENUES
Net sales	$ 6,454,723	$ 5,420,511	$ 16,897,920	$ 15,160,159
COST OF SALES
Cost of sales	4,190,496	3,504,078	10,863,237	9,700,524
GROSS PROFIT	2,264,227	1,916,433	6,034,683	5,459,635
EXPENSES
General and administrative	911,347	804,143	2,854,385	2,243,963
Sales and marketing	988,082	807,168	2,568,481	2,239,471
Research and development	158,698	166,368	484,809	479,967
Purchasing, warehousing and distribution	472,104	280,810	1,193,117	805,340
Depreciation and amortization	44,672	33,039	128,636	99,867
Total operating expenses	2,574,903	2,091,528	7,229,428	5,868,608
LOSS FROM OPERATIONS	(310,676)	(175,095)	(1,194,745)	(408,973)
OTHER INCOME (EXPENSE)
Interest expense	(45,992)	(30,693)	(129,672)	(65,635)
Interest income	25	7	50	21
Total other income (expense)	(45,967)	(30,686)	(129,622)	(65,614)
NET LOSS BEFORE PROVISION FOR INCOME TAXES	(356,643)	(205,781)	(1,324,367)	(474,587)
DEFERRED INCOME TAX EXPENSE	(1,832,000)		(1,832,000)
BENEFIT FROM INCOME TAXES			670
NET LOSS	$ (2,188,643)	$ (205,781)	$ (3,155,697)	$ (474,587)
NET LOSS PER COMMON SHARE
Basic	$ (0.03)	$ (0.00)	$ (0.04)	$ (0.01)
Diluted	$ (0.03)	$ (0.00)	$ (0.04)	$ (0.01)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	84,245,019	82,292,247	83,571,312	81,443,216
Diluted	84,245,019	82,292,247	83,571,312	81,443,216

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Statements of Cash Flows - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$ (3,155,697)	$ (474,587)
Adjustments to reconcile net loss to net cash flows (used) provided by operating activities:
Depreciation	118,991	92,716
Amortization	9,645	7,151
Inventory obsolesence reversal	(300,251)
Bad debt expense	429,540
Deferred tax expense	1,832,000
Stock option expense	285,610	265,202
Changes in operating assets and liabilities:
Accounts receivable	665,600	107,128
Inventory	(1,440,582)	(431,776)
Deposits on inventory	62,996	510,080
Prepaid and other	(266,096)	(193,561)
Other assets- Non-current	(414,762)
Accounts payable and accrued expenses	35,495	(582,646)
Net cash flows used by operating activities	(2,137,511)	(700,293)
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment purchased	(161,530)	(135,999)
Trademarks and patents	(63,333)	(366)
Net cash flows used in investing activities	(224,863)	(136,365)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock	134,633	129,453
Proceeds from bank line of credit	13,174,505	10,142,935
Payments on bank lines of credit	(10,941,377)	(9,499,666)
Net cash flows provided by financing activities	2,367,761	772,722
NET INCREASE (DECREASE) IN CASH	5,387	(63,936)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD	276,981	340,904
CASH AND CASH EQUIVALENTS END OF PERIOD	282,368	276,968
SUPPLEMENTAL DISCLOSURES
Interest paid in cash	129,672	65,635
Income taxes paid in cash

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1. Description of Business

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

1. Description of Business

1. Description of Business

Ironclad Performance Wear Corporation (“Ironclad”, the “Company”, “we”, “us” or “our”) was incorporated in Nevada on May 26, 2004 and engages in the business of design and manufacture of branded performance work wear including task-specific gloves and performance apparel designed to significantly improve the wearer’s ability to safely, efficiently and comfortably perform general to highly specific job functions. Its customers are primarily industrial distributors, hardware, lumber and automotive retailers, “Big Box” home centers and sporting goods retailers. The Company has received nine U.S. patents, 11 international patents and five U.S. patents and nine foreign patents pending for design and technological innovations incorporated in its performance work gloves. The Company has 51 registered U.S. trademarks, 6 in-use U.S. trademarks, 17 U.S. trademark pending registration, 34 registered international trademarks, 44 international trademarks pending and 7 copyright marks.

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2. Accounting Policies

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

2. Accounting Policies

2. Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) including those for interim financial information and with the instructions for Form 10-Q and Article 8 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. These financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2016.

Basis of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

Accounts Receivable

Accounts Receivable	September 30, 2016			December 31, 2015
Accounts receivable	$	8,222,168		$	8,887,768
Less - allowance for doubtful accounts		(459,540	)		(30,000	)
Net accounts receivable	$	7,762,628		$	8,857,768

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

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our current customers consist of large national, regional and smaller independent customers with good payment histories with us. We perform periodic credit evaluations of our customers and maintain allowances for potential credit losses based on management’s evaluation of historical experience and current industry trends. If the financial condition of our customers were to deteriorate, resulting in the impairment of their ability to make payments, additional allowances may be required. New customers are evaluated by us for credit worthiness before terms are established. Although we expect to collect all amounts due, actual collections may differ. In the third quarter of 2016 we increased our allowance for doubtful accounts by $489,000 to provide for the estimate of uncollectible 2015 receivables net of inventories expected to be returned from our former Canadian distributor. This return was accepted in order to allow us to refocus and rebuild our Canadian distribution network to enable us to service our major customers in Canada and due to the distributor’s inability to meet its financial obligations to us.

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 nine months ended September 30, 2016 and September 30, 2015 we decreased our inventory reserve by $300,251 and $0 with the corresponding adjustments in cost of goods sold, respectively, and reported an obsolescence reserve balance of $247,549 as of September 30, 2016 and $547,800 as of December 31, 2015. All adjustments for obsolete inventory establish a new cost basis for that inventory as we believe such reductions are permanent declines in the market price of our products. Generally, obsolete inventory is sold to companies that specialize in the liquidation of these items or contributed to charities, while we continue to market slow-moving inventories until they are sold or become obsolete. As obsolete or slow-moving inventory is sold or disposed of, we reduce the reserve.

Property and Equipment

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

Trademarks

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

Long-Lived Asset Impairment

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

Revenue Recognition

A customer is obligated to pay for products sold to it within a specified number of days from the date that title to the products is transferred to the customer. The Company’s standard terms are typically net 30 days from the transfer of title to the products to the customer, however we have negotiated special terms with certain customers and industries. The Company typically collects payment from a customer within 30 to 60 days from the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership generally passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale price of the Company’s products is substantially fixed or determinable at the date of sale based on purchase orders generated by a customer and accepted by the Company. A customer’s obligation to pay the Company for products sold to it is not contingent upon the resale of those products. The Company recognizes revenues when products are delivered, or shipped to customers, based on terms of agreement with the customers and collection is reasonably assured. 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, the Company entered into a barter agreement whereby it delivered $307,837 of its inventory in exchange for future advertising credits and other items. The credits, which expire in June 2019, are valued at the lower of the Company’s cost or market value of the inventory transferred. The Company has recorded barter credits of $307,837 in ‘‘Other Assets - Non-current’’ at September 30, 2016. Under the terms of the barter agreement, 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 nine months ended September 30, 2016 $0 was charged to expense for barter credits used.

In Q2 and Q3 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 $365,000. 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 September 30, 2016, representing the amounts that are due and payable within twelve months of September 30, 2016. At September 30, 2016, ‘‘Other Assets - Non-current’’ includes $106,925 of amounts that are due and payable in periods after September 30, 2017.

Revenue Disclosures

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

	Three Months Ended September 30, 2016		Three Months Ended September 30, 2015
Domestic	$	5,098,656	$	4,273,607
International		1,356,067		1,146,904
Total	$	6,454,723	$	5,420,511
		Nine Months Ended September 30, 2016		Nine Months Ended September 30, 2015
Domestic	$	13,581,504	$	11,190,725
International		3,316,416		3,969,434
Total	$	16,897,920	$	15,160,159

Cost of Goods Sold

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

Product Returns, Allowances and Adjustments

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

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

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

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

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

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

Reserve for Product Returns, Allowances and Adjustments
Reserve Balance 12/31/15	$	75,000
Payments Recorded During the Period		(87,480	)
		(12,480	)
Accrual for New Liabilities During the Reporting Period		87,480
Reserve Balance 3/31/16		75,000
Payments Recorded During the Period		(141,955	)
		(66,955	)
Accrual for New Liabilities During the Reporting Period		141,955
Reserve Balance 6/30/16		75,000
Payments Recorded During the Period		(4,599	)
		70,401
Accrual for New Liabilities During the Reporting Period		4,599
Reserve Balance 9/30/16	$	75,000

Advertising and Marketing

Advertising and marketing costs are expensed as incurred. Advertising expenses for the three and nine months ended September 30, 2016 and 2015 were $150,629 and $68,961 and $335,848 and $238,674, 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 $2,129,000 or 33.0% of net sales for the three months ended September 30, 2016.   One customer accounted for approximately $1,328,000 or 24.5% of net sales for the three months ended September 30, 2015.  Two customers accounted for approximately $5,782,000 or 34.2% of net sales for the nine months ended September 30, 2016.   Three customers accounted for approximately $6,807,000 or 44.9% of net sales for the nine months ended September 30, 2015. No other customers accounted for more than 10% of net sales during the periods.  

Supplier Concentrations

Two suppliers, who are located overseas, accounted for approximately 38% of total purchases for the three months ended September 30, 2016.  Three suppliers, who are located overseas, accounted for approximately 61% of total purchases for the three months ended September 30, 2015.  Three suppliers, who are located overseas, accounted for approximately 50% of total purchases for the nine months ended September 30, 2016.  Two suppliers, who are located overseas, accounted for approximately 51% of total purchases for the nine months ended September 30, 2015. All transactions are conducted in United States Dollars and therefore there are no transaction gains or losses incurred on transactions with foreign suppliers.

Stock Based Compensation

The Company follows the provisions of the 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.

Earnings (Loss) Per Share

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

As a result of the net loss for the nine months ended September 30, 2016 and 2015, the Company calculated diluted earnings per share using weighted average basic shares outstanding only, as using diluted shares would be anti-dilutive to loss per share.

The following table sets forth the calculation of the numerators and denominators of the basic and diluted per share computations for the three and nine months ended September 30, 2016 and 2015 if diluted shares were to be included:

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Numerator: Net Loss	$	(2,188,643	)	$	(205,781	)	$	(3,155,697	)	$	(474,597	)
Denominator: Basic and Diluted EPS
Common shares outstanding, beginning of period		84,000,454			81,132,811			82,937,309			80,808,629
Weighted average common shares issued during the period		244,565			1,159,436			634,003			634,587
Denominator for basic earnings per common share		84,245,019			82,292,247			83,571,312			81,443,216

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

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2016		2015		2016		2015
Options outstanding under the Company’s stock option plans		10,955,075		11,030,721		10,955,075		11,030,721
Common Stock Warrants		43,146		43,146		43,146		43,146

Income Taxes

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

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

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

The components of the provision for income taxes for the nine months ended September 30, 2016 and 2015 was deferred income tax expense of $1,832,000 and $0, respectively.  As of September 30, 2016, we reviewed current profitability and forecasted future results and concluded that it is more likely than not that we will not be able to realize any of our deferred tax assets. In recognition of this risk, we increased our valuation allowance by $1,832,000 on the deferred taxes for the period ended September 30, 2016. We will continue to evaluate if it is more likely than not that we will realize the future benefits from current and future deferred tax assets. These deferred tax benefits are recorded on the balance sheet as long term deferred tax assets of $0 and $1,832,000 as of September 30, 2016 and December 31, 2015.

Fair Value of Financial Instruments

The fair value of the Company’s financial instruments is determined by using available market information and appropriate valuation methodologies. The Company’s principal financial instruments are cash, accounts receivable, accounts payable and short term line of credit debt. At September 30, 2016 and December 31, 2015, cash, accounts receivable, accounts payable and short term line of credit debt, due to their short maturities, and liquidity, are carried at amounts which reasonably approximate fair value.

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

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

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

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

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

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

There were no items measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015.

Recent Accounting Pronouncements 

In April 2016, the FASB issued ASU 2016-10, an amendment to ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services and expands related disclosure requirements. ASU 2016-10 clarifies ASU 2014-09 to address the potential for diversity in practice at the adoption. ASU 2016-10 is effective for annual and interim reporting periods beginning after December 15, 2017, and early application is permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements as well as the expected adoption method.

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

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

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

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. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

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3. Inventory

9 Months Ended

Sep. 30, 2016

Inventory Disclosure [Abstract]

3. Inventory

3. Inventory

At September 30, 2016 and December 31, 2015 the Company had one class of inventory - finished goods.  Inventory is shown net of a provision for obsolescence of $247,549 as of September 30, 2016 and $547,800 as of December 31, 2015.

	September 30, 2016		December 31,  2015
Finished goods, net	$	8,422,548	$	6,681,715

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4. Property and Equipment

9 Months Ended

Sep. 30, 2016

Property, Plant and Equipment [Abstract]

4. Property and Equipment

4. Property and Equipment

Property and equipment consisted of the following:

	September 30, 2016			December 31, 2015
Computer equipment and software	$	255,010		$	622,264
Office furniture and equipment		295,394			308,398
Leasehold improvements		140,718			174,298
		691,122			1,104,960
Less: Accumulated depreciation		(310,670	)		(767,047	)
Property and equipment, net	$	380,452		$	337,913

Depreciation expense for the three months ended September 30, 2016 and 2015 was $41,359 and $30,656, respectively. Depreciation expense for the nine months ended September 30, 2016 and 2015 was $118,991 and $92,716, respectively.

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5. Trademarks and Patents

9 Months Ended

Sep. 30, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

5. Trademarks and Patents

5. Trademarks and Patents

Trademarks and patents consisted of the following:

	September30,			December 31,
	2016			2015
Trademarks and patents	$	257,322		$	193,989
Less: Accumulated amortization		(77,738	)		(68,094	)
Trademarks and Patents, net	$	179,584		$	125,895

Trademarks and patents consist of definite-lived trademarks and patents of $182,698 and $126,890 and indefinite-lived trademarks and patents of $74,624 and $67,099 at September 30, 2016 and December 31, 2015, respectively. All trademark and patent costs have been generated by the Company, and consist of legal and filing fees.

Amortization expense for the three months ended September 30, 2016 and 2015 was $3,313 and $2,383, respectively. Amortization expense for the nine months ended September 30, 2016 and 2015 was $9,645 and $7,151, respectively.

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6. Accounts Payable and Accrued Expenses

9 Months Ended

Sep. 30, 2016

Payables and Accruals [Abstract]

6. Accounts Payable and Accrued Expenses

6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following at September 30, 2016 and December 31, 2015:

	September 30,  2016		December 31, 2015
Accounts payable	$	2,471,232	$	2,468,847
Accrued rebates and co-op		389,455		159,227
Customer deposits		—		7,222
Accrued returns reserve		75,000		75,000
Accrued expenses – other		458,532		647,928
Total accounts payable and accrued expenses	$	3,394,219	$	3,358,724

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7. Bank Lines of Credit

9 Months Ended

Sep. 30, 2016

Debt Disclosure [Abstract]

7. Bank Lines of Credit

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 September 30, 2016 was 3.023%. This agreement contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. On March 16, 2016, the Company modified its Revolving Loan and Security Agreement with Capital One, N.A. which allowed the Company to add certain legal expenses of up to $325,000 in the calculation of EBITDAS for the trailing twelve month periods ending March 31, June 30, September 30 and December 31, 2016 and permit including certain receivables of up to $300,000 in the definition of eligible accounts receivable in determining the Borrowing Base.

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 November 7, 2016 and August 9, 2016, Capital One, N.A. also elected to waive the Minimum Debt Service Coverage Ratio, calculated as of September 30, 2016 and June 30, 2016, respectively, in accordance with Section 7.15(a) of the Loan and Security Agreement.

As of September 30, 2016 and December 31, 2015, the total amounts due to Capital One, N.A. were $5,457,908 and $3,224,780, respectively.

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8. Equity Transactions

9 Months Ended

Sep. 30, 2016

Equity [Abstract]

8. Equity Transactions

8. Equity Transactions

Common Stock

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

On May 3, 2016 the Company issued 2,000 shares of common stock upon the exercise of stock options at an exercise price of $0.09.

On May 16, 2016 the Company issued 115,000 shares of common stock upon the exercise of stock options at an exercise price of $0.09.

On May 18, 2016 the Company issued 531,854 shares of common stock upon the exercise of stock options at an exercise price of $0.09.

On June 15, 2016 the Company issued 253,000 shares of common stock upon the exercise of stock options at a range of exercise prices from of $0.24 to $0.25.

On August 16, 2016 the Company issued 500,000 shares of restricted common stock with a fair value of $0.24, vesting over a period of one year.

There were 84,500,454 shares of common stock of the Company outstanding at September 30, 2016.

Warrant Activity

A summary of warrant activity is as follows:

	Number of Shares		Weighted Average Exercise Price
Warrants outstanding at December 31, 2015		43,146		0.19
Warrants exercised		—
Warrants outstanding at September 30, 2016		43,146		0.19

Stock Based Compensation

Ironclad California reserved 3,020,187 shares of its common stock for issuance to employees, directors and consultants under the 2000 Stock Incentive Plan, which the Company assumed in the merger (the “2000 Plan”). Under the 2000 Plan, options may be granted at prices not less than the fair market value of the Company’s common stock at the grant date. Options generally have a ten-year term and shall be exercisable as determined by the Board of Directors.

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

The fair value of each stock option granted under either the 2000 Plan or 2006 Plan is estimated on the date of the grant using the Black-Scholes Model.  The Black-Scholes Model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the options and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on historical market prices of the Company’s common stock. The expected life of an option grant is based on management’s estimate. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a straight line basis.

For stock options issued during the three months and nine months ended September 30, 2016 and 2015, the fair value of these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following range of assumptions:

	Three Months Ended	Three Months Ended	Nine Months Ended	Nine Months Ended
	September 30, 2016	September 30, 2015	September 30, 2016	September 30, 2015
Risk free interest rate	0.51% - 1.13%	-	0.51% - 1.705%	1.54%
Dividends	-	-	-	-
Volatility factor	70.47% - 93.01%	-	70.47% - 101.0%	133.9%
Expected life	6.25 years	-	6.25 years	6.25 years

A summary of stock option activity is as follows:

	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2015		10,130,720		$	0.160
Granted		1,200,000		$	0.270
Exercised		(161,291	)	$	0.090
Cancelled/Expired		(56,253	)	$	0.220
Outstanding at March 31, 2016		11,113,176		$	0.180
Granted		-		$	-
Exercised		(901,854	)	$	0.133
Cancelled/Expired		(56,247	)	$	0.191
Outstanding at June 30, 2016		10,155,075		$	0.181
Granted		400,000		$	0.250
Exercised		-		$	-
Cancelled/Expired		(100,000)		$	0.270
Outstanding at September 30, 2016		10,455,075		$	0.161
Exercisable at September 30, 2016		7,413,400		$	0.163

The following table summarizes information about stock options outstanding at September 30, 2016:

Range of Exercise  Price		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Intrinsic Value Outstanding Shares
$	0.09 - $0.27		10,455,075		6.01	$	0.165	$	1,036,052

The following table summarizes information about stock options exercisable at September 30, 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		7,413,400		5.26	$	0.163	$	707,068

The following table summarizes information about non-vested stock options at September 30, 2016:

	Number of Shares			Weighted Average Grant Date Fair Value
Non-Vested at December 31, 2015		2,615,422		$	0.160
Granted		1,200,000		$	0.270
Vested		(303,224	)	$	0.116
Forfeited		(56,253	)	$	0.220
Non-Vested at March 31, 2016		3,455,945		$	0.193
Granted		-		$	-
Vested		(295,519	)	$	0.114
Forfeited		-		$	-
Non-Vested at June 30, 2016		3,160,426		$	0.215
Granted		400,000		$	0.250
Vested		(293,751	)	$	0.114
Forfeited		(100,000	)	$	0.130
Non-Vested at September 30, 2016		3,166,675		$	0.169

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 restricted common stock awards in 2016 and 733,333 restricted stock awards in 2015.

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		$	0.28
Granted		-		$	-
Vested		(183,333	)	$	0.28
Non-Vested at March 31, 2016		183,332		$	0.28
Granted		-		$	-
Vested		(183,332	)	$	0.28
Non-Vested at June 30, 2016		-		$	-
Granted		500,000		$	0.24
Vested		(125,000	)	$	0.24
Non-Vested at September 30, 2016		375,000		$	0.24

In accordance with ASC 718, the Company recorded $94,009 and $90,487 of compensation expense for employee stock options during the three months ended September 30, 2016 and 2015. The Company recorded $285,610 and $265,202 of compensation expense for employee stock options during the nine months ended September 30, 2016 and 2015. There was a total of $567,247 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan outstanding at September 30, 2016. This cost is expected to be recognized over a weighted average period of 2.19 years. The total fair value of shares vested during the nine months ended September 30, 2016 was $254,251.

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9. Income Taxes

9 Months Ended

Sep. 30, 2016

Income Tax Disclosure [Abstract]

9. Income Taxes

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 2013 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 provision for income taxes differs from the amount that would result from applying the federal statutory rate for the periods ended September 30, 2016 and 2015 as follows:  

	September 30,  2016			September 30,  2015
Statutory regular federal income benefit rate		34.0	%		34.0	%
State income taxes, net of federal benefit		2.9	%		2.7	%
Change in valuation allowance		(175.2	%)		(36.7	%)
Total		(138.3	%)		0	%

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. The Company’s glove business generally shows an increase in sales during the third and fourth quarters due primarily to an increase in the sale of the winter glove line during this period. The Company typically generates 55% - 65% of the glove net sales during these months. The change in valuation allowance is affected by the seasonality of the business. As of September 30, 2016, we reviewed current profitability and forecasted future results and concluded that it is more likely than not that we will not be able to realize any of our deferred tax assets. In recognition of this risk, we have increased the valuation allowance by $1,832,000 on the deferred taxes for the period ended September 30, 2016.

As of September 30, 2016, the Company had unused federal and states net operating loss carryforwards available to offset future taxable income of approximately $4,104,000 and $5,384,000, respectively, that expire between 2016 and 2027.

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10. Commitments and Contingencies

9 Months Ended

Sep. 30, 2016

Commitments and Contingencies Disclosure [Abstract]

10. Commitments and Contingencies

10. Commitments and Contingencies

The Company entered into a five-year lease with one option to renew for an additional five years for a corporate office and warehouse lease commencing in July 2006. The Company exercised its five year option to renew this lease commencing in July 2011. The facility is located in El Segundo, California. As part of this renewal process we reduced our square footage by approximately 1,700 square feet of unneeded warehouse space in exchange for six months of rent concessions and approximately $40,000 for tenant improvements. The Company has sublet this facility for the remainder of its lease term as the Company relocated to Texas. Accordingly, rent expense for this facility for the three months and nine months ended September 30, 2016 was $0 and $0, respectively. Rent expense for the three months and nine months ended September 30, 2015 was $2,032 and $4,063, respectively.

On June 11, 2014, the Company entered into a 42 month lease for a new corporate office facility in Farmers Branch, Texas, commencing in the third quarter of 2014. The Company relocated its corporate headquarters to Texas in the third quarter of 2014. This new facility is approximately 13,026 square feet and the Company has negotiated six months of rent abatement. The monthly base rent is $7,653 plus $3,449 for common area operating expenses. A security deposit of one month’s rent has been made in the amount of $11,102. As part of this process, we were granted $60,000 for tenant improvements. Rent expense attributable to this facility for the three months and nine months ended September 30, 2016 was $27,468 and $81,778, respectively. Rent expense for the three months and nine months ended September 30, 2015 was $24,263 and $72,788, 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 and nine months ended September 30, 2016 was $4,343 and $13,346, respectively. No rent expense was recognized during 2015.

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 $3,863 and $3,626 for the three months ended September 30, 2016 and 2015, respectively. Equipment lease expense charged to operations under these leases was $15,895 and $11,468 for the nine months ended September 30, 2016 and 2015, respectively.

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

Year	Facilities		Equipment		Total
2016		27,869		2,698		30,567
2017		112,919		10,794		123,713
2018		16,175		7,329		23,504
2019		-		1,295		1,295
	$	156,963	$	22,116	$	179,079

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11. Legal Proceedings

9 Months Ended

Sep. 30, 2016

Commitments and Contingencies Disclosure [Abstract]

11. Legal Proceedings

11. Legal Proceedings

On September 28, 2015 Ironclad Performance Wear Corporation filed a Petition in the District Court of Dallas County, Texas, 193rd Judicial District, Cause No. DC-15-11878, against Orr Safety Corporation (“Orr”), a significant customer of the Company.  The Petition alleged that Orr had materially breached an Exclusive License and Distributorship Agreement with Ironclad by, inter alia, failing to use its best efforts to actively promote, market and sell the KONG® brand of gloves manufactured by Ironclad, and selling gloves that were similar to, or competitive with, the KONG® brand.  The Petition also alleged that Orr materially breached other agreements between the parties, and provided notice that Ironclad was terminating the Exclusive License and Distributorship Agreement due to Orr’s material breaches.  The Petition sought damages, declaratory relief regarding Ironclad’s rights and obligations under the relevant agreements, and all other available relief.  On October 23, 2015, Orr filed an Answer and Counterclaim in the Dallas County action, and concurrently removed the case to the United States District Court for the Northern District of Texas, Case No. 3:15-cv-03453-D.  Orr’s Counterclaim alleged that Ironclad breached the Exclusive License and Distributorship Agreement, as well as a Sub-Distributorship Agreement between the parties by, inter alia, infringing upon Orr’s exclusive rights under the agreements, failing to pay appropriate royalties to Orr, and failing to protect the intellectual property of the KONG® brand of glove.  The Counterclaim also alleged that Ironclad engaged in selling “counterfeit” KONG® products in violation of the parties’ agreement.  Ironclad filed an Answer to the Counterclaim on November 27, 2015 denying all material allegations.  On December 7, 2015, Orr filed an Amended Answer to Ironclad’s Petition responding to each of the allegations pursuant to the pleading standards in federal court.  On December 3, 2015, the Court entered a Scheduling Order setting deadlines for discovery and dispositive motions.  On July 13, 2016, the Company filed a motion for summary judgement. 

On August 26, 2016, the Company executed a settlement agreement to settle the lawsuit. The terms of this agreement are confidential. Orr will continue to be an important distributor of the Company’s products, but the Company can also sell KONG® through other distribution channels.

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2. Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) including those for interim financial information and with the instructions for Form 10-Q and Article 8 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. These financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2016.

Basis of Consolidation

Basis of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

Accounts Receivable

Accounts Receivable

Accounts Receivable	September 30, 2016			December 31, 2015
Accounts receivable	$	8,222,168		$	8,887,768
Less - allowance for doubtful accounts		(459,540	)		(30,000	)
Net accounts receivable	$	7,762,628		$	8,857,768

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

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our current customers consist of large national, regional and smaller independent customers with good payment histories with us. We perform periodic credit evaluations of our customers and maintain allowances for potential credit losses based on management’s evaluation of historical experience and current industry trends. If the financial condition of our customers were to deteriorate, resulting in the impairment of their ability to make payments, additional allowances may be required. New customers are evaluated by us for credit worthiness before terms are established. Although we expect to collect all amounts due, actual collections may differ. In the third quarter of 2016 we increased our allowance for doubtful accounts by $489,000 to provide for the estimate of uncollectible 2015 receivables net of inventories expected to be returned from our former Canadian distributor. This return was accepted in order to allow us to refocus and rebuild our Canadian distribution network to enable us to service our major customers in Canada and due to the distributor’s inability to meet its financial obligations to us.

Inventory

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 nine months ended September 30, 2016 and September 30, 2015 we decreased our inventory reserve by $300,251 and $0 with the corresponding adjustments in cost of goods sold, respectively, and reported an obsolescence reserve balance of $247,549 as of September 30, 2016 and $547,800 as of December 31, 2015. All adjustments for obsolete inventory establish a new cost basis for that inventory as we believe such reductions are permanent declines in the market price of our products. Generally, obsolete inventory is sold to companies that specialize in the liquidation of these items or contributed to charities, while we continue to market slow-moving inventories until they are sold or become obsolete. As obsolete or slow-moving inventory is sold or disposed of, we reduce the reserve.

Property and Equipment

Property and Equipment

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

Trademarks

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

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

Revenue Recognition

A customer is obligated to pay for products sold to it within a specified number of days from the date that title to the products is transferred to the customer. The Company’s standard terms are typically net 30 days from the transfer of title to the products to the customer, however we have negotiated special terms with certain customers and industries. The Company typically collects payment from a customer within 30 to 60 days from the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership generally passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale price of the Company’s products is substantially fixed or determinable at the date of sale based on purchase orders generated by a customer and accepted by the Company. A customer’s obligation to pay the Company for products sold to it is not contingent upon the resale of those products. The Company recognizes revenues when products are delivered, or shipped to customers, based on terms of agreement with the customers and collection is reasonably assured. 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, the Company entered into a barter agreement whereby it delivered $307,837 of its inventory in exchange for future advertising credits and other items. The credits, which expire in June 2019, are valued at the lower of the Company’s cost or market value of the inventory transferred. The Company has recorded barter credits of $307,837 in ‘‘Other Assets - Non-current’’ at September 30, 2016. Under the terms of the barter agreement, 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 nine months ended September 30, 2016 $0 was charged to expense for barter credits used.

In Q2 and Q3 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 $365,000. 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 September 30, 2016, representing the amounts that are due and payable within twelve months of September 30, 2016. At September 30, 2016, ‘‘Other Assets - Non-current’’ includes $106,925 of amounts that are due and payable in periods after September 30, 2017.

Revenue Disclosures

Revenue Disclosures

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

	Three Months Ended September 30, 2016		Three Months Ended September 30, 2015
Domestic	$	5,098,656	$	4,273,607
International		1,356,067		1,146,904
Total	$	6,454,723	$	5,420,511
		Nine Months Ended September 30, 2016		Nine Months Ended September 30, 2015
Domestic	$	13,581,504	$	11,190,725
International		3,316,416		3,969,434
Total	$	16,897,920	$	15,160,159

Cost of Goods Sold

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 and Warranty Returns, Allowances and Adjustments

Product Returns, Allowances and Adjustments

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

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

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

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

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

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

Reserve for Product Returns, Allowances and Adjustments
Reserve Balance 12/31/15	$	75,000
Payments Recorded During the Period		(87,480	)
		(12,480	)
Accrual for New Liabilities During the Reporting Period		87,480
Reserve Balance 3/31/16		75,000
Payments Recorded During the Period		(141,955	)
		(66,955	)
Accrual for New Liabilities During the Reporting Period		141,955
Reserve Balance 6/30/16		75,000
Payments Recorded During the Period		(4,599	)
		70,401
Accrual for New Liabilities During the Reporting Period		4,599
Reserve Balance 9/30/16	$	75,000

Advertising and Marketing

Advertising and Marketing

Advertising and marketing costs are expensed as incurred. Advertising expenses for the three and nine months ended September 30, 2016 and 2015 were $150,629 and $68,961 and $335,848 and $238,674, respectively.

Shipping and Handling Costs

Shipping and Handling Costs

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

Customer Concentrations

Customer Concentrations

Two customers accounted for approximately $2,129,000 or 33.0% of net sales for the three months ended September 30, 2016.   One customer accounted for approximately $1,328,000 or 24.5% of net sales for the three months ended September 30, 2015.  Two customers accounted for approximately $5,782,000 or 34.2% of net sales for the nine months ended September 30, 2016.   Three customers accounted for approximately $6,807,000 or 44.9% of net sales for the nine months ended September 30, 2015. No other customers accounted for more than 10% of net sales during the periods.  

Suppliers Concentrations

Supplier Concentrations

Two suppliers, who are located overseas, accounted for approximately 38% of total purchases for the three months ended September 30, 2016.  Three suppliers, who are located overseas, accounted for approximately 61% of total purchases for the three months ended September 30, 2015.  Three suppliers, who are located overseas, accounted for approximately 50% of total purchases for the nine months ended September 30, 2016.  Two suppliers, who are located overseas, accounted for approximately 51% of total purchases for the nine months ended September 30, 2015. All transactions are conducted in United States Dollars and therefore there are no transaction gains or losses incurred on transactions with foreign suppliers.

Stock Based Compensation

Stock Based Compensation

The Company follows the provisions of the 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.

Earnings (Loss) Per Share

Earnings (Loss) Per Share

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

As a result of the net loss for the nine months ended September 30, 2016 and 2015, the Company calculated diluted earnings per share using weighted average basic shares outstanding only, as using diluted shares would be anti-dilutive to loss per share.

The following table sets forth the calculation of the numerators and denominators of the basic and diluted per share computations for the three and nine months ended September 30, 2016 and 2015 if diluted shares were to be included:

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Numerator: Net Loss	$	(2,188,643	)	$	(205,781	)	$	(3,155,697	)	$	(474,597	)
Denominator: Basic and Diluted EPS
Common shares outstanding, beginning of period		84,000,454			81,132,811			82,937,309			80,808,629
Weighted average common shares issued during the period		244,565			1,159,436			634,003			634,587
Denominator for basic earnings per common share		84,245,019			82,292,247			83,571,312			81,443,216

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

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2016		2015		2016		2015
Options outstanding under the Company’s stock option plans		10,955,075		11,030,721		10,955,075		11,030,721
Common Stock Warrants		43,146		43,146		43,146		43,146

Income Taxes

Income Taxes

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

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

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

The components of the provision for income taxes for the nine months ended September 30, 2016 and 2015 was deferred income tax expense of $1,832,000 and $0, respectively.  As of September 30, 2016, we reviewed current profitability and forecasted future results and concluded that it is more likely than not that we will not be able to realize any of our deferred tax assets. In recognition of this risk, we increased our valuation allowance by $1,832,000 on the deferred taxes for the period ended September 30, 2016. We will continue to evaluate if it is more likely than not that we will realize the future benefits from current and future deferred tax assets. These deferred tax benefits are recorded on the balance sheet as long term deferred tax assets of $0 and $1,832,000 as of September 30, 2016 and December 31, 2015.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The fair value of the Company’s financial instruments is determined by using available market information and appropriate valuation methodologies. The Company’s principal financial instruments are cash, accounts receivable, accounts payable and short term line of credit debt. At September 30, 2016 and December 31, 2015, cash, accounts receivable, accounts payable and short term line of credit debt, due to their short maturities, and liquidity, are carried at amounts which reasonably approximate fair value.

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

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

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

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

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

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

There were no items measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015.

Recent Issued Accounting Pronouncements

Recent Accounting Pronouncements 

In April 2016, the FASB issued ASU 2016-10, an amendment to ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services and expands related disclosure requirements. ASU 2016-10 clarifies ASU 2014-09 to address the potential for diversity in practice at the adoption. ASU 2016-10 is effective for annual and interim reporting periods beginning after December 15, 2017, and early application is permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements as well as the expected adoption method.

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

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

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

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. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

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2. Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

Accounts Receivable

Accounts Receivable	September 30, 2016			December 31, 2015
Accounts receivable	$	8,222,168		$	8,887,768
Less - allowance for doubtful accounts		(459,540	)		(30,000	)
Net accounts receivable	$	7,762,628		$	8,857,768

Revenue Disclosures

	Three Months Ended September 30, 2016		Three Months Ended September 30, 2015
Domestic	$	5,098,656	$	4,273,607
International		1,356,067		1,146,904
Total	$	6,454,723	$	5,420,511
		Nine Months Ended September 30, 2016		Nine Months Ended September 30, 2015
Domestic	$	13,581,504	$	11,190,725
International		3,316,416		3,969,434
Total	$	16,897,920	$	15,160,159

Reserve for Product and Warranty Returns

Reserve for Product Returns, Allowances and Adjustments
Reserve Balance 12/31/15	$	75,000
Payments Recorded During the Period		(87,480	)
		(12,480	)
Accrual for New Liabilities During the Reporting Period		87,480
Reserve Balance 3/31/16		75,000
Payments Recorded During the Period		(141,955	)
		(66,955	)
Accrual for New Liabilities During the Reporting Period		141,955
Reserve Balance 6/30/16		75,000
Payments Recorded During the Period		(4,599	)
		70,401
Accrual for New Liabilities During the Reporting Period		4,599
Reserve Balance 9/30/16	$	75,000

Earnings (Loss) Per Share

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Numerator: Net Loss	$	(2,188,643	)	$	(205,781	)	$	(3,155,697	)	$	(474,597	)
Denominator: Basic and Diluted EPS
Common shares outstanding, beginning of period		84,000,454			81,132,811			82,937,309			80,808,629
Weighted average common shares issued during the period		244,565			1,159,436			634,003			634,587
Denominator for basic earnings per common share		84,245,019			82,292,247			83,571,312			81,443,216

Earnings Per Share, Anti-Dilutive Common Shares

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2016		2015		2016		2015
Options outstanding under the Company’s stock option plans		10,955,075		11,030,721		10,955,075		11,030,721
Common Stock Warrants		43,146		43,146		43,146		43,146

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3. Inventory (Tables)

9 Months Ended

Sep. 30, 2016

Inventory Disclosure [Abstract]

Inventory

	September 30, 2016		December 31,  2015
Finished goods, net	$	8,422,548	$	6,681,715

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4. Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2016

Property, Plant and Equipment [Abstract]

Property and Equipment

	September 30, 2016			December 31, 2015
Computer equipment and software	$	255,010		$	622,264
Office furniture and equipment		295,394			308,398
Leasehold improvements		140,718			174,298
		691,122			1,104,960
Less: Accumulated depreciation		(310,670	)		(767,047	)
Property and equipment, net	$	380,452		$	337,913

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5. Trademarks and Patents (Tables)

9 Months Ended

Sep. 30, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Trademarks and Patents

	September30,			December 31,
	2016			2015
Trademarks and patents	$	257,322		$	193,989
Less: Accumulated amortization		(77,738	)		(68,094	)
Trademarks and Patents, net	$	179,584		$	125,895

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6. Accounts Payable and Accrued Expenses (Tables)

9 Months Ended

Sep. 30, 2016

Payables and Accruals [Abstract]

Accounts Payable and Accrued Expenses

	September 30,  2016		December 31, 2015
Accounts payable	$	2,471,232	$	2,468,847
Accrued rebates and co-op		389,455		159,227
Customer deposits		—		7,222
Accrued returns reserve		75,000		75,000
Accrued expenses – other		458,532		647,928
Total accounts payable and accrued expenses	$	3,394,219	$	3,358,724

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8. Equity Transactions (Tables)

9 Months Ended

Sep. 30, 2016

Equity [Abstract]

Warrant Activity

	Number of Shares		Weighted Average Exercise Price
Warrants outstanding at December 31, 2015		43,146		0.19
Warrants exercised		—
Warrants outstanding at September 30, 2016		43,146		0.19

Fair Value of Stock Options - Assumptions Used

	Three Months Ended	Three Months Ended	Nine Months Ended	Nine Months Ended
	September 30, 2016	September 30, 2015	September 30, 2016	September 30, 2015
Risk free interest rate	0.51% - 1.13%	-	0.51% - 1.705%	1.54%
Dividends	-	-	-	-
Volatility factor	70.47% - 93.01%	-	70.47% - 101.0%	133.9%
Expected life	6.25 years	-	6.25 years	6.25 years

Stock Option Activity

	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2015		10,130,720		$	0.160
Granted		1,200,000		$	0.270
Exercised		(161,291	)	$	0.090
Cancelled/Expired		(56,253	)	$	0.220
Outstanding at March 31, 2016		11,113,176		$	0.180
Granted		-		$	-
Exercised		(901,854	)	$	0.133
Cancelled/Expired		(56,247	)	$	0.191
Outstanding at June 30, 2016		10,155,075		$	0.181
Granted		400,000		$	0.250
Exercised		-		$	-
Cancelled/Expired		(100,000)		$	0.270
Outstanding at September 30, 2016		10,455,075		$	0.161
Exercisable at September 30, 2016		7,413,400		$	0.163

Stock Options Outstanding

The following table summarizes information about stock options outstanding at September 30, 2016:

Range of Exercise  Price		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Intrinsic Value Outstanding Shares
$	0.09 - $0.27		10,455,075		6.01	$	0.165	$	1,036,052

The following table summarizes information about stock options exercisable at September 30, 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		7,413,400		5.26	$	0.163	$	707,068

Non-Vested Stock Options

	Number of Shares			Weighted Average Grant Date Fair Value
Non-Vested at December 31, 2015		2,615,422		$	0.160
Granted		1,200,000		$	0.270
Vested		(303,224	)	$	0.116
Forfeited		(56,253	)	$	0.220
Non-Vested at March 31, 2016		3,455,945		$	0.193
Granted		-		$	-
Vested		(295,519	)	$	0.114
Forfeited		-		$	-
Non-Vested at June 30, 2016		3,160,426		$	0.215
Granted		400,000		$	0.250
Vested		(293,751	)	$	0.114
Forfeited		(100,000	)	$	0.130
Non-Vested at September 30, 2016		3,166,675		$	0.169

	Number of Shares			Weighted Average Grant Date Fair Value
Non-Vested at December 31, 2015		366,665		$	0.28
Granted		-		$	-
Vested		(183,333	)	$	0.28
Non-Vested at March 31, 2016		183,332		$	0.28
Granted		-		$	-
Vested		(183,332	)	$	0.28
Non-Vested at June 30, 2016		-		$	-
Granted		500,000		$	0.24
Vested		(125,000	)	$	0.24
Non-Vested at September 30, 2016		375,000		$	0.24

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9. Income Taxes (Tables)

9 Months Ended

Sep. 30, 2016

Income Tax Disclosure [Abstract]

Income Taxes

	September 30,  2016			September 30,  2015
Statutory regular federal income benefit rate		34.0	%		34.0	%
State income taxes, net of federal benefit		2.9	%		2.7	%
Change in valuation allowance		(175.2	%)		(36.7	%)
Total		(138.3	%)		0	%

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10. Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Year	Facilities		Equipment		Total
2016		27,869		2,698		30,567
2017		112,919		10,794		123,713
2018		16,175		7,329		23,504
2019		-		1,295		1,295
	$	156,963	$	22,116	$	179,079

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1. Description of Business (Details Narrative)	9 Months Ended
	Sep. 30, 2016 Patents
In Use U.S. Trademarks
Patents Held	6
U.S. Trademarks Pending Registration
Patents Held	17
International Trademarks
Patents Held	34
International Trademarks Pending
Patents Held	44
Copyright Marks
Patents Held	7
U.S. Trademarks
Patents Held	51

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2. Accounting Policies - Accounts Receivable (Details) - USD ($)	Sep. 30, 2016	Sep. 30, 2015
Accounting Policies [Abstract]
Accounts receivable	$ 8,222,168	$ 8,887,768
Less - allowance for doubtful accounts	(459,540)	(30,000)
Net accounts receivable	$ 7,762,628	$ 8,857,768

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2. Accounting Policies - Revenue Disclosures (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Accounting Policies [Abstract]
Domestic	$ 5,098,656	$ 4,273,607	$ 13,581,504	$ 11,190,725
International	1,356,067	1,146,904	3,316,416	3,969,434
Net Sales	$ 6,454,723	$ 5,420,511	$ 16,897,920	$ 15,160,159

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2. Accounting Policies - Reserve for Product and Warranty Returns (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Mar. 31, 2016	Sep. 30, 2016
Accounting Policies [Abstract]
Reserve Balance, Beginning	$ 75,000	$ 75,000	$ 75,000
Payments Recorded During the Period	(4,599)	(87,480)	(141,955)
Accrual for New Liabilities During the Reporting Period	4,599	87,480	141,955
Reserve Balance Ending	$ 75,000	$ 75,000	$ 75,000

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2. Accounting Policies - Earnings (Loss) Per Share (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Net Income (Loss)	$ (2,188,643)	$ (205,781)	$ (3,155,697)	$ (474,587)
Basic and Diluted EPS
Net Income (Loss)	$ (2,188,643)	$ (205,781)	$ (3,155,697)	$ (474,597)
Common shares outstanding, beginning of period	84,000,454	81,132,811	82,937,309	80,808,629
Weighted average common shares issued during the period	244,565	1,159,436	634,003	634,587
Denominator for basic earnings per common share	$ 84,245,019	$ 82,292,247	$ 83,571,312	$ 81,443,216

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2. Accounting Policies - Earnings Per Share, Anti-Dilutive Common Shares (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Accounting Policies [Abstract]
Options outstanding under the Company’s stock option plans	10,955,075	10,955,075	11,030,721	11,030,721
Common Stock Warrants	$ 43,146	$ 43,146	$ 43,146	$ 43,146

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3. Inventory - Inventory (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Inventory Disclosure [Abstract]
Net Inventory	$ 8,422,548	$ 6,681,715

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4. Property and Equipment - Property and Equipment (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Property, Plant and Equipment [Abstract]
Computer equipment and software	$ 255,010	$ 622,264
Office furniture and equipment	295,394	308,398
Leasehold improvements	140,718	174,298
Property and Equipment, Gross	691,122	1,104,960
Less: Accumulated depreciation	(310,670)	(767,047)
Total Property and Equipment	$ 380,452	$ 337,913

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4. Property and Equipment (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Property, Plant and Equipment [Abstract]
Depreciation Expense	$ 41,359	$ 30,656	$ 118,991	$ 92,716

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5. Trademarks and Patents - Trademarks and Patents (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Goodwill and Intangible Assets Disclosure [Abstract]
Trademarks and patents	$ 257,322	$ 193,989
Less: Accumulated amortization	(77,738)	(68,094)
Trademarks, net	$ 179,584	$ 125,895

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5. Trademarks and Patents (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Goodwill and Intangible Assets Disclosure [Abstract]
Finite Lived, Intangible Assets	$ 182,698		$ 182,698		$ 126,890
Indefinite Lived, Intangible Assets	74,624		74,624		$ 67,099
Amortization of Intangible Assets	$ 3,239	$ 2,383	$ 9,645	$ 9,645

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6. Accounts Payable and Accrued Expenses - Accounts Payable and Accrued Expenses (Details) - USD ($)	Sep. 30, 2016	Sep. 30, 2015
Payables and Accruals [Abstract]
Accounts payable	$ 2,471,232	$ 2,468,847
Accrued rebates and co-op	389,455	159,227
Customer deposits		7,222
Accrued returns reserve	75,000	75,000
Accrued expenses - other	458,532	647,928
Total accounts payable and accrued expenses	$ 3,394,219	$ 3,358,724

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8. Equity Transactions - Warrant Activity (Details) - USD ($)	3 Months Ended		9 Months Ended
	Jun. 30, 2016	Mar. 31, 2016	Sep. 30, 2016
Equity [Abstract]
Outstanding, Beginning		$ 43,146	$ 43,146
Outstanding, Beginning, Per Share		$ 0.19	$ 0.19
Warrants Exercised	$ 0.133	$ .090
Outstanding, Ending			43,146
Outstanding, Ending, Per Share			$ 0.19

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8. Equity Transactions - Fair Value of Stock Options - Assumptions Used (Details)	3 Months Ended	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2016	Sep. 30, 2015
Equity [Abstract]
Risk free interest rate, minimum	51.00%	51.00%
Risk free interest rate, maximum	113.00%	1.705%
Risk free interest rate			154.00%
Volatility factor, High	93.01%	10100.00%
Volatility Factor, Low	70.47%	70.47%
Volatility			13390.00%
Expected life	6 years 3 months	6 years 3 months	6 years 3 months

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8. Equity Transactions - Stock Option Activity (Details) - $ / shares	3 Months Ended
	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016
Equity [Abstract]
Outstanding, Beginning	10,155,075	11,113,176	10,130,720
Outstanding, Beginning, Per Share	$ 0.181	$ 0.180	$ 0.160
Granted	400,000		1,200,000
Granted, Per Share	$ 0.250		$ 0.27
Exercised		(901,854)	(161,291)
Exercised, Per Share		$ 0.133	$ .090
Cancelled/Expired	(100,000)	(56,247)	(56,253)
Cancelled/Expired, Per Share	$ 0.270	$ 0.191	$ 0.220
Outstanding, End	10,455,075	10,155,075	11,113,176
Outstanding, Ending, Per Share	$ 0.161	$ 0.181	$ 0.180
Exercisable, Shares	7,413,400
Exercisable, Per Share	$ 0.163

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8. Equity Transactions - Stock Options Outstanding (Details) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2015
Number Outstanding	10,455,075		10,155,075	11,113,176	10,130,720
Weighted Average Exercise Price	$ 0.163
Options Exercisable
Range of Exercise Price, Low		$ 0.09
Range of Exercise Price, High		$ 0.27
Number Outstanding		6,994,649
Weighted Average Remaining Contractual Life (Years)		5 years 6 months
Weighted Average Exercise Price		$ 0.165
Intrinsic Value Outstanding Shares		$ 462,222
Options Outstanding
Range of Exercise Price, Low	0.09
Range of Exercise Price, High	$ 0.27
Number Outstanding	10,155,075
Weighted Average Remaining Contractual Life (Years)	6 years 4 months 24 days
Weighted Average Exercise Price	$ 0.181
Intrinsic Value Outstanding Shares	$ 549,743

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8. Equity Transactions - Non-Vested Stock Options (Details) - $ / shares	3 Months Ended
	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016
Equity [Abstract]
Non-Vested, Beginning		183,332	366,665
Non-Vested, Beginning, Per Share		$ 0.28	$ 0.28
Granted	500,000
Granted, Per Share	$ 0.24
Vested	(125,000)	(183,332)	(183,333)
Vested, Per Share	$ 0.24	$ 0.28	$ 0.28
Non-Vested, End	375,000		183,332
Non-Vested, End, Per Share	$ 0.24		$ 0.28

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9. Income Taxes - Income Taxes (Details 1)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Income Taxes - Income Taxes Details 1
Statutory regular federal income benefit rate	34.00%	34.00%
State income taxes, net of federal benefit	2.90%	2.70%
Change in valuation allowance	(175.20%)	(36.70%)
Total	(138.30%)	0.00%

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9. Income Taxes (Details Narrative)	Sep. 30, 2016 USD ($)
Federal
Net Operating Loss Carryforwards	$ 4,104,000
State and Local
Net Operating Loss Carryforwards	$ 5,384,000

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10. Commitments and Contingencies - Commitments and Contingencies (Details)	Sep. 30, 2016 USD ($)
2016	$ 30,567
2017	123,713
2018	23,504
2019	1,295
Future Minimum Rental Commitments	179,079
Facilities
2016	27,869
2017	112,919
2018	16,175
2019
Future Minimum Rental Commitments	156,963
Equipment
2016	2,698
2017	10,794
2018	7,329
2019	1,295
Future Minimum Rental Commitments	$ 22,116