Item 1.Business.
With respect to this discussion, the terms “we” “us” “our” “Ironclad” and the “Company” refer to Ironclad Performance Wear Corporation, a Nevada corporation and its wholly-owned subsidiary Ironclad Performance Wear Corporation, a California corporation, or “Ironclad California.”
General
Founded in 1998, we design and manufacture branded performance work wear for a variety of construction, do-it-yourself, industrial, sporting goods and general services markets. Since inception, we have leveraged our proprietary technologies to design task-specific technical gloves and performance apparel designed to improve the wearer’s ability to safely, efficiently and comfortably perform specific job functions. Our goal is to establish and maintain a reputation in the construction, do-it-yourself, industrial, sporting goods and general services markets as a leader in performance gloves and apparel.
We manufacture our performance gloves and apparel using functional materials, including DuPont™ Kevlar® and Teflon®, Clarino® Synthetic Leather, DriRelease® and Duraclad®. We incorporate these materials in the manufacturing process to create products that meet the functional and protective requirements of our consumers. Since inception, we have employed an in-house research and development department responsible for identifying and creating new products and applications, and improving and enhancing existing products.
We currently sell our products in all 50 states and internationally through approximately 9,000 retail outlets. Our gloves are priced at retail between $8 and $60 per unit, with apparel unit prices ranging from $10 to $80.
Glove Products
Currently, our primary products are our task-specific technical gloves. Glove products are specially designed for individual user groups. Currently, we produce and sell 53 distinct glove types in a variety of sizes and colors which cater to the specific demands and requirements of construction, do-it-yourself, industrial and sporting goods consumers, including carpenters, machinists, package handlers, plumbers, welders, roofers, oil and gas workers, hunters, gardeners and do-it-yourself users. Gloves are available in multiple levels of protection and abrasion that allow the wearer to choose a product based on the task demands, weather and ease of motion. Glove products are currently manufactured by multiple suppliers operating in China and Indonesia. The manufacturing capabilities necessary for the manufacturing of our gloves is not particularly specialized and we believe that we would be able to replace our current manufacturers without significant disruption in supply, if necessary. Raw material suppliers and substitute materials are readily available and we believe that our manufacturers would be able to replace their current raw material suppliers without significant disruption in supply.
Apparel
We launched a line of performance apparel products during the fourth quarter of 2005. This apparel line initially consisted of long and short sleeved shirts designed to increase the comfort and functionality of the wearer by taking into account environmental temperatures and workers’ corresponding perspiration levels. The apparel is engineered to keep the wearer dry and cool under extreme work conditions. Ironclad’s apparel products are comparable to Under Armour™ Products, but we have incorporated worker-centric features such as anti-microbials, SPF 30 sunscreen protection and self wicking, and have made our apparel products slightly heavier for durability. Our existing sales force sells the performance apparel line to our existing customer base. In 2007, we expanded the apparel line to include performance jackets, pants, shorts, reflective and polo shirts, underwear and tights. The apparel line is manufactured by four suppliers located in Taiwan, Mexico, Vietnam and the Dominican Republic. Manufacturing capacity for apparel is readily available and we believe that we would be able to replace our current manufacturers and add new manufacturers without significant disruption in supply.
In mid-2008, after completing an internal and competitive analysis, we determined that Ironclad should reduce its focus and attention on performance apparel because of the cost involved in launching a new line of business and promoting this new line into the marketplace. As a result, we have decreased the number of performance apparel items produced and sold by the Company. The reduction in performance apparel was guided by our sell-through analysis and a survey of our retail customer’s preferences. Those apparel items remaining in Ironclad’s offerings will continue to be sold through our existing sales channels.
Competition
Ironclad competes in the following principal markets: industrial, construction and sport.
Technical Gloves
Ironclad faces competition from other specialty gloves and apparel companies, such as Custom Leathercraft Manufacturing Company, Ergodyne and Mechanix Wear. Compared generally, we believe our material selection and construction provides for superior protection, durability, quality and repeat customers affording a substantial, sustainable advantage in the category.
Performance Work Apparel
We are one of a limited number of manufacturers of performance work apparel and, in the opinion of management, currently face relatively little competition from other manufacturers in this sector. However, as mentioned above, we intend on de-emphasizing our work apparel line in favor of focusing on the task-specific technical glove business. As such, our position in the performance work apparel market will decline significantly.
Mainstream Product Channels
To date, we have established our reputation, customer loyalty and brand by selling our products through hardware stores, lumber yards, big box home centers, industrial distributors and sporting goods retailers. We intend to continue to expand into additional large retailers and distributors in 2011.
International Expansion
We began distributing products internationally in 2005 in Australia and Japan. In 2006, we entered the Canadian market through a distributor. We expanded into the United Kingdom in 2007 and into Spain and the Netherlands in 2008. In 2010 we expanded into Sweden through a direct customer. We plan to expand further into Europe and other international markets in the future.
Ironclad Branding
We place an emphasis on the establishment and maintenance of our brand equity. Since the inception of our business, our products have carried the “Ironclad” brand. We believe that our success in building a dedicated following of users with substantial product penetration across a large number of retailers and storefronts was instrumental in recently allowing us to gain entry into larger retailers, and providing the foundation to expand internationally and into broader industrial distributors.
We de-emphasized our sports sponsorship, print and television media advertising programs in 2008 and 2009 in an effort to control costs and make better use of our resources. We will, however, be expanding our efforts on Web sales and marketing through a redesigned Ironclad Website which will focus on e-commerce (i.e. selling gloves and apparel directly to the end consumer).
Sales and Customer Analysis
We are currently distributing our products through approximately 10,000 outlets that cater to the professional tradesman, do-it-yourself consumer, industrial user and sporting goods consumer, including “Big Box” home centers, hardware co-ops, lumber yards, industrial distributors and sporting goods retailers. Currently, we estimate that our products are sold in only 30% of the retail and distribution outlets identified by our management as viable Ironclad outlets. We intend to continue to emphasize and expand our relationships with these retailers and distributors.
Sales through industrial distributors accounted for approximately 36% of our sales revenue in 2010. One distributor, Orr Safety Corporation, accounted for approximately 23% of our sales in 2010.
Selected Analysis of “Big Box” and International Retailers
We plan to continue our expansion by increasing selling efforts through “Big Box” home centers, large industrial distributors and international channels, which we believe creates significant opportunities for strengthening our brand and expanding our product penetration in the various markets.
Geographic Information
Domestic sales accounted for 92% of our revenue in 2010 and 88% in 2009. International sales in Australia, the United Kingdom, Canada, the Netherlands, Sweden and other countries accounted for our remaining revenue in 2010. All of our fixed assets are located in the United States, principally in California at our headquarters. Our products are currently manufactured in China, Indonesia, Taiwan, Mexico, Vietnam and the Dominican Republic.
Private-Label and Co-Branded Products and Relationships
We have selectively teamed up with several existing brands in our marketplace to produce private-label gloves (co-branded with a “Built Tough by Ironclad” tag). In addition, we have also developed co-branded gloves with qualified partners to penetrate alternate marketplaces, such as the oil & gas industry (i.e. the KONG glove). We have also licensed several brand names (Snapon, RealTree, Tuff Chix) whereby we have the right to use their logo or patterns on gloves we produce for sale to our customers.
Intellectual Property and Proprietary Rights
We currently have five U.S. patents and three U.S. patents pending, which are intended to protect the design and technical innovations found in our performance work gloves. Following are descriptions of the patents or patents pending.
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Advanced Touch® Technology is a seamless fingertip design that places a smooth layer of material on the touch receptors of the fingers. The result is an increase in comfort and a high degree of touch sensitivity. It is used in Ironclad’s Evolution™, Tuff Chix® and Ranchworx® gloves. This patent was issued on October 30, 2007.
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Ironclad’s Engineered Grip System consists of a uniquely patterned, molded thermoplastic elastomer, or TPE, that is welded to a synthetic leather palm. It provides extreme grip and abrasion protection without sacrificing hand dexterity. It is found in Ironclad’s Extreme Duty® glove, which is designed to handle brick, cement block, rebar, and demolition rubble. The Extreme Duty glove is primarily used by search and rescue professionals, including units of the New York and Los Angeles Fire Departments. This patent was issued on September 5, 2006.
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Silicone rubber is fused to the synthetic leather palm of the Box Handler® and Gripworx® gloves in a specific pattern. The patent for this pattern, designed for optimum grip on smooth surfaces, was issued April 28, 2008.
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Ironclad’s signature palm pattern is found on nine popular glove styles, including the General Utility™, Wrenchworx®, and Ranchworx gloves. Management believes this pattern differentiates Ironclad from other non-branded gloves. This patent was issued on February 14, 2006.
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Ironclad has developed two glove styles that absorb tool impacts with a unique design of multiple gel-filled palm pads. This design is found on the Wrenchworx Impact and Mach 5® Impact gloves. This patent was issued on February 13, 2007.
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Ironclad has developed a heat resistant, shrink resistant, oil repellant, high durability synthetic fabric used for the palm of high temperature, high dexterity gloves. Exclusive Ironclad Hotshield ® palm technology is found in the Heatworx® line. This patent is pending.
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Utilized in the KONG™ glove, specific geometry and construction for a glove used in the oil and gas extraction industries provides protection to the entire hand for impacts, glancing blows and pinched fingers. This patent is pending.
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Ironclad has designed a new silicone impregnated palm pattern specifically for use in automotive market glove products. This patent is pending.
Ironclad owns the following trademark intellectual property: 54 registered U.S. trademarks, 12 common law U.S. trademarks, and 13 registered international trademarks. These trademarks significantly strengthen consumer awareness of the Ironclad brand, and enable Ironclad to maintain distinction between it and other companies trying to copy the Ironclad brand image. We also have 7 copyright marks.
We seek to protect our intellectual property through existing laws and regulations, and by contractual restrictions. We rely upon trademark, patent and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to help us protect our intellectual property.
The status of any patent involves complex legal and factual questions. The scope of allowable claims is often uncertain. As a result, we cannot be sure that any patent application filed by us will result in a patent being issued, nor that any patents issued in the future will afford adequate protection against competitors with similar technology; nor can we provide assurance that patents issued to us will not be infringed upon or be designed around by others.
Employees
As of March 1, 2011, Ironclad had 23 full-time employees. Since inception, we have never had a work stoppage, and our employees are not represented by a labor union. Ironclad considers its relationships with its employees to be positive.
Item 1A.
Item 1A.Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this report before purchasing our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of the money you paid to purchase our common stock.
RISKS RELATING TO OUR BUSINESS
We may need additional funding to support our operations and capital expenditures. Our inability to obtain such funding could adversely affect our business.
We have funded our operations and capital expenditures with cash flow from operations, our cash on hand, the net proceeds of the private placements completed on May 9, 2006, September 21, 2007, April 22, 2008 and February 5, 2009, and the factoring agreement entered into on December 7, 2009. As part of our planned growth, we will be required to make expenditures necessary to expand and improve our operating and management infrastructure.
While capital resources have historically been insufficient to support the continued growth of our operations, we believe that the proceeds from our February 5, 2009 financing transaction, our cash flows from operations and borrowings available to us under our senior secured credit facility, the availability of purchase order financing and our continuing cost containment measures will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. In the event that our working capital needs exceed our cash sources we will need to raise additional funds. There can be no assurance that any financing arrangements will be available in amounts or on terms acceptable to us, if at all. Furthermore, if we are able to raise additional capital through the sale of equity or convertible debt securities it may result in additional dilution to our existing shareholders. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of the implementation of our business strategy. This limitation could substantially harm our business, results of operations and financial condition.
Our operating results may fluctuate significantly and our stock price could decline or fluctuate if our results do not meet the expectation of analysts or investors.
Management expects that we will experience substantial variations in our net sales and operating results from quarter to quarter. We believe that the factors which influence this variability of quarterly results include:
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the timing of our introduction of new product lines, particularly our specialty apparel;
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the level of consumer acceptance of each new product line;
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general economic and industry conditions that affect consumer spending and retailer purchasing;
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the availability of manufacturing capacity;
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the seasonality of the markets in which we participate;
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the timing of trade shows;
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the product mix of customer orders;
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the timing of the placement or cancellation of customer orders;
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the weather;
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transportation delays;
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quotas and other regulatory matters; and
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the timing of expenditures in anticipation of increased sales and actions of competitors.
As a result of fluctuations in our revenue and operating expenses that may occur, management believes that period-to-period comparisons of our results of operations are not a good indication of our future performance. It is possible that in some future quarter or quarters, our operating results will be below the expectations of securities analysts or investors. In that case, our common stock price could fluctuate significantly or decline.
We have a history of operating losses and there can be no assurance that we can achieve or maintain profitability.
We have a history of operating losses and may not sustain profitability. We cannot guarantee that we will remain profitable. Even if we remain profitable, given the competitive and evolving nature of the industry in which we operate, we may be unable to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.
We may be unable to effectively manage our growth.
Our strategy envisions growing our business. Any growth in or expansion of our business is likely to continue to place a strain on our financial, managerial and other administrative resources, infrastructure and systems. We have historically been undercapitalized to effectively manage and sustain our growth. As with other growing businesses, we expect that we will need to continually restructure and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:
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expand our systems effectively or efficiently or in a timely manner;
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allocate our human resources optimally;
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meet our capital needs;
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identify and hire qualified employees or retain valued employees; or
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incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.
Our inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating results and financial condition.
Substantially all of our revenues have been derived from a relatively limited product line consisting of task-specific gloves and performance apparel, and our future success depends on our ability to expand our product line and achieve broader market acceptance of our company and our products.
To date, our products have consisted mainly of task-specific gloves and performance apparel, targeted primarily to the construction, do-it-yourself, industrial and sporting goods markets. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance in our existing market segments as well as in new segments. We may be required to enter into new arrangements and relationships with vendors, suppliers and others to achieve broader acceptance of our products, but cannot guarantee that we will be able to enter into such relationships. We also may be required to undertake new types of risks or obligations that we may be unable to manage. There can be no assurance that consumers will purchase our products or that retail outlets will stock our products. Though we plan to continue to expend resources on promoting, marketing and advertising to increase product awareness, we cannot guarantee that any expenses we incur in such efforts will generate the desired product awareness or commensurate increase in sales of our products. If we are unable to expand into new market segments, we may be unable to grow and expand our business or implement our business strategy as described in this report. This could materially impair our ability to increase sales and revenue and materially and adversely affect our margins, which could harm our business and cause our stock price to decline.
We may be unable to compete successfully against existing and future competitors, which could decrease our revenue and margins, and harm our business.
The performance task specific glove and apparel industries are highly competitive. There are several other companies that provide similar products, many of which are larger and have greater financial resources than us. Our future growth and financial success depend on our ability to further penetrate and expand our existing distribution channels and to increase the size of our average annual net sales per account in these channels, as well as our ability to penetrate and expand other distribution channels. For example, we encounter competition in our existing glove and workwear distribution channels from a number of competitors. Unknown or unforeseen new entrants into our distribution channels, particularly low-cost overseas producers, will further increase the level of competition in these channels. There can be no assurance that we will be able to maintain our growth rate or increase our market share in our distribution channels at the expense of existing competitors and other apparel manufacturers choosing to enter the market segments in which we compete. In addition, there can be no assurance that we will be able to enter and achieve significant growth in other distribution channels.
Failure to expand into new distribution channels and new international markets could materially and adversely impact our growth plan and profitability.
Our sales growth depends in part on our ability to expand from the hardware and lumber retail channels and industrial distributors that we focused on in our first eight years, into new distribution channels, particularly “Big Box” home centers and work wear and sporting goods retailers. Failure to expand into these mass-market channels could severely limit our growth.
Our business plan also depends in part on our ability to expand into international markets. We have begun the distribution of our products in Japan, Australia, Canada and Europe and we are in the process of establishing additional distribution in Europe and other international markets. Failure to expand international sales through these and other markets could limit our growth capability and leave us vulnerable solely to United States market conditions.
Our dependence on independent manufacturers reduces our ability to control the manufacturing process, which could harm our sales, reputation and overall profitability.
We depend on independent contract manufacturers to maintain sufficient manufacturing and shipping capacity in an environment characterized by declining prices, labor shortages, continuing cost pressure and increased demands for product innovation and speed-to-market. This dependence could subject us to difficulty in obtaining timely delivery of products of acceptable quality. In addition, a contractor’s failure to ship products to us in a timely manner or to meet the required quality standards could cause us to miss the delivery date requirements of our customers. The failure to make timely deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices or reduce future orders, any of which could harm our sales, reputation and overall profitability.
We do not have long-term contracts with any of our independent contractors and any of these contractors may unilaterally terminate their relationship with us at any time. While management believes that there exists an adequate supply of contractors to provide products and services to us, to the extent we are not able to secure or maintain relationships with independent contractors that are able to fulfill our requirements, our business would be harmed.
We have initiated standards for our suppliers, and monitor our independent contractors’ compliance with applicable labor laws, but we do not control our contractors or their labor practices. The violation of federal, state or foreign labor laws by one of our contractors could result in us being subject to fines and our goods that are manufactured in violation of such laws being seized or their sale in interstate commerce being prohibited. To date, we have not been subject to any sanctions that, individually or in the aggregate, have had a material adverse effect on our business, and we are not aware of any facts on which any such sanctions could be based. There can be no assurance, however, that in the future we will not be subject to sanctions as a result of violations of applicable labor laws by our contractors, or that such sanctions will not have a material adverse effect on our business and results of operations.
Our dependence on a single provider for all warehouse and fulfillment functions reduces our ability to control the warehousing and fulfillment processes, which could harm our sales, reputation, and overall business.
We have entered into an agreement to outsource most of our warehouse and fulfillment functions to a single provider where we will consolidate most of our inventory at one site, which is managed by an independent contractor who will then perform most of our warehousing, assembly, packaging and fulfillment services. We depend on our independent contractor fulfiller to properly fulfill customer orders in a timely manner and to properly protect our inventories. The contractor’s failure to ship products to customers in a timely manner, to meet the required quality standards, to correctly fulfill orders, to maintain appropriate levels of inventory, or to provide adequate security measures and protections against excess shrinkage could cause us to miss delivery date requirements of our customers or incur increased expense to replace or replenish lost or damaged inventory or inventory shortfall. The failure to make timely and proper deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices or reduce future orders, any of which could harm our sales, reputation and overall profitability.
Trade matters may disrupt our supply chain, which could result in increased expenses and decreased sales.
We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the U.S. and other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes, safeguards and customs restrictions, against apparel items, as well as U.S. or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition and results of operations. Although the quota system established by the Agreement on Textiles and Clothing was completely phased out for World Trade Organization countries effective January 1, 2005, there can be no assurances that restrictions will not be reestablished for certain categories in specific countries. We are unable to determine the impact of the changes to the quota system on our sourcing operations, particularly in China. Our sourcing operations may be adversely affected by trade limits or political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and/or other trade disruptions.
Our international operations, and the operations of our manufacturers and suppliers in China, are subject to additional risks that are beyond our control and that could harm our business.
Our glove products are manufactured by 4 manufacturers operating in China, Hong Kong and Indonesia. Our performance apparel products are currently manufactured in Taiwan, Vietnam, Mexico and the Dominican Republic. We may in the future use offshore manufacturers for all or some of these products. In addition, approximately 8% of our fiscal 2010 net revenues were generated through international sales and we plan to increase our sales to international markets in the future. As a result of our international manufacturing and sales, we are subject to additional risks associated with doing business abroad, including:
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political unrest, terrorism and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured;
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difficulties in managing foreign operations, including difficulties associated with inventory management and collection on foreign accounts receivable;
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dependence on foreign distributors and distribution networks;
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currency exchange fluctuations and the ability of our Chinese manufacturers to change the prices they charge us based on fluctuations in the value of the U.S. dollar relative to that of the Chinese Yuan;
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the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards as well as restrictions on the transfer of funds;
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disruptions or delays in shipments;
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changes in local economic and non-economic conditions and standards in which our manufacturers, suppliers or customers are located; and
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reduced protection for intellectual property rights in jurisdictions outside the United States.
These and other factors beyond our control could interrupt our manufacturers’ production in offshore facilities, influence the ability of our manufacturers to export our products cost-effectively or at all, inhibit our and our unaffiliated manufacturer’s ability to produce certain materials and influence our ability to sell our products in international markets, any of which could have an adverse effect on our business, financial conditions and operations.
We may be unable to adequately protect our intellectual property rights.
We rely in part on patent, trade secret, trade dress and trademark law to protect our rights to certain aspects of our products, including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks, all of which we believe are important to the success of our products and our competitive position. There can be no assurance that any of our pending patent or trademark applications will result in the issuance of a registered patent or trademark, or that any patent or trademark granted will be effective in thwarting competition or be held valid if subsequently challenged. In addition, there can be no assurance that the actions taken by us to protect our proprietary rights will be adequate to prevent imitation of our products, that our proprietary information will not become known to competitors, that we can meaningfully protect our rights to unpatented proprietary information or that others will not independently develop substantially equivalent or better products that do not infringe on our intellectual property rights. We could be required to devote substantial resources to enforce our patents and protect our intellectual property, which could divert our resources and result in increased expenses. In addition, an adverse determination in litigation could subject us to the loss of our rights to a particular patent or other intellectual property, could require us to grant licenses to third parties, could prevent us from manufacturing, selling or using certain aspects of our products or could subject us to substantial liability, any of which could harm our business.
We may become subject to litigation for infringing the intellectual property rights of others.
Others may initiate claims against us for infringing on their intellectual property rights. We may be subject to costly litigation relating to such infringement claims and we may be required to pay compensatory and punitive damages or license fees if we settle or are found culpable in such litigation, we may be required to pay damages, including punitive damages. In addition, we may be precluded from offering products that rely on intellectual property that is found to have been infringed by us. We also may be required to cease offering the affected products while a determination as to infringement is considered. These developments could cause a decrease in our operating income and reduce our available cash flow, which could harm our business and cause our stock price to decline.
We may be unable to attract and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation of our business plan.
Our success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. If we fail to attract, train and retain sufficient numbers of these qualified people, our prospects, business, financial condition and results of operations will be materially and adversely affected. In particular, we are heavily dependent on the continued services of Eduard Albert Jaeger, Scott Jarus and the other members of our senior management team. We do not have long-term employment agreements with any of the members of our senior management team, each of whom may voluntarily terminate his employment with us at any time. Following any termination of employment, these employees would not be subject to any non-competition covenants. The loss of any key employee, including members of our senior management team, and our inability to attract highly skilled personnel with sufficient experience in our industries could harm our business.
Our senior management’s limited experience managing a publicly traded company may divert management’s attention from operations and harm our business.
Our management team has relatively limited experience managing a publicly traded company and complying with federal securities laws, including compliance with recently adopted disclosure requirements on a timely basis. Our management will be required to design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business.
Adverse conditions in the economy and disruption of financial markets could negatively impact us and our customers and therefore our results of operations.
A further economic downturn in the businesses or geographic areas in which we sell our products could reduce demand for these products and result in a decrease in sales volume that could have a negative impact on our results of operations. Volatility and disruption of financial markets could limit our ability, as well as our customers’ ability, to obtain adequate financing or credit to purchase and pay for our products in a timely manner, or to maintain operations, and result in a decrease in sales volume that could have a negative impact on our results of operations.
If we are unable to adequately fund our operations, we may be forced to voluntarily file for deregistration of our common stock with the U.S. Securities and Exchange Commission.
Compliance with the periodic reporting requirements required by the U.S. Securities and Exchange Commission (or SEC) consumes a considerable amount of both internal, as well external, resources and represents a significant cost for us. If we are unable to continue to devote adequate funding and the resources needed to maintain such compliance, while continuing our operations, we may be forced to deregister with the SEC. If we file for deregistration, our common stock will no longer be listed on NASDAQ’s OTC Bulletin Board (or OTCBB), and it may suffer a decrease in or absence of liquidity as after the deregistration process is complete, our common stock will only be tradable on the “Pink Sheets.” As a result of such deregistration, non-affiliates will no longer have access to information regarding our results of operations. Without the availability of such information, our lenders may be forced to increase their monitoring of our operations which may result in higher costs to us when borrowing money which could have a negative impact and harm our business.
RISKS RELATING TO OUR INDUSTRY
If we are unable to respond to the adoption of technological innovation in our industry and changes in consumer demand, our products will cease to be competitive, which could result in a decrease in revenue and harm our business.
Our future success will depend, in part, on our ability to keep up with changes in consumer tastes and our continued ability to differentiate our products through implementation of new technologies, such as new materials and fabrics. We may not, however, be able to successfully do so, and our competitors may be able to produce designs that are more appealing, implement new technologies or innovations in their design, or manufacture their products at a much lower cost. These types of developments could render our products less competitive and possibly eliminate any differentiating advantage in design and materials that we might hold at the present time.
We are susceptible to general economic conditions, and a downturn in our industries or a reduction in spending by consumers could adversely affect our operating results.
The apparel industry in general has historically been characterized by a high degree of volatility and subject to substantial cyclical variations. Our operating results will be subject to fluctuations based on general economic conditions, in particular conditions that impact consumer spending and construction and industrial activity. A downturn in the construction, industrial or housing sectors could be expected to directly and negatively impact sales of protective gear to workers in these sectors, which could cause a decrease in revenue and harm our sales.
Difficult economic conditions could also increase the risk of extending credit to our retailers. Since we have entered into a factoring relationship, a customer’s financial problems would limit the amount of customer receivables that we could assign to such factor on the receivables, and could cause us to assume more credit risk relating to those assigned receivables or to curtail business with that customer.
Changes in international treaties or governmental regulatory schemes could adversely impact our business.
Any negative changes to international treaties and regulations such as the North American Free Trade Agreement (or NAFTA), and to the effects of international trade agreements and embargoes imposed by entities such as the World Trade Organization, could result in a rise in trade quotas, duties, taxes and similar impositions limit the countries from whom we can purchase our fabric or other component materials, or limit the countries where we might market and sell our products, any of which could correspondingly have an adverse effect on our business.
Any changes in regulation by the Federal Trade Commission (or FTC) with respect to labeling and advertising of our products could have an adverse affect on our business. The FTC requires apparel companies to provide a label clearly stating the country of origin of manufacture and the company’s apparel registration number and a second label stating washing instructions for the product. A change in these requirements could add additional cost to the production of our products, though we do not believe that this additional cost would be material, especially in relation to the cost of producing our products.
RISKS RELATING TO OUR COMMON STOCK
There is a limited trading market for our common stock and a market for our stock may not be sustained, which will adversely affect the liquidity of our common stock and could cause our market price to decline.
Although prices for our shares of common stock are quoted on the OTCBB (under the symbol ICPW.OB), there is a limited public trading market for our common stock, and no assurance can be given that a public trading market will be sustained.
Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. The absence of an active trading market reduces the liquidity of our common stock. As a result of the lack of trading activity, the quoted price for our common stock on the OTC Bulletin Board is not necessarily a reliable indicator of its fair market value. Further, if we cease to be quoted, holders of our common stock would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock, and the market value of our common stock would likely decline.
The market price of our common stock is likely to be highly volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the offering price.
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including announcements of new products or services by our competitors. In addition, the market price of our common stock could be subject to wide fluctuations in response to a variety of factors, including:
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quarterly variations in our revenues and operating expenses;
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developments in the financial markets, apparel industry and the worldwide or regional economies;
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announcements of innovations or new products or services by us or our competitors;
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announcements by the government that affect international trade treaties;
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fluctuations in interest rates and/or the asset backed securities market;
·
significant sales of our common stock or other securities in the open market; and
·
changes in accounting principles.
In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder were to file any such class action suit against us, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to respond to the litigation, which could harm our business.
Substantial future sales of our common stock in the public market could cause our stock price to fall.
We completed private placements on May 9, 2006, September 21, 2007, April 22, 2008 and February 5, 2009 relating to the sale of 9,761,593, 5,250,000, 7,075,000 and 30,147,698 shares of our common stock, respectively. The sale of these shares could further depress the market price of our common stock. Sales of a significant number of shares of our common stock in the open market could cause additional harm to the market price of our common stock. Further reduction in the market price for our shares could make it more difficult to raise funds through future equity offerings.
Moreover, as additional shares of our common stock become available for resale in the open market (including shares issued upon the exercise of our outstanding warrants), the supply of our publicly traded shares will increase, which could decrease its price.
Some of our shares may also be offered from time-to-time in the open market pursuant to Rule 144, and these sales may have a depressive effect on the market for our shares. In general, a non-affiliate who has held restricted shares for a period of six months may sell an unrestricted number of shares of our common stock into the market. The resale of these shares under Rule 144 may cause our stock price to decline.
The sale of securities by us in any equity or debt financing could result in dilution to our existing stockholders and have a material adverse effect on our earnings.
Any sale of common stock by us in a future private placement offering could result in dilution to the existing stockholders as a direct result of our issuance of additional shares of our capital stock. In addition, our business strategy may include expansion through internal growth, by acquiring complementary businesses, by acquiring or licensing additional brands, or by establishing strategic relationships with targeted customers and suppliers. In order to do so, or to finance the cost of our other activities, we may issue additional equity securities that could dilute our stockholders’ stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if we acquire another company and this could negatively impact our earnings and results of operations.
The trading of our common stock on the OTCBB and the potential designation of our common stock as a “penny stock” could impact the trading market for our common stock.
Our securities, as traded on the OTCBB, may be subject to SEC rules that impose special sales practice requirements on broker-dealers who sell these securities to persons other than established customers or accredited investors. For the purposes of the rule, the phrase “accredited investors” means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse’s income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction before the sale. Consequently, the rule may affect the ability of broker-dealers to sell our securities and also may affect the ability of purchasers to sell their securities in any market that might develop therefor.
In addition, the SEC has adopted a number of rules to regulate “penny stock” that restrict transactions involving these securities. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities Exchange Act of 1934, as amended. These rules may have the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market if current price and volume information with respect to transactions in such securities is provided by the exchange or system). Because our securities may constitute “penny stock” within the meaning of the rules, the rules would apply to us and to our securities.
Shareholders should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, resulting in investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.
We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our common stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price appreciates, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price of our stock does not appreciate, then there will be no return on investment. Investors seeking cash dividends should not purchase our common stock.
Our officers, directors and principal stockholders can exert significant influence over us and may make decisions that are not in the best interests of all stockholders.
Our officers, directors and principal stockholders (greater than 5% stockholders) collectively control approximately 42% of our outstanding common stock. As a result, these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.
Anti-takeoverprovisions may limit the ability of another party to acquire us, which could cause our stock price to decline.
Our Articles of Incorporation, as amended, our bylaws and Nevada law contain provisions that could discourage, delay or prevent a third party from acquiring us, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.
Item 1B.
Item 1B.Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2.Properties.
We lease all of our facilities. Our headquarters are located at 2201 Park Place, Suite 101, El Segundo, California 90245. The table below sets forth certain information regarding our leaseholds as of March 1, 2011.
Subsequent to the end of fiscal 2010 we exercised our option to extend our current lease for an additional five years. We believe our facilities are adequate to meet our current and near-term needs.
Item 3.
Item 3.Legal Proceedings.
None
Item 4.
Item 4.(Removed and Reserved).
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Common Stock
Our common stock is quoted on the OTC Bulletin Board under the symbol “ICPW.OB.” The following table sets forth, for the periods indicated, the high and low bid information for the common stock, as determined from sporadic quotations on the OTC Bulletin Board. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
On March 1, 2011, the closing sales price of our common stock as reported on the OTC Bulletin Board was $0.11 per share. As of March 1, 2011, there were approximately 156 shareholders of record of our common stock.
Dividends
We have never paid dividends on our common stock. We intend to retain any future earnings for use in our business.
Item 6.
Item 6.Selected Financial Data.
Not applicable.
Item 7.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with the Consolidated Financial Statements of Ironclad Performance Wear Corporation and the “Notes to Consolidated Financial Statements” included elsewhere in this report. This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of Ironclad Performance Wear Corporation for the fiscal years ended December 31, 2010 and 2009. 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.
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 clients’ needs has created a high level of brand loyalty and has solidified substantial brand equity.
We plan to increase our domestic revenues by leveraging our relationships with existing retailers and industrial distributors, including “Big Box” and sporting goods retailers, increasing our product offerings in new and existing locations, and introducing new products, developed and targeted for specific customers and/or industries.
We believe that our products have international appeal. In 2005, we began selling products in Australia and Japan through independent distributors, which accounted for approximately 4% of total sales. From 2006 through 2010 we entered the Canadian and European markets through distributors and international sales represented approximately 7% - 12% of total sales. 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, 2011.
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. We typically collect payment from a customer within 30 to 45 days from the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery, depending on the terms of our agreement with a particular customer. The sale price of our products is substantially fixed or determinable at the date of sale based on purchase orders generated by a customer and accepted by us. A customer’s obligation to pay us for products sold to it is not contingent upon the resale of those products. We recognize revenue at the time product is delivered to a customer.
Cost of Goods Sold
Our cost of goods sold includes the FOB 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 margins may not be comparable to other entities that may include some or all of these costs in the calculation of gross margin.
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. For apparel products we are using a longer horizon to allow for market penetration. Products that are no longer part of the current product offering are considered obsolete. The potential for re-sale of slow-moving and obsolete inventories is based upon our assumptions about future demand and market conditions. The recorded cost of obsolete inventories is then reduced to zero and a reserve is established for slow moving products. Both the write down and reserve adjustments are recorded as charges to cost of goods sold. For the years ended December 31, 2010 and December 31, 2009 we adjusted our inventory reserve by $88,000 and $20,000, respectively, to a current balance of $220,000 and recorded a corresponding adjustment in cost of goods sold. All adjustments for obsolete inventory establish a new cost basis for that inventory as we believe such reductions are permanent declines in the market price of our products. Generally, obsolete inventory is sold to companies that specialize in the liquidation of these items or contributed to charities, while we continue to market slow-moving inventories until they are sold or become obsolete. As obsolete or slow-moving inventory is sold or disposed of, we reduce the reserve.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our current customers consist of large national, regional and smaller independent customers with good payment histories with us. In 2010 we began factoring certain accounts receivable without recourse with our factor. 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 and our factor for credit worthiness before terms are established. Although we expect to collect all amounts due, actual collections may differ.
Product Returns, Allowances and Adjustments
Product returns, allowances and adjustments is a broad term that encompasses a number of offsets to gross sales. Included herein are warranty returns of defective products, returns of saleable products and accounting adjustments.
Warranty Returns - We have a warranty policy that covers defects in workmanship. It allows customers to return damaged or defective products to us following a customary return merchandise authorization process.
Saleable Product Returns - We may allow from time-to-time, depending on the customer and existing circumstances, stock adjustment returns, whereby the customer is given the opportunity to ‘trade out’ of a style of product that does not sell well in their territory, usually in exchange for another product, again following the customary return merchandise authorization process. In addition we may allow from time to time other saleable product returns from customers for other business reasons, for example, in settlement of an outstanding accounts receivable, from a discontinued distributor customer or other customer service purpose.
Accounting Adjustments - These adjustments include pricing and shipping corrections and periodic adjustments to the product returns reserve.
For both warranty and saleable product returns we utilize actual historical return rates to determine our allowance for returns in each period, adjusted for unique, one-time events. Gross sales 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 warranty product return rate is approximately 1.75% and our current estimated future stock adjustment return rate is approximately 0.25%. 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.
Stock Based Compensation
On January 1, 2006, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Share-Based Payment (formerly “SFAS 123R”). This statement establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods and services. The statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as the options issued under our stock option plans. The statement provides for, and we have elected to adopt the standard using the modified prospective application under which compensation cost is recognized on or after the required effective date for the fair value of all future share based award grants and the portion of outstanding awards at the date of adoption of this statement for which the requisite service has not been rendered, based on the grant-date fair value of those awards calculated under FASB ASC 718 for pro forma disclosures.
Income Taxes
Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates as of the date of enactment.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be effectively sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Since we have reported losses for 2003, 2004, 2005, 2006, 2007, 2008 and 2009, uncertainty exists as to whether benefits from deferred tax assets may result and hence we have fully reserved the deferred tax assets.
Interest and penalties associated with unrecognized tax benefits would be classified as additional income taxes in the statement of operations.
Recent Accounting Pronouncements
In June 2009, the FASB issued FASB ASC 860-10-05 (prior authoritative literature: FASB Statement No. 166 “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140”). FASB ASC 860-10-05 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. FASB ASC 860-10-05 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. As such, the Company was required to adopt this standard in 2010. We adopted FASB ASC 860-10-05 and determined that it has no effect on our consolidated financial statements.
In June 2009, the FASB issued FASB ASC 810-10-05 (prior authoritative literature: FASB Statement No. 167 “Amendments to FASB Interpretation No. 46(R)”). FASB ASC 810-10-05 improves financial reporting by enterprises involved with variable interest entities and to address (1) the effects on certain provisions of prior authoritative literature FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, as a result of the elimination of the qualifying special-purpose entity concept in prior authoritative literature FASB ASC 860-10-05 and (2) constituent concerns about the application of certain key provisions of prior authoritative literature Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FASB ASC 810-10-05 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. As such, the Company was required to adopt this standard in 2010. We adopted FASB ASC 810-10-05 and determined that it has no effect on our consolidated financial statements.
In June 2009, the FASB issued FASB ASC 105-10 (prior authoritative literature: FASB Statement No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”). FASB ASC 105-10 replaces SFAS 162 and establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. FASB ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. As such, the Company adopted this standard in the prior period. Adoption of FASB ASC 105-10 did not have a significant effect on the Company’s consolidated financial statements.
Results of Operations
Comparison of Years Ended December 31, 2010 and December 31, 2009
Net Sales increased $1,373,909, or 10.1%, to $14,999,181 in the year ended December 31, 2010 from $13,625,272 for the corresponding period in 2009. This increase was primarily due to increased sales with our industrial customers, notably the oil and gas industry, of approximately $1,923,000, increased sales of approximately $831,000 with private label customers, offset by approximately $705,000 of decreased international sales, due primarily to timing of container shipments, and by decreased sales from our retail sector, primarily housing and construction customers of approximately $675,000. Two customers accounted for approximately 36% of net sales during the year ended December 31, 2010 and three customers accounted for approximately 56% of net sales for the year ended December 31, 2009. Customer demand for our products in our retail sector seems to have stabilized this year, however those sectors tied to housing and construction are still slow. We continue to focus our sales efforts on those areas where we see continued growth, the industrial channel, safety markets and job specific glove styles.
Gross Profit increased $755,365 to $5,920,388 for the year ended December 31, 2010 from $5,165,023 for the year ended December 31, 2009. Gross profit as a percentage of net sales, or gross margin, increased to 39.5% in 2010 from 37.9% in 2009. The increase in gross margin reflects a reduction in special, low margin one-time promotions in the current year, plus product mix and customer sales mix that resulted in slightly higher average selling prices. Product mix and customer sales mix shifts can affect gross profit in any period. Sales to “Big Box” home centers generally include an assortment of lower priced products than are sold to other retailers and distributors. Sales to international distributors are generally at lower gross margin, as the international distributor pays the cost of selling and distributing the product and servicing their customers. These increased costs have been offset by increased direct factory-to-customer shipments to international and certain domestic customers.
Operating Expenses decreased by $332,841, or 5.8%, to $5,441,219 in 2010 from $5,774,060 in 2009. As a percentage of net sales, operating expenses decreased to 36.3% in 2010 from 42.4% in the same period of 2009. The decreased spending in 2010 was primarily due to decreased trade show costs, print and cooperative advertising of approximately $221,000; decreased expenses associated with our status as public company costs of approximately $100,000; decreased legal costs of approximately $35,000; decreased contracted service fees, primarily third-party fulfillment services, of approximately $19,000; decreased stock options expense of $185,000; offset by increased salaries and benefits of approximately $204,000; increased travel and entertainment expenses of approximately $13,000 and increased general office expenses of approximately $11,000. Expenses associated with being a public company included public accounting and investor relations expenses. Our number of employees increased to 22 at December 31, 2010 from 21 at December 31, 2009.
Income from Operations increased $1,088,206 or 178.7%, to $479,169 in 2010 from a loss of ($609,037) in 2009. Income from operations as a percentage of net sales increased to 3.2% in 2010 from (4.5%) in 2009. The increase in income for 2010 was primarily the result of increased sales and gross profit from both new and existing products and customers in addition to the ongoing cost containment measures we have implemented to reduce our operating expenses, as discussed above.
Interest Expense increased $6,020 to $90,883 in 2010 from $84,863 in 2009. The increase was primarily due to higher interest rates and financing costs with our factor, offset by reduced bank borrowing in the current year.
Interest Income decreased $452 to $73 in 2010 from $525 in 2009. Interest income is a result of the temporary investment of excess funds during the year. Returns on invested short-term funds are at historical lows.
Other Income (Expense) net was ($19,525) in 2010 as compared with ($11,135) in 2009. Change in the fair value of warrant liability was ($1,929) in 2010 as compared to ($3,286) for 2009. This income (expense) primarily represents the difference in the fair value of warrants recorded as liabilities. Other expense in 2010 consisted primarily of prior period adjustments charged back by a “Big Box” customer. In 2009 there were net losses of ($480) on the disposition of equipment.
Net Income increased $1,075,319 to $365,577 in 2010 from a loss of ($709,742) in 2009. This transition from a loss to income is a result of the combination of each of the factors discussed above.
Seasonality and Annual Results
Our glove business generally shows an increase in sales during the third and fourth quarters due primarily to an increase in the sale of our winter glove line during this period. We typically generate 55% - 65% of our glove net sales during these months. Though the overall economy appears to be experiencing pockets of recovery, our results have been improved by the successful introduction of new products designed specifically for the oil and gas, safety and sporting goods industries.
Our working capital, at any particular time, reflects the seasonality of our glove business and plans to expand product lines and enter new markets. We expect inventory, accounts payable and accrued expenses to be higher in the third and fourth quarters for these reasons.
Liquidity and Capital Resources
Our cash requirements are principally for working capital. Our need for working capital is seasonal, with the greatest requirements from July through the end of October each year as a result of our inventory build-up during this period for the fall and winter selling seasons. Historically, our main sources of liquidity have been borrowings under our existing revolving credit facility, the issuance of subordinated debt and the sale of equity. In the short term we are monitoring our credit issuances and cash collections to maximize cash flows and investigating opportunities to quickly reduce our current inventories to convert these assets into cash. Over the past year, and continuing in the near and longer term we are focused on reducing our operating costs, increasing margins and improving operating procedures to generate sustained profitability.
Operating Activities. In 2010, cash provided by operating activities was $64,485 and consisted primarily of net income of $365,577, increased by non-cash items of $503,495 and decreases in inventory of $160,000, prepaid and other expenses of $10,451, and accounts payable and accrued expenses of $1,043,085; offset by increases in accounts receivable of $1,270,524, and deposits on inventory of $747,599.
In 2009, cash used in operating activities was $627,691 and consisted primarily of a net loss of $709,742, reduced by non-cash items of $650,791 and increases in inventory of $383,348, deposits on inventory of $14,659 and prepaid and other expenses of $14,981, and decreases in accounts receivable of $160,251, offset by a decrease in accounts payable and accrued expenses of $316,003.
Investing Activities. In 2010 and 2009, investing activities were primarily the result of capital expenditures, mainly for computer equipment and trademark applications. Cash used in investing activities increased $227,021 to $248,027 for 2010 from $21,006 in 2009. Expenditures for property and equipment increased $225,386 and investment in trademarks and patents increased $1,635.
Financing Activities. Financing activities during 2010 consisted entirely of our net borrowing under our new factoring facility. Cash provided by financing activities was $538,427 for 2010.
Financing activities during 2009 consisted primarily of our net borrowing under our old asset-based credit facility and our new factoring facility, and proceeds from the issuance of common stock. Cash provided by financing activities was $1,146,046 for 2009. The increase in cash provided by financing activities was due to proceeds from the issuance of common stock of $1,507,385, offset by net payments on our bank lines of credit of $361,339.
Between October 20, 2008 and January 31, 2009, we entered into Subscription Agreements (the “Subscription Agreements”) with various high net worth individuals and trusts (collectively, the “Investors”) pursuant to which we agreed to sell an aggregate of 30,147,698 shares of our common stock, par value $0.001 per share, at $0.05 per share for aggregate proceeds to us of $1,507,384.90 (the “Financing”). The Financing closed on February 5, 2009. We used the proceeds received for general working capital purposes and strategic initiatives.
We believe that our cash flows from operations and borrowings available to us under our senior secured credit facility, the availability of purchase order financing and our continuing cost containment measures will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.
Our ability to access these sources of liquidity may be negatively impacted by a decrease in demand for our products and the requirement that we meet certain borrowing conditions under our senior secured credit facility, as well as the other factors described in Risk Factors.
Credit Facilities
On September 15, 2006 we entered into a new factoring agreement with Wells Fargo Century, Inc., dba Wells Fargo Trade Capital, Inc. (“WFTC”), whereby we assigned certain of our accounts receivable with full recourse. On November 21, 2006, we entered into an amendment to this factoring agreement. This facility allowed us to borrow the lesser of (a) $2,500,000 or (b) the sum of: (i) seventy-five percent (75%) of the net amount of our Eligible Receivables and (ii) 40% of the value of our Eligible Inventory (which amount shall not exceed the lesser of $750,000 and the net amount of our Eligible Receivables) (as such terms are defined in the factoring agreement). This credit facility did not contain any financial covenants. All of our assets secured amounts borrowed under the terms of this agreement. Interest on outstanding balances accrued at the prime rate announced from time to time by Wells Fargo Bank N.A. (or such other bank as WFTC selected in its discretion) as its “prime” or base rate for commercial loans and the agreement had an initial term of 24 months. On November 30, 2008 we entered into another amendment to this factoring agreement whereby our interest rate was increased to Prime plus 2%. This facility was paid off and replaced in December 2009.
On December 7, 2009 we entered into a new factoring agreement with FCC, LLC, dba First Capital Western Region, LLC (“FCC”), whereby we assign certain of our accounts receivable without recourse and other accounts receivable with recourse. FCC, based on its internal credit policies, determines which accounts receivable it will accept on a no recourse basis. This facility allows the Company to borrow the lesser of (a) $3,000,000 or (b) the sum of (i) the threshold for the net amount of eligible accounts receivable set forth in the agreement and (ii) the threshold for the value of eligible inventory set forth in the agreement, which amount shall not exceed the lesser of $1,500,000 or the net amount of eligible accounts receivable. All of the Company’s assets secure amounts borrowed under the terms of this agreement. Interest on outstanding balances based on accounts receivable accrues at LIBOR plus 7.5% and interest on outstanding balances based on inventory accrues at LIBOR plus 8.5%. This agreement has an initial term of thirty-six (36) months.
Off Balance Sheet Arrangements
At December 31, 2010, 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 7A.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8.
Item 8.Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Audited Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2010 and December 31, 2009
Consolidated Statements of Operations for each of the Twelve Months Ended December 31, 2010, and December 31, 2009
Consolidated Statements of Cash Flows for the Twelve Months Ended December 31, 2010, and December 31, 2009
Consolidated Statements of Changes in Stockholders’ Equity from December 31, 2008 to December 31, 2010
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ironclad Performance Wear Corporation
We have audited the accompanying consolidated balance sheets of Ironclad Performance Wear Corporation as of December 31, 2010 and 2009, and the related consolidated statements of operations, cash flows, and changes in stockholders’ equity for each of the years in the two-year period ended December 31, 2010. Ironclad Performance Wear Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ironclad Performance Wear Corporation as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
/s/ EFP Rotenberg, LLP
EFP Rotenberg, LLP
Rochester, New York
March 10, 2011
IRONCLAD PERFORMANCE WEAR CORPORATION
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2010 AND 2009
See Notes to Consolidated Financial Statements.
IRONCLAD PERFORMANCE WEAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010 and 2009
See Notes to Consolidated Financial Statements.
IRONCLAD PERFORMANCE WEAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010 and 2009
See Notes to Consolidated Financial Statements.
IRONCLAD PERFORMANCE WEAR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2010 and 2009
See Notes to Consolidated Financial Statements
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business.
The Company was incorporated in Nevada on May 26, 2004 and engages in the business of design and manufacture of branded performance work wear including task-specific gloves and performance apparel designed to significantly improve the wearer’s ability to safely, efficiently and comfortably perform general to highly specific job functions. Its customers are primarily hardware, lumber retailers, “Big Box” home centers, industrial distributors and sporting goods retailers. The Company has received five patents and has three patents pending for design and technological innovations incorporated in its performance work gloves. The Company has 54 registered U.S. trademarks, 12 common law U.S. trademarks and 13 registered international trademarks. The Company introduced its line of specialty work apparel in the fourth quarter of 2005. The apparel is engineered to keep the wearer dry and cool under extreme work conditions.
2. Accounting Policies.
Basis of Consolidation
The consolidated financial statements include the accounts of Ironclad Performance Corporation, an inactive parent company, and its wholly owned subsidiary Ironclad California. All significant inter-company transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company places its cash with high credit quality institutions. The Federal Deposit Insurance Company (FDIC) insures cash amount at each institution for up to $250,000. From time to time, the Company maintains cash in excess of the FDIC limit.
Accounts Receivable
The Company factors its trade receivables pursuant to a factoring agreement with a financial institution. Prior to December 7, 2009 all trade receivables were factored with recourse. On December 7, 2009 the Company entered into a new factoring agreement whereby it assigns certain of its trade receivables with recourse and other trade receivables without recourse. The financing institution, based on its internal credit policies, determines which trade receivables it will accept without recourse. Trade receivables with recourse are carried at the original invoice amount less an estimate made for doubtful accounts. The allowance for doubtful accounts is based on management’s regular evaluation of individual customer’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.
Inventory
Inventory is stated at the lower of average cost (which approximates first in, first out) or market and consists primarily of finished goods. The Company regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on management’s estimated forecast of product demand and production requirements.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are depreciated over fifteen years or the lease term, whichever is shorter. Maintenance and repairs are charged to expense as incurred.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Trademarks
The costs incurred to acquire trademarks, which are active and relate to products with a definite life cycle, are amortized over the estimated useful life of fifteen years. Trademarks, which are active and relate to corporate identification, such as logos, are not amortized. Pending trademarks are capitalized and reviewed monthly for active status.
Long-Lived Asset Impairment
The Company periodically evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that the asset should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flows over the remaining life of the asset in measuring whether the asset is recoverable. Based upon the anticipated future income and cash flow from operations and other factors, relevant in the opinion of the Company’s management, there has been no impairment.
Operating Segment Reporting
As previously discussed, the Company has two product lines, “gloves” and “apparel,” both of which have similar characteristics. They each provide functional protection and comfort to workers in the form of workwear for various parts of the body; their production processes are similar; they are both sold to the same type of class of customers, typically on the same purchase order; and they are warehoused and distributed from the same warehouse facility. In addition, the “apparel” segment currently comprises less than 10% of the Company’s revenues. The Company believes that the aggregation criteria of FASB ASC 280-10 applies and will accordingly aggregate these two segments.
Revenue Recognition
A customer is obligated to pay for products sold to it within a specified number of days from the date that title to the products is transferred to the customer. The Company’s standard terms are typically net 30 days from the transfer of title to the products to the customer. The Company typically collects payment from a customer within 30 to 45 days from the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer. The sale price of the Company’s products is substantially fixed or determinable at the date of sale based on purchase orders generated by a customer and accepted by the Company. A customer’s obligation to pay the Company for products sold to it is not contingent upon the resale of those products. The Company recognizes revenues when products are delivered to customers.
Revenue Disclosures
The Company’s revenues are derived from the sale of our core line of task specific work gloves plus our line of workwear apparel products, available to all of our customers, both domestically and internationally. Below is a table outlining this breakdown for the comparative periods:
Cost of Goods Sold
Cost of goods sold includes all of the costs associated with producing the product by independent, third party factories (FOB costs), plus the costs of transporting, inspecting and delivering the product to our distribution warehouse in California (landed costs). Landed costs consist primarily of ocean/air freight, transport insurance, import duties, administrative charges and local trucking charges from the port to our warehouse. Cost of goods sold for the years ended December 31, 2010 and 2009 were $9,078,793 and $8,460,249 respectively.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Purchasing, warehousing and distribution costs are reported in operating expenses on the line item entitled “Purchasing, warehousing and distribution” and, for the years ending December 31, 2010 and 2009 were $678,650 and $595,279, respectively. These costs were comprised of salaries and benefits of approximately $266,000 and $219,000; office expenses of approximately $20,000 and $13,000; travel and lodging of approximately $27,000 and $8,000; and warehouse operations of approximately $365,000 and $355,000, respectively.
Product Returns, Allowances and Adjustments
Product returns, allowances and adjustments is a broad term that encompasses a number of offsets to gross sales. Included herein are warranty returns of defective products, returns of saleable products and accounting adjustments.
Warranty Returns - the Company has a warranty policy that covers defects in workmanship. It allows customers to return damaged or defective products to us following a customary return merchandise authorization process. Warranty returns for the years ending December 31, 2010 and 2009 were approximately $65,000 or 0.4% and $101,000 or 0.7%, respectively.
Saleable Product Returns - the Company may allow from time to time, depending on the customer and existing circumstances, stock adjustment returns, whereby the customer is given the opportunity to ‘trade out’ of a style of product that does not sell well in their territory, usually in exchange for another product, again following the customary return merchandise authorization process. In addition we may allow from time to time other saleable product returns from customers for other business reasons, for example, in settlement of an outstanding accounts receivable, from a discontinued distributor customer or other customer service purpose. Saleable product returns for the years ending December 31, 2010 and 2009 were approximately $214,000 or 1.4 % and $541,000 or 3.7%, respectively. Included in saleable product returns for the year ended December 31, 2009 were two large, unique and non-recurring returns. In one instance the Company “took back” inventory from a customer who had lost it’s customer for the product as a means of recovering its value for approximately $251,000. In the second instance a long-time hardware distributor customer whose marketplace suffered significant set-backs during the recent recession, found itself unable to sell, and pay for inventory in its possession. The Company agreed to allow it to return approximately $67,000 of this product. These two returns account for approximately $318,000 or 2.1% of the 2009 total.
Accounting Adjustments - these adjustments include pricing and shipping corrections and periodic adjustments to the product returns reserve. Pricing and shipping corrections for the years ending December 31, 2010 and 2009 were approximately $23,000 or 0.1% and $81,000 or 0.5%, respectively. Adjustments to the product returns reserve for the years ending December 31, 2010 and 2009 were approximately ($85,000) or (0.5%) and $5,000 or 0.0%, respectively.
For warranty returns the Company utilizes actual historical return rates to determine the allowance for returns in each period. For saleable product returns the Company also utilizes actual historical return rates, adjusted for large, non-recurring occurrences. The Company does not accrue for pricing and shipping corrections as they are unpredictable and generally de minimis. Gross sales are reduced by estimated returns. We record a corresponding accrual for the estimated liability associated with the estimated returns which is based on the historical gross sales of the products corresponding to the estimated returns. This accrual is offset each period by actual product returns.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Advertising and Marketing
Advertising and marketing costs are expensed as incurred. Advertising expenses for the years ended December 31, 2010 and 2009 were $392,906 and $597,662, 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 $5,438,000 or 36% of net sales for year ended December 31, 2010 and three customers accounted for approximately $7,666,000 or 56% of net sales for year ended December 31, 2009. No other customer accounted for more than 10% of net sales.
Supplier Concentrations
Two suppliers, which are located overseas, accounted for approximately 75% of total purchases during the year ended December 31, 2010 and 83% of total purchases during the year ended December 31, 2009.
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.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following potential common shares have been excluded from the computation of diluted net earnings (loss) per share for the periods presented because the effect would have been anti-dilutive:
Income Taxes
The Company adopted the provisions of FASB ASC 740-10, formerly FIN 48, 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 significant components of the provision for income taxes for the years ended December 31, 2010 and 2009 were $1,328 and $1,466, respectively, for the current state provisions. There was no state deferred and federal tax provision. Due to its current net loss position, the Company has provided a valuation allowance in full on its net deferred tax assets in accordance with FASB ASC 740 and in light of the uncertainty regarding ultimate realization of the net deferred tax assets.
By statute, tax years ending in December 31, 2009 through 2007 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Use of Estimates
The preparation of financial statements requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant estimates and assumptions made by management are used for, but not limited to, the allowance for doubtful accounts, inventory obsolescence, allowance for returns and the estimated useful lives of long-lived assets.
Valuation of Derivative Instruments
FASB ASC 815-10 “Accounting for Derivative Instruments and Hedging Activities” requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance to determine whether they should be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes-Merton Option Pricing Formula (the “Black Scholes Model”). At each period end, or when circumstances indicate that the Company reevaluate the accounting for the derivative liability, derivative liabilities are adjusted to reflect changes in fair value, with any increase or decrease in the fair value being recorded in results of operations as Adjustments to Fair Value of Derivatives.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued FASB ASC 860-10-05 (prior authoritative literature: FASB Statement No. 166 “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140”). FASB ASC 860-10-05 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. FASB ASC 860-10-05 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. As such, the Company was required to adopt this standard in 2010. We adopted FASB ASC 860-10-05 and determined that it has no effect on our consolidated financial statements.
In June 2009, the FASB issued FASB ASC 810-10-05 (prior authoritative literature: FASB Statement No. 167 “Amendments to FASB Interpretation No. 46(R)”). FASB ASC 810-10-05 improves financial reporting by enterprises involved with variable interest entities to address (1) the effects on certain provisions of prior authoritative literature FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, as a result of the elimination of the qualifying special-purpose entity concept in prior authoritative literature FASB ASC 860-10-05 and (2) constituent concerns about the application of certain key provisions of prior authoritative literature Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FASB ASC 810-10-05 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. As such, the Company was required to adopt this standard in 2010. We adopted FASB ASC 810-10-05 and determined that it has no effect on our consolidated financial statements.
In June 2009, the FASB issued FASB ASC 105-10 (prior authoritative literature: FASB Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”). FASB ASC 105-10 replaces SFAS 162 and establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. FASB ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. As such, the Company adopted this standard in the prior period. Adoption of FASB ASC 105-10 did not have a significant effect on the Company’s consolidated financial statements.
3. Inventory
At December 31, 2010 and 2009 the Company had one class of inventory - finished goods.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Property and equipment
Property and equipment consisted of the following:
Depreciation expense for the years ended December 31, 2010 and 2009 was $71,593 and $82,978, respectively.
5. Trademarks and patents
Trademarks and patents consisted of the following:
Trademarks consist of definite-lived trademarks of $93,466 and $81,182 and indefinite-lived trademarks of $41,253 and $39,553 at December 31, 2010 and 2009, respectively. All trademark costs have been generated by the Company, and consist of initial legal and filing fees.
Amortization expense was $5,754 and $4,935 for the years ended December 31, 2010 and 2009, respectively. The Company expects to amortize $6,415 in each of the next five years.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Accounts payable and accrued expenses
Accounts payable and accrued expenses consisted of the following at December 31, 2010 and 2009:
7. Bank Lines of Credit
Factoring Agreement
On September 15, 2006 the Company entered into a new factoring agreement with Wells Fargo Century, Inc., dba Wells Fargo Trade Capital, Inc. (“WFTC”), whereby it assigned certain of its accounts receivable with full recourse. On November 21, 2006, the Company entered into an amendment to this factoring agreement. This facility allowed the Company to borrow the lesser of (a) $2,500,000 or (b) the sum of: (i) seventy-five percent (75%) of the net amount of its Eligible Receivables and (ii) 40% of the value of its Eligible Inventory (which amount shall not exceed the lesser of $750,000 and the net amount of its Eligible Receivables) (as such terms are defined in the factoring agreement). This credit facility did not contain any financial covenants. All of the Company’s assets secured amounts borrowed under the terms of this agreement. Interest on outstanding balances accrued at the prime rate announced from time to time by Wells Fargo Bank N.A. (or such other bank as WFTC selected in its discretion) as its “prime” or base rate for commercial loans and the agreement had an initial term of 24 months. On November 30, 2008 the Company entered into another amendment to this factoring agreement whereby its interest rate was increased to Prime plus 2%. This facility was paid off and replaced in December 2009.
On December 7, 2009 the Company entered into a new factoring agreement with FCC, LLC, dba First Capital Western Region, LLC (“FCC”), whereby it assigns certain of its accounts receivable without recourse and other accounts receivable with recourse. FCC, based on its internal credit policies, determines which accounts receivable it will accept without recourse. This facility allows the Company to borrow the lesser of (a) $3,000,000 or (b) the sum of (i) the threshold for the net amount of total eligible accounts receivable set forth in the agreement, with and without recourse, and (ii) the threshold for the value of eligible inventory set forth in the agreement, which amount shall not exceed the lesser of $1,500,000 or the net amount of eligible accounts receivable. All of the Company’s assets secure amounts borrowed under the terms of this agreement. Interest on outstanding balances based on accounts receivable accrues at LIBOR plus 7.5% and interest on outstanding balances based on inventory accrues at LIBOR plus 8.5%. This agreement has an initial term of thirty-six (36) months.
As of December 31, 2010, the total amount due to FCC was $1,776,388 offset by $776,943 due from factor. As of December 31, 2009, the total amount due to FCC was $1,237,961 offset by $320,169 due from factor.
8. Equity transactions
Common Stock
In February 2009, the Company completed a private placement transaction with institutional investors and other high net worth individuals. Pursuant to its subscription agreements with these investors, the Company sold 30,147,698 shares of common stock, at $0.05 per share. The Company received net proceeds of approximately $1.51 million in the private placement.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Warrant Activity
A summary of warrant activity is as follows:
Stock Based Compensation
Effective with the Company’s fiscal year that began on January 1, 2006, the Company adopted the accounting and disclosure provisions of FASB ASC 718 (formerly “SFAS No. 123R”), “Share-Based Payments” using the modified prospective application transition method.
Ironclad California reserved 7,000,000 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 Company’s board of directors.
Effective May 18, 2006, the Company reserved 4,250,000 shares of its common stock for issuance to employees, directors and consultants under its 2006 Stock Incentive Plan (the “2006 Plan”). Under the 2006 Plan, options may be granted at prices not less than the fair market value of the Company’s common stock at the grant date. Options generally have a ten-year term and shall be exercisable as determined by the Company’s board of directors.
Effective May 9, 2009, the Company reserved an additional 6,750,000 shares of its common stock for issuance to employees, directors and consultants under its 2006 Stock Incentive Plan (the “2006 Plan”). Under the 2006 Plan, options may be granted at prices not less than the fair market value of the Company’s common stock at the grant date. Options generally have a ten-year term and shall be exercisable as determined by the Company’s board of directors.
The fair value of each stock option granted under either the 2000 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.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For stock options issued during the years ended December 31, 2010 and 2009, the fair value of these options was estimated at the date of the grant using a Black-Scholes Model with the following range of assumptions:
A summary of stock option activity is as follows:
The following tables summarize information about stock options outstanding at December 31, 2010:
The following tables summarize information about stock options exercisable at December 31, 2010:
The Company recorded $320,219 of compensation expense for employee stock options during the year ended December 31, 2010. These compensation expense charges were recorded in the following operating expense categories, general and administrative - $204,398; sales and marketing - $73,530; research and development - $22,098; and purchasing, warehousing and distribution - $20,193. There was a total of $228,317 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan outstanding at December 31, 2010. This cost is expected to be recognized over a weighted average period of 2.7 years. The total fair value of shares vested during the year ended December 31, 2010 was $336,910.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2010 and 2009 consisted of the following:
The provision for income taxes differs from the amount that would result from applying the federal statutory rate for the years ended December 31, 2010 and 2009 as follows:
In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize all of the benefits of these deductible, differences, however the Company chooses to provide a 100% valuation allowance against its deferred tax asset.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of the Company’s deferred tax assets and liabilities for federal incomes taxes at December 31, 2010 consisted of the following:
As of December 31, 2010, the Company had unused federal and state net operating loss carryforwards available to offset future taxable income of $9,403,000 and $9,920,000, respectively, that expire between 2015 and 2023.
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 facility is located in El Segundo, California. Rent expense for this facility for the years ended December 31, 2010 and 2009 for this facility were $180,702 and $177,306, respectively. Subsequent to the end of the year the Company exercised its option to renew this facility lease for another five-year term.
The Company has various non-cancelable operating leases for office equipment expiring through March 31, 2013. Equipment lease expense charged to operations under these leases was $8,457 and $7,806 for the years ended December 31, 2010 and 2009, respectively.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum rental commitments under these non-cancelable operating leases for years ending December 31 are as follows:
Ironclad California executed a Separation Agreement with Eduard Albert Jaeger effective in April 2004. Pursuant to the terms of the Separation Agreement, if Ironclad terminates Mr. Jaeger’s employment with Ironclad California at any time other than for Cause, then Ironclad California must pay Mr. Jaeger (a) all accrued and unpaid salary and other compensation payable by the Company for services rendered through the termination date, payable in a lump sum payment on the termination date; and (b) a cash amount equal to Two Hundred Thousand Dollars ($200,000), payable in installments throughout the one (1)-year period following the termination date in the same manner as Ironclad California pays salaries to its other executive officers. The Separation Agreement requires Mr. Jaeger to comply with certain obligations, including execution of a general release, in order to receive the lump sum payment. For the purposes of the Separation Agreement, termination for “Cause” means termination by reason of: (i) any act or omission knowingly undertaken or omitted by Mr. Jaeger with the intent of causing damage to Ironclad California, its properties, assets or business or its stockholders, officers, directors or employees; (ii) any improper act of Mr. Jaeger involving a material personal profit to him, including, without limitation, any fraud, misappropriation or embezzlement, involving properties, assets or funds of Ironclad or any of its subsidiaries; (iii) any consistent failure by Mr. Jaeger to perform his normal duties as directed by the Chairman of the Company’s board of directors, in the sole discretion of the Company’s board of directors; (iv) any conviction of, or pleading nolo contendere to, (A) any crime or offense involving monies or other property of Ironclad; (B) any felony offense; or (C) any crime of moral turpitude; or (v) the chronic or habitual use or consumption of drugs or alcoholic beverages.
11. Legal Proceedings
On February 13, 2009, Ansell Protective Products, Inc. filed a suit against the Company in the United States District Court in the District of New Jersey, alleging infringement of a trademark last used by the Company over three years ago. Since the Company no longer uses the subject trademark, on June 5, 2009, the Company entered into a settlement with Ansell Protective Products, Inc. pursuant to which the Company paid to Ansell Protective Products the amount of $6,000 to fully settle all claims.
12. Related Party Transactions
Mr. Jarus, an Ironclad board member since May 2006 and currently Chairman of the Board, was appointed in September 2008, in a consulting capacity, as Executive Chairman of the Corporation with a compensation of $10,000 per month. In May 2009, Mr. Jarus also took on the role of Interim Chief Executive Officer. He performed in this capacity through December 31, 2009. On January 1, 2010, Mr. Jarus was employed by the Company in the role of Chief Executive Officer at an annual salary of $130,000. Mr. Jarus will also receive an additional annual amount equal to $5,220 to cover any employee portion of health benefits offered by the Company.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Mr. Alderton, an Ironclad board member since August 2002, is a partner of the law firm, Stubbs, Alderton and Markiles, LLP, or SAM, which is Ironclad’s attorney of record. SAM rendered services to Ironclad California as its primary legal firm since 2002, and became our primary legal counsel upon closing of the merger with Ironclad California on May 9, 2006. The Company has incurred legal fees from SAM of $108,629 and $141,571 in 2010 and 2009, respectively.
Prior to Dr. Frank’s appointment to the Company’s board of directors, Dr. and Mrs. Frank purchased 2,000,000 shares of the Company’s common stock on December 8, 2008, at $0.05 per share for an aggregate purchase price of $100,000. Further, Dr. Frank and Mrs. Frank purchased an additional 4,000,000 shares of the Company common stock on February 5, 2009, at $0.05 per share for an aggregate purchase price of $200,000. Dr. Frank is the father-in-law of Mr. Eduard Albert Jaeger, the Company’s Founder and head of new business development.
13. Customs and Duties Protests
Early in 2008 the Company became aware that competitors had been importing gloves similar to many of its products under a temporary tariff provision at a lower duty rate under Chapter 99. This lower duty rate of 2.8% was significantly less than the 10.4% rate the Company had been paying. The Company filed retroactive, formal protests with U.S. Customs and Border Protection (CBP) for refund of duties for previous entries totaling approximately $165,000.
In July, 2008, the Company received a written denial on its formal protest from CBP. The Company is continuing to contest this denial through the courts.
The outcome of the Company’s challenge to the classification of its products for the purpose of determining the appropriate duty rate is approaching finalization. We have received a letter from the U.S. Department of Justice determining that eleven of our glove styles are classifiable under Chapter 99 and are thus eligible for the reduced duty rate. We have also modified the wrist closure on some of our glove styles to conform with the current classification, where feasible. The Company continues to protest all entries still in the Customs Department and remains reasonably confident that a final resolution is forthcoming.
Should the Company prevail in the court or through later administrative protests, the Company could receive refunds for previously paid duties in excess of $80,000. The actual amount is indeterminable until this situation is resolved.
14. Subsequent Event
In connection with preparation of the consolidated financial statements and in accordance with the recently issued Statement of Financial Accounting Standards FASB ASC 855-10 “Subsequent Events,” the Company evaluated subsequent events after the balance sheet date of December 31, 2010 through March 1, 2011.
In March 2011, the Company received a waiver from FCC concerning the violation of a clause in the Factoring and Inventory Advances and Security Agreement restricting capital expenditures in 2010.
15. Reclassifications
In 2009, royalty expenses associated with certain branded glove products totaling $26,035 have been reclassified from sales and marketing expense to cost of goods sold in order to align them with the classification utilized in 2010 and future periods.
Item 9.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.Controls and Procedures.
Evaluation of Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
As of December 31, 2010, management conducted an evaluation, with the participation of our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management has concluded that as of December 31, 2010, our disclosure controls and procedures were effective.
Changes in Internal Controls
During the last fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed, under the supervision of our principal executive and principal financial officers, and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). Our internal control over financial reporting includes those policies and procedures that:
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the our assets;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
We carried out an evaluation under the supervision, and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of our internal control over financial reporting as of December 31, 2010. This evaluation was based on the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Based on their evaluation our management concluded that internal control over financial reporting was effective as of December 31, 2010.
Item 9B.
Item 9B.Other Information.
None.
PART III
Item 10.
Item 10.Directors, Executive Officers and Corporate Governance.
The following table sets forth the name, age and position of each of our executive officers and directors as of March 1, 2011. All directors serve until the next annual meeting of stockholders or until their successors are elected and qualified. Officers are appointed by our board of directors and their terms of office are, except to the extent governed by an employment contract, at the discretion of our board of directors.
Scott Jarus, Chief Executive Officer, Executive Chairman of the Corporation, Director
Mr. Jarus was appointed and elected as a director of our Company on May 18, 2006, and became its Executive Chairman in September 2008. Mr. Jarus’ experience in turning-around and running a $1B market-cap public company (j2 Global Communications, Inc.), and his experience serving on various growth company Boards of Directors in his past, led to the Company’s decision to first appoint Mr. Jarus to the Company’s Board of Director, then to name him Chairman.
On May 4, 2009, to facilitate the turn-around plan for our company designed and orchestrated by Mr. Jarus, he was named Chief Executive Officer for our company (in addition to his role as Chairman). Mr. Jarus was, until early-April 2010, Chief Executive Officer of Cognition Technologies, Inc., an early-stage company located in Culver City, CA, which is a developer of revolutionary meaning-based content search technology. He continues to serve on Cognition Technologies’ board of directors.
Mr. Jarus also serves on the boards of directors for Oversee.net and Global Conference Partners (FreeConference.com), none of which compete with or are in the same industry as our company.
From 2001 to 2005, Mr. Jarus was President and principal executive of j2 Global Communications, Inc. (NASDAQ: JCOM), a provider of outsourced, value-added messaging and communications services to individuals and companies throughout the world. Before joining j2 Global Communications, Inc., from 1998 to 2001, Mr. Jarus was President and Chief Operating Officer for OnSite Access, a provider of building-centric integrated communications services. Mr. Jarus has 28 years of management experience in the telecommunications industry and has served in various senior management positions. Mr. Jarus is a member of the Tech Coast Angels, the largest angel investor organization in the Country. In 2005, Mr. Jarus was named National Entrepreneur of the Year for Media/Entertainment/Communications by Ernst & Young (and Los Angeles Entrepreneur of the Year for Technology in 2004). He holds a Bachelor of Arts degree in Psychology and a Master of Business Administration degree from the University of Kansas.
Eduard Albert Jaeger, Director, Head of New Business Development
Mr. Jaeger founded Ironclad in 1998 and has served as a Director since that time. Mr. Jaeger currently serves as the Company’s Head of New Business Development. Mr. Jaeger has been Founder, co-Founder and President of a number of successful companies in the consumer products sector over a 30 year period. The specific experience, qualifications, attributes and skills that led to the conclusion that Mr. Jaeger should serve on our board of directors, in light of our business and structure, include his extensive experience and expertise in innovative product design and development, overseas manufacturing, importing and exporting, sales and marketing, and forming worldwide distribution channels. Mr. Jaeger is also the inventor and co-inventor of many U.S. patents and two patents pending, and has held executive positions in marketing and promotion. Mr. Jaeger’s father-in-law, Kenneth J. Frank, M.D., also serves on our board of directors.
Rhonda Hoffarth, Executive Vice President & Chief Operating Officer
Ms. Hoffarth has served as our Executive Vice President & Chief Operating Officer since January 2003. From August 2005 through May 2006, Ms. Hoffarth also served as Ironclad’s interim Chief Financial Officer. Ms. Hoffarth has over 20 years of experience in operations and finance with growing consumer product companies. Prior to joining us, Ms. Hoffarth spent 9 years with Bell Sports, Inc. in various roles, including Vice President of Operations, North American, helping the company grow from $45,000,000 in revenue to over $200,000,000. Subsequently, Ms. Hoffarth spent 2 years as the Senior Vice President of Operations for Targus, Inc., a $500,000,000 developer of mobile accessories. Both Bell Sports and Targus source their finished products from Asia and have multiple sales channels (independent shops, regional and national accounts, big box accounts). Ms. Hoffarth received her Masters of Business Administration from the University of Southern California in 1992.
Thomas Kreig, Senior Vice President of Finance, Principal Financial Officer and Secretary
Mr. Kreig currently serves as Senior Vice President of Finance, Principal Financial Officer and Secretary. From September 2002 through May 2009, Mr. Kreig served as our Vice President of Finance and Secretary. From April 2007 through November 2007 and from March 2008 through May 2009 Mr. Kreig served as our Interim Chief Financial Officer. Before joining Ironclad, Mr. Kreig spent 18 years serving as Controller, Vice President of Finance and Chief Financial Officer at companies in several different industries. Most recently he served as Controller for In-Flight Network, LLC, a developer of satellite-based broadband communications for airline passengers. Prior to In-Flight Network, Mr. Kreig served as Vice President of Finance for Network Courier Services, Inc. From 1983 to 1996, Mr. Kreig served as Controller and Chief Financial Officer for Triple L Distributing Co., Inc. and Controller and Treasurer for a medical diagnostic equipment company where he was instrumental in helping to successfully execute an initial public offering. He is a certified public accountant and received his Masters of Business Administration from the University of Detroit in 1975.
Federico Castro, Vice President of Sales
Mr. Castro joined the Ironclad Team in February 2009 and currently serves as Vice President of Sales. Mr. Castro comes to us with extensive experience in sales, sales team management, and strategic channel marketing in addition to a proven track record for developing leading premium brands. Mr. Castro spent six years with Marzocchi Suspension Italy developing the first US based independent bicycle dealer aftermarket suspension and parts distribution program. Subsequently, Mr. Castro spent the next eleven years with Mechanix Wear Inc. working in various roles, including National Sales Manager, helping to grow the company from $7,000,000 to over $60,000,000 in revenue annually. Both Marzocchi Suspension and Mechanix Wear Inc. continue to hold dominant positions in their respective markets and sell to multiple sales channels (independent shops, regional and national accounts, big box accounts).
R. D. Pete Bloomer, Director
Mr. Bloomer served as Chairman of our board of directors from April 2003 through September 2008. He is the Chairman and Chief Executive Officer of CVM Management, Inc. and Managing Partner of CVM Equity Fund V, Ltd., LLP, or CVM, which is one of our larger stockholders. The specific experience, qualifications, attributes and skills that led to the conclusion that Mr. Bloomer should serve on our board of directors, in light of our business and structure, include his service as the managing partner of 7 venture funds dating back to 1983. Those funds have invested in over 90 early stage venture investments. Mr. Bloomer has served as a member of the board of directors of many of the entities in which he has invested. Mr. Bloomer has significant experience in marketing and sales having been Vice President of Sales/Marketing for Head Ski & Tennis, and having spent 11 years with IBM in sales and marketing. Mr. Bloomer is also an experienced operations executive having served as Vice President of Operations for Hanson Industries. Mr. Bloomer has served on the board of directors of several private companies not associated with his venture capital activity.
Vane Clayton, Director
Mr. Clayton has served on our board of directors since March 2004. He currently serves as the CEO and board member of KPA, LLC, a software and services company providing environmental, safety and human resource compliance services to the auto services market. Additionally, he is also Chairman of TK Carsites, a strategic partner of KPA. TK is a software and services company providing website, SEO and Social Media services to the North America auto dealer market. Prior to KPA, Mr. Clayton was President of ZOLL Data Systems, an Enterprise Software subsidiary of ZOLL Medical Corporation ($400M in Sales - NASDAQ: ZOLL). Earlier in his career, Mr. Clayton managed a sales team for Raychem ($1.7B in Sales), a division of Tyco Electronics. The specific experience, qualifications, attributes and skills that led to the conclusion that Mr. Clayton should serve on our board of directors, in light of our business and structure, include Mr. Clayton’s experience in directing public and private companies in high growth sales and marketing strategies; new product and channel development; fund raising; Sarbanes-Oxley Section 404 compliance; strategic positioning; and building successful teams. Mr. Clayton holds a B.S. in Agricultural/Mechanical Engineering from Purdue University and an MBA from Harvard Business School.
Scott Alderton, Director
Mr. Alderton has served on our board of directors since August 2002. In 2002, Mr. Alderton co-founded the law firm of Stubbs Alderton & Markiles, LLP and has over 25 years experience working with technology and emerging growth companies at all stages along their evolutionary path. The specific experience, qualifications, attributes and skills that led to the conclusion that Mr. Alderton should serve on our board of directors, in light of our business and structure, include his expertise in securities law matters, capital formation, venture capital and financing transactions, mergers, acquisitions and divestitures, the protection of copyrights, trademarks and trade secrets, as well as his extensive experience advising middle market companies on a wide range of business matters. Mr. Alderton received his Bachelor of Arts from the University of California at Los Angeles in 1982 and juris doctor from Loyola Law School in 1985.
Kenneth J. Frank, M.D., Director
Dr. Frank joined our board of directors in February of 2009. He received his medical degree from NYU School of Medicine in 1972 and received his BA from Rutgers, the State University in 1968. He served as a board member of the Isla Vista Medical Clinic from 1975 to 1977 and The National Association of Urgent Care Clinics from 1992 to1994. He is an author, lecturer, inventor and formulator of nutritional supplements. Besides having belonged to numerous medical societies, Dr. Frank has been an entrepreneur for over 30 years and has owned and operated a nutritional supplement research, development and marketing company and other associated companies for the past 20 years. In 1973, Dr. Frank founded the Emergency Medical Group of Santa Barbara where he practiced Emergency Medicine for 9 years. In 1982, Dr. Frank founded and served as managing partner, CEO, president and medical director of Immedicenter Medical Group, Inc. In 1989, he established Advanced Physicians’ Products, a nutritional supplement research and development company with over 60 products, many formulated by Dr. Frank. This grew into what is today Dr. Frank’s Health Products, LLC and its four associated companies for which he serves as CEO. He co-owns a patented invention using MSM (methylsulfonyl methane) in an oral spray to stop snoring and is also credited with creating several other proprietary oral sprays for health. In 2005, he authored a book called, “User’s Guide to Natural and Safe Pain Relief”, which has sold over 100,000 copies. The specific experience, qualifications, attributes and skills that led to the conclusion that Dr. Frank should serve on our board of directors, in light of our business and structure, include his management, capital raising, financial and marketing skills developed from managing numerous companies over the past 40 years. Dr. Frank’s son-in-law, Eduard Albert Jaeger, also serves on our board of directors.
During the past ten years none of our officers and directors have had a petition under federal bankruptcy laws or any state insolvency law filed by or against them, nor has a receiver, fiscal agent or similar officer been appointed by a court for their business or property, or any partnership in which they were a general partner at or within two years before the date hereof, or any corporation or business association of which they were an executive officer at or within two years of the date hereof; have been convicted in a criminal proceeding or is a named subject of a pending criminal proceeding, excluding traffic violations and other minor offenses; have been the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or Federal or State authority, permanently or temporarily enjoining such person from, barring, suspending or otherwise limiting for more than 60 days the right of such person to, or otherwise limiting such person from acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity, engaging in any type of business practice or engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws; have been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated any Federal or State securities law or Federal commodities law, and the judgment in such civil action or finding by the Securities and Exchange Commission or Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated; have been the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or State securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or have been the subject of, or party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Audit Committee of the Board of Directors
The Audit Committee of our board of directors currently consists of Messrs. Clayton, Alderton and Jaeger. None of our current Audit Committee members is an audit committee financial expert, as defined in Item 407(d)(5) of Regulation S-K. Our board of directors has determined, however, that each member of our Audit Committee is able to read and understand fundamental financial statements and has substantial business experience that results in such member’s financial sophistication. Accordingly, our board of directors believes that each member of our Audit Committee has sufficient knowledge and experience necessary to fulfill such member’s duties and obligations on our Audit Committee. The primary purposes of the Audit Committee are (i) to review the scope of the audit and all non-audit services to be performed by our independent auditors and the fees incurred by us in connection therewith, (ii) to review the results of such audit, including the independent accountants’ opinion and letter of comment to management and management’s response thereto, (iii) to review with our independent accountants our internal accounting principles, policies and practices and financial reporting, (iv) to engage our independent auditors and (v) to review our quarterly and annual financial statements prior to public issuance. The role and responsibilities of the Audit Committee are more fully set forth in a written Charter adopted by our board of directors. The Audit Committee was created by our board of directors effective May 18, 2006.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers and directors, and persons who own more than ten percent of a registered class of our equity securities, file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater-than-ten percent stockholders are required by SEC regulations to furnish us with all Section 16(a) forms they file. Based solely on our review of the copies of the forms received by us and written representations from certain reporting persons that they have complied with the relevant filing requirements, we believe that, during the year ended December 31, 2010, all of our executive officers, directors and greater-than-ten percent stockholders complied with all Section 16(a) filing requirements other than Messrs. Bloomer and Jarus, who each did not timely file a Form 4 reporting one transaction and Mr. Castro, who did not timely file a Form 3 and a Form 4 reporting one transaction.
Code of Ethics
We have adopted a Code of Ethics applicable to all of our board members and to all of our employees, including our Chief Executive Officer and Principal Financial Officer. The Code of Ethics constitutes a “code of ethics” as defined by applicable SEC rules and a “code of conduct” as defined by applicable NASDAQ rules. We will provide a copy of the Code of Ethics to any person without charge, upon request by writing or calling us at:
Ironclad Performance Wear Corporation
Attn: Investor Relations
2201 Park Place, Suite 101
El Segundo, CA 90245
(310) 643-7800
Any waiver of the Code of Ethics pertaining to a member of our board of directors or one of our executive officers will be disclosed in a report on Form 8-K filed with the SEC.
Item 11.
Item 11.Executive Compensation.
Summary Compensation Table
The following table sets forth, as to the Chief Executive Officer and as to each of the other two most highly compensated executive officers whose compensation exceeded $100,000 during the last fiscal year, information concerning all compensation paid for services to us in all capacities for our last two fiscal years.
(1)
Mr. Jaeger served as our President and Chief Executive Officer from our formation through May 4, 2009. Mr. Jaeger’s current annual base salary is $204,740 and he may also receive a discretionary bonus as determined by the Compensation Committee of our board of directors. The terms of Mr. Jaeger’s Separation Agreement with us are discussed below. The other compensation disclosed for Mr. Jaeger represents an automobile allowance. The fair value of options granted to Mr. Jaeger was estimated on the date of grant using the Black-Scholes Model with the following weighted-average assumptions (accounting for the re-pricing of options on May 4, 2009 as discussed below):
(2)
Due to the bi-weekly timing of pay periods, 2009 included 27 pay periods versus the normal 26 pay periods.
(3)
Mr. Jarus served as our Interim Chief Executive Officer from May 4 to December 31, 2009, and was appointed our Chief Executive Officer effective as of January 1, 2010. The other compensation disclosed for Mr. Jarus represents amounts paid pursuant to his consulting arrangement with us ($170,000 in 2009 which included $50,000 accrued in 2008 and paid in 2009) and fees paid for service as a director ($20,000 in 2009 which included $10,000 accrued in 2008 and paid in 2009). Mr. Jarus’ current annual base salary is $130,000 and he may also receive a discretionary bonus as determined by the Compensation Committee of our board of directors. Mr. Jarus will also receive an additional annual amount equal to $5,220 to cover any employee portion of health benefits offered by us. Mr. Jarus does not have an employment agreement with us. The fair value of options granted to Mr. Jarus was estimated on the date of grant using the Black-Scholes Model with the following weighted-average assumptions (accounting for the re-pricing of options on May 4, 2009 as discussed below):
(4)
Ms. Hoffarth’s current annual base salary is $165,000 and she may also receive a discretionary bonus as determined by the Compensation Committee of our board of directors. The other compensation disclosed for Ms. Hoffarth represents an automobile allowance. Ms. Hoffarth does not have an employment agreement with us. The fair value of options granted to Ms. Hoffarth was estimated on the date of grant using the Black-Scholes Model with the following weighted-average assumptions (accounting for the re-pricing of options on May 4, 2009 as discussed below):
Outstanding Equity Awards at Fiscal Year End
The following table presents information regarding outstanding options held by our named executive officers as of the end of our fiscal year ended December 31, 2010.
(1)
On May 4, 2009, the board of directors approved changing the exercise price for all outstanding stock options which were fixed and re-priced at $0.09 per share, which price represents an amount equal to $0.02 above the average closing stock price of the Company over the prior 30 days.
(2)
Ironclad California executed a Separation Agreement with Eduard Albert Jaeger effective in April 2004, the terms of which are described in Employment Contracts herein.
(3)
Mr. Jaeger was granted options to purchase 43,146 shares on 5/10/01, 25% vested on the first anniversary of the date of grant, and 1/24th of the remaining amount of shares vest at the end of each month thereafter.
(4)
Mr. Jaeger was granted options to purchase 215,728 shares on 1/14/03, 33.3% vested on June 15, 2003 and 1/24th of the remaining amount of shares vest at the end of each month thereafter.
(5)
Mr. Jaeger was granted options to purchase 32,053 shares on 3/3/03, 25% vested on the first anniversary of the effective date of grant and 1/36th of the remaining amount of shares vest at the end of each month thereafter.
(6)
Mr. Jaeger was granted options to purchase 431,455 shares on 3/30/04, 100% vested on the date of grant.
(7)
Mr. Jaeger was granted options to purchase 276,131 shares on 9/2/05, 146,695 shares vested immediately and 50% of the remainder vests on each of the first and second anniversary of the effective date of grant.
(8)
Mr. Jaeger was granted options to purchase 500,000 shares on 5/18/06, 25% vested on the first anniversary of the effective date of grant and 1/36th of the remaining amount of shares vest at the end of each month thereafter.
(9)
Mr. Jaeger was granted options to purchase 103,900 shares on 11/17/07, 25% vested on the first anniversary of the effective date of grant and 1/36th of the remaining amount of shares vest at the end of each month thereafter.
(10)
Mr. Jaeger was granted options to purchase 167,000 shares on 7/16/09, 25% vested on the first anniversary of the effective date of grant and 1/36th of the remaining amount of shares vest at the end of each month thereafter.
(11)
Mr. Jarus was granted options to purchase 75,000 shares on 5/18/06, 1/12th vesting at the end of each month thereafter.
(12)
Mr. Jarus was granted options to purchase 75,000 shares on 9/18/07, 1/12th vesting at the end of each month thereafter.
(13)
Mr. Jarus was granted options to purchase 75,000 shares on 11/10/08, 1/12th vesting at the end of each month thereafter.
(14)
Mr. Jarus was granted options to purchase 250,000 shares on 7/16/09, 1/12th vesting at the end of each month thereafter.
(15)
Mr. Jarus was granted options to purchase 207,000 shares on 3/10/10, 100% vested on the date of grant.
(16)
Ms. Hoffarth was granted options to purchase 172,582 shares on 1/14/03, 25% vested on the first anniversary of the effective date of grant and 1/36th of the remaining amount of shares vest at the end of each month thereafter.
(17)
Ms. Hoffarth was granted options to purchase 21,573 shares on 6/22/04, 25% vested on the first anniversary of the effective date of grant and 1/36th of the remaining amount of shares vest at the end of each month thereafter.
(18)
Ms. Hoffarth was granted options to purchase 125,000 shares on 5/18/06, 25% vested on the first anniversary of the effective date of grant and 1/36th of the remaining amount of shares vest at the end of each month thereafter.
(19)
Ms. Hoffarth was granted options to purchase 71,500 shares on 11/17/07, 25% vested on the first anniversary of the effective date of grant and 1/36th of the remaining amount of shares vest at the end of each month thereafter.
(20)
Ms. Hoffarth was granted options to purchase 200,000 shares on 7/16/09, 25% vested on the first anniversary of the effective date of grant and 1/36th of the remaining amount of shares vest at the end of each month thereafter.
None of the executive officers listed in the above table exercised options during the fiscal year ended December 31, 2010.
Director Compensation
The following table presents information regarding compensation paid to our non-employee directors for our fiscal year ended December 31, 2010.
(1) The aggregate number of common shares reserved under option awards outstanding at fiscal year end totaled 690,728. The fair value of options granted to Mr. Bloomer was estimated on the date of grant using the Black-Scholes Model with the following weighted-average assumptions:
(2) Fees granted to Mr. Alderton are made to the law firm, Stubbs Alderton and Markiles, LLP, of which he is a partner. Option awards granted to Mr. Alderton prior to 2008 were also made to the law firm, Stubbs Alderton and Markiles, LLP. The aggregate number of common shares reserved under option awards granted to the law firm Stubbs Alderton & Markiles, LLP, outstanding at fiscal year end totaled 161,291. The fair value of options granted to Stubbs Alderton and Markiles, LLP was estimated on the date of grant using the Black-Scholes Model with the following weighted-average assumptions:
(3) The aggregate number of common shares reserved under option awards outstanding at fiscal year end totaled 400,000. The fair value of options granted to Mr. Alderton was estimated on the date of grant using the Black-Scholes Model with the following weighted-average assumptions:
(4) The aggregate number of common shares reserved under option awards outstanding at fiscal year end totaled 561,291. The fair value of options granted to Mr. Clayton was estimated on the date of grant using the Black-Scholes Model with the following weighted-average assumptions:
(5) The aggregate number of common shares reserved under option awards outstanding at fiscal year end totaled 306,250. The fair value of options granted to Dr. Frank was estimated on the date of grant using the Black-Scholes Model with the following weighted-average assumptions:
In 2010, non-employee directors of Ironclad received $10,000 for attending meetings and serving on Ironclad California’s board of directors. Since April 2000, non-employee directors of Ironclad California have each received options to purchase shares of Ironclad common stock upon their appointment to our board of directors and annually thereafter. We expect to continue the practice of compensating our directors with options to purchase our common stock going forward. Compensation payable to non-employee directors may be adjusted from time to time, as approved by our board of directors.
Employment Contracts
We are not party to any employment agreements with any or our executive officers. Except as described in this section, Ironclad California is not party to any employment agreements with any of its executive officers.
Ironclad California executed a Separation Agreement with Eduard Albert Jaeger effective in April 2004. Pursuant to the terms of the Separation Agreement, if Ironclad terminates Mr. Jaeger’s employment with Ironclad California at any time other than for Cause, then Ironclad California must pay Mr. Jaeger (a) all accrued and unpaid salary and other compensation payable by the Company for services rendered through the termination date, payable in a lump sum payment on the termination date; and (b) a cash amount equal to Two Hundred Thousand Dollars ($200,000), payable in installments throughout the one (1)-year period following the termination date in the same manner as Ironclad California pays salaries to its other executive officers. The Separation Agreement requires Mr. Jaeger to comply with certain obligations, including execution of a general release, in order to receive the lump sum payment. For the purposes of the Separation Agreement, termination for “Cause” means termination by reason of: (i) any act or omission knowingly undertaken or omitted by Mr. Jaeger with the intent of causing damage to Ironclad California, its properties, assets or business or its stockholders, officers, directors or employees; (ii) any improper act of Mr. Jaeger involving a material personal profit to him, including, without limitation, any fraud, misappropriation or embezzlement, involving properties, assets or funds of Ironclad or any of its subsidiaries; (iii) any consistent failure by Mr. Jaeger to perform his normal duties as directed by the Chairman of the Board, in the sole discretion of our board of directors; (iv) any conviction of, or pleading nolo contendere to, (A) any crime or offense involving monies or other property of Ironclad; (B) any felony offense; or (C) any crime of moral turpitude; or (v) the chronic or habitual use or consumption of drugs or alcoholic beverages.
2006 Stock Incentive Plan
Our 2006 Stock Incentive Plan, or the Plan, was adopted on September 18, 2006 and became effective on January 12, 2007. A total of 11,000,000 shares of common stock have been reserved for issuance upon exercise of awards granted under the Plan. Any shares of common stock subject to an award, which for any reason expires or terminates unexercised, are again available for issuance under the Plan.
The Plan will terminate after 10 years from the date on which our board of directors approved the plan, unless it is terminated earlier by our board of directors. The plan authorizes the award of stock options and stock purchase grants.
The Plan will be administered by our board of directors or the Compensation Committee of our board of directors as determined by our board of directors or otherwise permitted under the Plan. Our board of directors has the authority to select the eligible participants to whom awards will be granted, to determine the types of awards and the number of shares covered and to set the terms, conditions and provisions of such awards, to cancel or suspend awards under certain conditions, and to accelerate the exercisability of awards. Our board of directors will be authorized to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the plan, to determine the terms of agreements entered into with recipients under the plan, and to make all other determinations that may be necessary or advisable for the administration of the Plan. Our board of directors may at its discretion delegate the responsibility for administering the plan to any committee or subcommittee of our board of directors.
The exercise price per share of common stock purchasable under any stock option will be determined by our board of directors, but cannot in any event be less than 100% of the fair market value of the common stock on the date the option is granted. Our board of directors will determine the term of each stock option (subject to a maximum of 10 years) and each option will be exercisable pursuant to a vesting schedule determined by our board of directors. The grants and the terms of ISOs will be restricted to the extent required for qualification as ISOs by the U.S. Internal Revenue Code of 1986, as amended, or the Code. Subject to approval of our board of directors, options may be exercised by payment of the exercise price in cash, shares of common stock, which have been held for at least six months, or pursuant to a “cashless exercise” through a broker-dealer under an arrangement approved by us. Our board of directors may require the grantee to pay to us any applicable withholding taxes that the company is required to withhold with respect to the grant or exercise of any award. The withholding tax may be paid in cash or, subject to applicable law, our board of directors may permit the grantee to satisfy these obligations by the withholding or delivery of shares of common stock. We may withhold from any shares of common stock that may be issued pursuant to an option or from any cash amounts otherwise due from the company to the recipient of the award an amount equal to such taxes.
Stock purchase rights are generally treated similar to stock options with respect to exercise/purchase price, exercisability and vesting.
In the event of any change affecting the shares of common stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distribution to shareholders other than cash dividends, our board of directors will make such substitution or adjustment in the aggregate number of shares that may be distributed under the Plan and in the number and option price (or exercise or purchase price, if applicable) as it deems to be appropriate in order to maintain the purpose of the original grant.
No option will be assignable or otherwise transferable by the grantee other than by will or the laws of descent and distribution and, during the grantee’s lifetime, an option may be exercised only by the grantee.
If a grantee’s service to the company terminates on account of death, disability or retirement, then the grantee’s unexercised options, if exercisable immediately before the grantee’s death, disability or retirement, may be exercised in whole or in part, not later than one year after this event. If a grantee’s service to the company terminates for cause, then the grantee’s unexercised option terminates effective immediately upon such termination. If a grantee’s service to us terminates for any other reason, then the grantee’s unexercised options, to the extent exercisable immediately before such termination, will remain exercisable, and may be exercised in whole or in part, for a period of three months after such termination of employment.
Under the Plan, the occurrence of a “Change in Control” can affect options and other awards granted under the plan. Generally, the Plan defines a “Change in Control” to include the consummation of a merger or consolidation with or into another entity or any other corporate reorganization, if more than 80% of the combined voting power of the continuing or surviving entity’s securities outstanding immediately after the merger, consolidation or other reorganization is owned, directly or indirectly, by persons who were not our shareholders immediately before the merger, consolidation or other reorganization, except that in making the determination of ownership by our shareholders, immediately after the reorganization, equity securities that persons own immediately before the reorganization as shareholders of another party to the transaction will be disregarded. For these purposes voting power will be calculated by assuming the conversion of all equity securities convertible (immediately or at some future time) into shares entitled to vote, but not assuming the exercise of any warrants or rights to subscribe to or purchase those shares. “Change in Control” also includes the sale, transfer or other disposition of all or substantially all of our assets. A transaction will not constitute a Change in Control if its sole purpose is to change the state of our incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the our securities immediately before such transaction.
If a “Change in Control” were to occur, our board of directors would determine, in its sole discretion, whether to accelerate any unvested portion of any option grant. Additionally, if a Change in Control were to occur, any agreement between us and any other party to the Change in Control could provide for (i) the continuation of any outstanding awards, (ii) the assumption of the Plan or any awards by the surviving corporation or any of its affiliates, (iii) cancellation of awards and substitution of other awards with substantially the same terms or economic value as the cancelled awards, or (iv) cancellation of any vested or unvested portion of awards, subject to providing notice to the option holder.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table presents information regarding the beneficial ownership of our common stock as of March 1, 2011 by:
·
each of our executive officers;
·
each of our directors;
·
all of our directors and executive officers as a group; and
·
each shareholder known by us to be the beneficial owner of more than 5% of our common stock.
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of our common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of March 1, 2011 are deemed to be outstanding and to be beneficially owned by the person holding the options or warrants for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
The information presented in this table is based on 72,951,185 shares of our common stock outstanding on March 1, 2011. Unless otherwise indicated, the address of each of the executive officers and directors and 5% or more shareholders named below is c/o Ironclad Performance Wear Corporation, 2201 Park Place, Suite 101, El Segundo, California 90245.
(1)
Consists of (i) 2,763,984 shares of common stock held by Eduard and Kari Family Trust dtd 7/19/2006, of which Eduard Albert Jaeger is a trustee and as such has voting and investment power, and (ii) 1,662,659 shares of common stock reserved for issuance upon exercise of stock options which currently are exercisable or will become exercisable within 60 days of March 1, 2011. Mr. Jaeger disclaims beneficial ownership of the shares of common stock held by Jaeger Family, LLC and by Eduard and Kari Family Trust dtd 7/19/2006 except to the extent of his pecuniary interest therein.
(2)
Includes 470,165 shares of common stock reserved for issuance upon exercise of stock options which currently are exercisable or will become exercisable within 60 days of March 1, 2011.
(3)
Includes 374,576 shares of common stock reserved for issuance upon exercise of stock options which currently are exercisable or will become exercisable within 60 days of March 1, 2011.
(4)
Includes 173,158 shares of common stock reserved for issuance upon exercise of stock options which currently are exercisable or will become exercisable within 60 days of March 1, 2011.
(5)
Includes 690,728 shares of common stock reserved for issuance upon exercise of stock options which currently are exercisable or will become exercisable within 60 days of March 1, 2011.
(6)
Includes 561,291 shares of common stock reserved for issuance upon exercise of stock options which currently are exercisable or will become exercisable within 60 days of March 1, 2011.
(7)
Includes (i) 400,000 shares of common stock reserved for issuance upon exercise of stock options which currently are exercisable or will become exercisable within 60 days of March 1, 2011, and (ii) 77,258 shares of common stock reserved for issuance upon exercise of certain warrants to purchase common stock which are currently exercisable.
(8)
Consists of (i) 3,526,667 shares of common stock held by the Jarus Family Trust, for which Mr. Jarus exercises voting and investment power, (ii) 682,000 shares of common stock reserved for issuance upon exercise of stock options which currently are exercisable or will become exercisable within 60 days of March 1, 2011, and (iii) 61,806 shares of common stock reserved for issuance upon exercise of certain warrants to purchase common stock which are currently exercisable.
(9)
Consists of (i) 4,775,000 shares of common stock held jointly by Dr. and Mrs. Frank, (ii) 128,201 shares of common stock held directly by Dr. Frank, (iii) 225,000 shares of common stock held by Dr. Frank’s Health Products LLC 401k Profit Sharing Plan for which Dr. Frank exercises voting and investment power, (iv) 196,000 shares of common stock held by Dr. Frank’s Health Products Defined Benefit Plan, (v) 306,250 shares of common stock reserved for issuance upon exercise of stock options which currently are exercisable or will become exercisable within 60 days of March 1, 2011, and (vi) 154,516 shares of common stock reserved for issuance upon exercise of certain warrants to purchase common stock which are currently exercisable.
(10)
Consists of (i) 12,182,263 shares of common stock, (ii) 293,580 shares of common stock reserved for issuance upon exercise of certain warrants to purchase common stock which are currently exercisable, and (ii) 5,320,827 shares of common stock reserved for issuance upon exercise of stock options which currently are exercisable or will become exercisable within 60 days of March 1, 2011.
(11)
William E. Coleman as Trustee of the Colman Survivor Trust, exercises voting and investment power over the shares of common stock held by Coleman Survivor Trust but disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein.
Equity Compensation Plan Information
The following table sets forth information concerning our equity compensation plans as of December 31, 2010.
(1) This number represents options assumed in connection with the merger with Ironclad California.
(2) This number represents stock options to purchase 7,706,253 shares of our common stock under the 2006 Stock Incentive Plan, or the Plan.
(3) This number represents: (i) warrants to purchase 9,389,536 shares of our common stock which were issued to shareholders at or prior to our private placement in May, 2006, (ii) warrants to purchase 683,312 shares of our common stock which were issued to one of the placement agents in our private placement in exchange for services, and (iii) warrants issued to purchase 43,146 shares of our common stock in exchange for services.
(4) This number represents warrants issued to purchase 60,000 shares of our common stock in exchange for services. The warrants have a term of five years and are exercisable at a per share price of $0.05
Item 13.
Item 13.Certain Relationships and Related Transactions, and Director Independence.
Transactions with Officers and Directors
Since January 1, 2010, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party:
·
in which the amount involved exceeds $120,000; and
·
in which any director, executive officer, shareholder who beneficially owns 5% or more of our common stock or any member of their immediate family had or will have a direct or indirect material interest.
Director Independence
Our board of directors currently consists of six members: Messrs. Jarus (Executive Chairman), Jaeger, Clayton, Alderton, Bloomer and Frank. We are not a “listed issuer” under SEC rules. We believe that Messrs. Bloomer and Clayton are “independent” as that term is defined in Section 4200 of the Marketplace Rules as required by the NASDAQ Stock Market.
Item 14.
Item 14.Principal Accounting Fees and Services.
EFP Rotenberg, LLP is our principal independent public accounting firm. All audit work was performed by the full time employees of EFP Rotenberg, LLP. Our Audit Committee approves in advance, all services performed by EFP Rotenberg, LLP. Our board of directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant’s independence, and has approved such services.
Audit Fees
Fees for audit services totaled approximately $96,000 and $93,938 for the years ended December 31, 2010 and 2009, respectively, including fees associated with the annual audit, and reviews of our quarterly reports on Form 10-Q.
Audit-Related Fees
Fees for audit-related services totaled approximately $-0- and $1,100 for the years ended December 31, 2010 and 2009, respectively. Audit-related services principally include due diligence in connection with acquisitions, financing transactions, and accounting consultations.
Tax Fees
Fees were incurred totaling approximately $16,014 and $12,798 during the years ended December 31, 2010 and 2009, respectively for tax services, including for tax compliance, tax advice and tax planning.
All Other Fees
No other fees were incurred during the years ended December 31, 2010 and 2009 for services provided by EFP Rotenberg, LLP, except as described above.
PART IV
Item 15.
Item 15.Exhibits, Financial Statement Schedules.
The financial statements filed as part of this Annual Report on Form 10-K are listed on page 23.
The following exhibits are filed with this Annual Report on Form 10-K:
Exhibit
Number
Exhibit Title
3.1.1
Articles of Domestication of the Registrant. Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form SB-2 (File No. 333-118808), filed September 3, 2004.
3.1.2
Certificate of Change effecting a forward stock split and increasing the number of authorized shares, filed May 9, 2006. Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K (File No. 000-51365), filed May 12, 2006.
3.1.3
Articles of Merger effecting a name change to the Registrant. Incorporated by reference to Exhibit 3.3 to our Current Report on Form 8-K (File No. 000-51365), filed May 12, 2006.
3.2
Bylaws. Incorporated by reference to Exhibit 3.2 to our Registration Statement on Form SB-2 (File No. 333-118808), filed September 3, 2004.
4.1.1
Articles of Domestication of the Registrant. Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form SB-2 (File No. 333-118808), filed September 3, 2004.
4.1.2
Certificate of Change effecting a forward stock split and increasing the number of authorized shares, filed May 9, 2006. Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K (File No. 000-51365), filed May 12, 2006.
4.1.3
Articles of Merger effecting a name change to the Registrant. Incorporated by reference to Exhibit 3.3 to our Current Report on Form 8-K (File No. 000-51365), filed May 12, 2006.
4.2
Bylaws. Incorporated by reference to Exhibit 3.2 to our Registration Statement on Form SB-2 (File No. 333-118808), filed September 3, 2004.
4.3
Form of Warrant issued to Investors in Private Placement. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K (File No. 000-51365), filed May 12, 2006.
4.4
Ironclad Performance Wear Corporation 2000 Stock Incentive Plan. Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8 (File No. 333-139210), filed December 8, 2006.
4.5
First Amendment to Ironclad Performance Wear Corporation 2000 Stock Incentive Plan. Incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-8 (File No. 333-139210), filed December 8, 2006.
4.6
2006 Stock Incentive Plan. Incorporated by reference to Exhibit 99.1 to our Registration Statement on Form S-8 (File No. 333-145855), filed September 4, 2007.
4.7
Amendment No. 1 to Ironclad Performance Wear Corporation’s 2006 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-51365), filed May 11, 2009.
10.1†
Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form SB-2 (File No. 333-135288), filed June 26, 2006.
10.2†
Separation Agreement between Eduard Albert Jaeger and the Registrant. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-51365), filed May 12, 2006.
10.3
Standard Industrial/Commercial Multi-Tenant Lease by and between Park/El Segundo Partners, LLC, and the Registrant, dated September 12, 2005, as amended. Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K (File No. 000-51365), filed May 12, 2006.
10.4
Letter Agreement with Advantage Media Systems, Inc., dated June 29, 2007. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-51365), filed July 6, 2007.
Exhibit
Number
Exhibit Title
10.5*
Exclusive License and Distributorship Agreement dated January 6, 2009, between the Registrant and Orr Safety Corporation. Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 000-51365), filed May 15, 2009.
10.6
Form of Subscription Agreement in connection with the private placement consummated on February 5, 2009. Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q (File No. 000-51365), filed May 15, 2009.
10.7
Ironclad Performance Wear 2006 Profit Sharing Plan. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-51365), filed May 8, 2009.
10.8*
Factoring and Inventory Advances and Security Agreement dated December 7, 2009, between the Registrant and FCC, LLC d/b/a First Capital Western Region, LLC. Incorporated by reference to Exhibit 10.13 to our Annual Report on Form 10-K (File No. 000-51365), filed March 11, 2010.
10.9
Patent and Trademark Security Agreement dated December 7, 2009, between the Registrant and FCC, LLC d/b/a First Capital Western Region, LLC. Incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K (File No. 000-51365), filed March 11, 2010.
21.1
Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21.1 to our Current Report on Form 8-K (File No. 000-51365), filed May 12, 2006.
23.1
Consent of Rotenberg & Co.
24.1
Power of Attorney (included on signature page).
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.
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.
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.
† Each a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K.
* Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
POWER OF ATTORNEY
The undersigned directors and officers of Ironclad Performance Wear Corporation do hereby constitute and appoint Scott Jarus and Thomas Kreig, and each of them, with full power of substitution and resubstitution, as their true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto, and we do hereby ratify and confirm all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Scott Jarus
Chief Executive Officer, Executive
March 10, 2011
Scott Jarus
Chairman of the Board and Director (Principal Executive Officer)
/s/ Thomas Kreig
Senior Vice President of Finance and
March 10, 2011
Thomas Kreig
Principal Financial Officer (Principal Financial and Accounting Officer)
/s/ Scott Alderton
Director
March 10, 2011
Scott Alderton
Director
March __, 2011
R. D. Pete Bloomer
Director
March __, 2011
Vane Clayton
/s/ Eduard Albert Jaeger
Director and Head of New Business
March 10, 2011
Eduard Albert Jaeger
Development
/s/ Kenneth J. Frank
Director
March 10, 2011
Kenneth J. Frank, M.D.