-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ex//7mJI6sxqnBVhVKGk0Y/D1nlw9eV9E5qDYf3EkTn8jidAoHBC+jksaJdAopCh pDgBlpNyo6Bj76rlMBGoNA== 0001144204-08-019588.txt : 20080401 0001144204-08-019588.hdr.sgml : 20080401 20080401091704 ACCESSION NUMBER: 0001144204-08-019588 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080401 DATE AS OF CHANGE: 20080401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IRONCLAD PERFORMANCE WEAR CORP CENTRAL INDEX KEY: 0001301712 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISC DURABLE GOODS [5090] IRS NUMBER: 980434104 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-51365 FILM NUMBER: 08727428 BUSINESS ADDRESS: STREET 1: 2201 PARK PLACE, SUITE 101 CITY: EL SEGUNDO STATE: CA ZIP: 90245-4909 BUSINESS PHONE: 310-643-7800 MAIL ADDRESS: STREET 1: 2201 PARK PLACE, SUITE 101 CITY: EL SEGUNDO STATE: CA ZIP: 90245-4909 FORMER COMPANY: FORMER CONFORMED NAME: EUROPA TRADE AGENCY LTD. DATE OF NAME CHANGE: 20040827 10KSB/A 1 v109254_10ksba.htm Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-KSB/A
 
x
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2007
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from__________ to__________
 
Commission file number: 0-51365
 
IRONCLAD PERFORMANCE WEAR CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
 
Nevada
 
98-0434104
(State or Other Jurisdiction of Incorporation or
Organization)
 
(I.R.S. Employer Identification No.)

2201 Park Place, Suite 101
El Segundo, California 90245
 
(Address of Principal Executive Offices)
(310) 643-7800
 
(Issuer’s Telephone Number, Including Area Code)
 
Securities registered under Section 12(b) of the Exchange Act:
None
 
Securities registered under Section 12(g) of the Exchange Act:
 
Common Stock, par value $.001 per share
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                   Yes x No ¨
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB of any amendment to this Form 10-KSB. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
 
Yes ¨ No x
 
Issuer’s Revenues for the fiscal year ended December 31, 2007 were $13,049,197.
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of March 27, 2008 was $7,355,481
 
As of March 27, 2008, the issuer had 35,389,504 shares of common stock, par value $.001 per share, issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None
 
Transitional Small Business Disclosure Format (check one): Yes ¨ No x
 

 
EXPLANATORY NOTE

This Annual Report on Form 10-KSB/A is being filed by Ironclad Performance Wear Corporation (the “Company”) to amend the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission on March 31, 2008 (the “10-KSB”), solely for the purpose of including Exhibit 32.2 “Certification Of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002”, which was inadvertently omitted from the 10-KSB. Except for the items contained herein, this form 10-KSB/A does not modify or update other disclosures in the 10-KSB.
 


IRONCLAD PERFORMANCE WEAR CORPORATION
INDEX TO FORM 10-KSB
 
PART I
 
 
Page
Item 1.
Description of Business
 
1
Item 2.
Description of Property
 
11
Item 3.
Legal Proceedings
 
11
Item 4.
Submission of Matters to a Vote of Security Holders
 
12
 
 
 
 
PART II
 
 
 
Item 5.
Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
 
13
Item 6.
Management’s Discussion and Analysis or Plan of Operation
 
15
Item 7.
Financial Statements
 
22
 
Report of Independent Registered Public Accounting Firm
 
23-24
 
Consolidated Balance Sheet
 
25
 
Consolidated Statements of Operations
 
26
 
Consolidated Statements of Cash Flows
 
27
 
Consolidated Statements of Changes in Stockholders’ Equity
 
28
 
Notes to Consolidated Financial Statements
 
29-44
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
45
Item 8A.
Controls and Procedures
 
45
Item 8B
Other Information
 
46
 
 
 
 
PART III
 
 
 
Item 9.
Director, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance With Section 16(a) of the Exchange Act
 
46
Item 10.
Executive Compensation
 
48
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
54
Item 12.
Certain Relationships and Related Transactions, and Director Independence
 
57
Item 13.
Exhibits
 
58
Item 14.
Principal Accountant Fees and Services
 
59
 
i

 
PART I
 
This report, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis or Plan of Operation” and “Description of Business,” contains “forward-looking statements” that include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new services; our expectations concerning litigation, regulatory developments or other matters; statements concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and future economic performance; statements of management’s goals and objectives; and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.
 
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause these differences include, but are not limited to other factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition or Plan of Operation” and “Description of Business.”
 
Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statement. 
 
Item 1. Description of 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
 
2006 Merger Transaction
 
Founded in 1998, and based in El Segundo, CA, we are a designer and manufacturer of branded performance work wear for a variety of construction, do-it-yourself, industrial, sporting goods and general services markets.
 
On April 20, 2006, we entered into an Agreement and Plan of Merger, or Merger Agreement, with Ironclad California, and Ironclad Merger Corporation, a California corporation and our wholly-owned subsidiary, or MergerCo, pursuant to which we would acquire Ironclad California in a merger transaction wherein MergerCo would merge with and into Ironclad California, with Ironclad California being the surviving corporation, or the Merger. On May 9, 2006, the Merger closed, Ironclad California became our wholly-owned subsidiary, and we changed our name to Ironclad Performance Wear Corporation.
 
Private Placement Transaction
 
Immediately following the closing of the Merger, we received gross proceeds of approximately $7.3 million in a private placement transaction, or the Private Placement, with institutional investors and other high net worth individuals, or the Investors. Pursuant to Subscription Agreements entered into with these Investors, we sold 9,761,558 investment units, at $0.75 per investment unit. Each investment unit consists of one share of our common stock, and a five year non-callable warrant to purchase three-quarters of one share of our common stock, at an exercise price of $1.00 per share.
 
General
 
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 job-specific 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 a reputation in the construction, do-it-yourself, industrial, sporting goods and general services markets as a leader in performance gloves and apparel. We recently expanded our performance apparel product line to include jackets, pants, shorts, reflective and polo shirts, underwear and tights.
 
We manufacture our performance gloves and apparel using 20 functional materials, including DuPont™ Kevlar® and Teflon®, Gore-tex® Synthetic Leather, 3M Reflective Scotchlite™, 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 team responsible for identifying and creating new products and applications, and improving and enhancing existing products.
 
1

 
We currently sell our products in all 50 states and internationally through approximately 9,000 retail outlets. Our gloves are priced at retail between $15 and $60 per unit with apparel unit prices ranging from $20 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 45 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, 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 three suppliers operating in China, Hong Kong 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 consists of eight 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. In 2006, we hired a Director of Apparel who was a designer/developer of performance apparel for Under Armour and other apparel companies. We also hired a Vice President of Sales - Apparel, who previously worked for Dickies and other apparel companies, to develop a sales force to sell the performance apparel line to the work wear and sporting goods channels. Our existing sales force will sell 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 will be manufactured by three suppliers located in Taiwan, Mexico 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.
 
Competition
 
Ironclad competes in the following two principal markets: construction and industrial.
 
Technical Gloves
 
Ironclad faces competition from other specialty gloves and apparel companies such as Custom Leathercraft Manufacturing Company, Big Time, Gorgonz 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.
 
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 expand into work wear chains and additional large retailers in 2008.
 
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 plan to expand into Europe and other international markets in 2008.
 
2

 
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.
 
Television Relationships
 
Ironclad is working to develop advertising and marketing opportunities with television programs that could provide strong exposure to our target demographic and demonstrate to viewers the advantage of utilizing Ironclad products. Our products are currently featured on twelve television programs.
 
Print Media
 
We expanded our marketing programs in print media throughout 2007, in construction industry and occupational health and safety publications, and lifestyle and recreational magazines.
 
Sponsorship Relationships
 
We maintain a number of sponsorship relationships with sporting and television events that appeal to our target demographic. We view these relationships as a means to further establish and solidify brand recognition with our target customers.
 
Sales and Customer Analysis
 
We are currently distributing our products through approximately 9,000 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. In 2008 we intend to sell our expanded performance apparel line to work wear 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 “Big Box” home centers accounted for approximately 25% of our sales revenue in 2007. One retailer, Menard, Inc., accounted for approximately 19% of our sales in 2007.
 
Selected Analysis of “Big Box” and International Retailers
 
We plan to continue our expansion by increasing selling efforts through “Big Box” home centers and international channels, which we believe creates significant opportunities for strengthening our brand.
 
Geographic Information
 
Domestic sales accounted for 89% of our revenue in 2007 and 93% in 2006. International sales in Australia, United Kingdom, Canada and other countries accounted for our remaining revenue in 2007. 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, Hong Kong and the Dominican Republic.
 
Co-Branded Products and Relationships
 
Although we do not sell privately-labeled products, we have opportunistically sought to co-brand with major partners that represent a value added relationship in terms of sales and brand awareness.
 
Intellectual Property and Proprietary Rights
 
We currently have eight patents or 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.
 
·
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 issued on October 30, 2007.
 
·
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 issued on September 5, 2006.
 
·
Silicone rubber is fused to the synthetic leather palm of the Box Handler and Gripworx gloves in a specific pattern. This pattern, designed for optimum grip on smooth surfaces, is patent pending.
 
3

 
·
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.
 
·
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 issued on February 13, 2007.
 
·
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, found in the Heatworx line. This patent is pending.
 
·
A specific geometry, construction and chemical composition for the palm of a glove that is heat resistant up to 650°F yet maintains hand dexterity, found on Heatworx Heavy Duty glove. This patent is pending.
 
Ironclad owns the following intellectual trademark property: 39 registered US trademarks, 10 registered international trademarks and 9 in-use US 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 designed around by others.
 
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
 
Our operating results may fluctuate significantly and our stock price could decline or fluctuate if our results do not meet the expectation of analysts or investors.
 
Management expects that we will experience substantial variations in our net sales and operating results from quarter to quarter. We believe that the factors which influence this variability of quarterly results include:
 
·
the timing of our introduction of new product lines, particularly specialty apparel;
 
·
the level of consumer acceptance of each new product line;
 
·
general economic and industry conditions that affect consumer spending and retailer purchasing;
 
·
the availability of manufacturing capacity;
 
·
the seasonality of the markets in which we participate;
 
·
the timing of trade shows;
 
·
the product mix of customer orders;
 
·
the timing of the placement or cancellation of customer orders;
 
·
the weather;
 
·
transportation delays;
 
4

 
·
quotas and other regulatory matters; and
 
·
the timing of expenditures in anticipation of increased sales and actions of competitors.
 
As a result of fluctuations in our revenue and operating expenses that may occur, management believes that period-to-period comparisons of our results of operations are not a good indication of our future performance. It is possible that in some future quarter or quarters, our operating results will be below the expectations of securities analysts or investors. In that case, our common stock price could fluctuate significantly or decline.
 
We may need additional funding to support our operations and capital expenditures, which may not be available to us and which lack of availability could adversely affect our business.
 
We intend to fund our operations and capital expenditures from limited cash flow from operations, our cash on hand, the net proceeds of the private placements completed on May 9, 2006 and September 28, 2007 and the factoring agreement entered into on September 15, 2006. We believe we will have sufficient funds to finance the cost of our operations and planned expansion for the foreseeable future. As part of our planned growth and expansion, we will be required to make expenditures necessary to expand and improve our operating and management infrastructure. We also plan to invest more heavily in research and development of new products, designs or services. In addition, we may need additional funds to pursue business opportunities (such as acquisitions of complementary businesses), to react to unforeseen difficulties or to respond to competitive pressures.
 
If our capital resources are insufficient, 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, the sale of additional equity or convertible debt securities may result in additional dilution to existing stockholders. 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.
 
We have a history of operating losses and there can be no assurance that we can achieve or maintain profitability.
 
We have a history of operating losses and may not achieve or sustain profitability. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may be unable to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.
 
We may be unable to effectively manage our growth.
 
Our strategy envisions growing our business. We plan to expand our technology, sales, administrative and marketing organizations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:
 
·
expand our systems effectively or efficiently or in a timely manner;
 
·
allocate our human resources optimally;
 
·
meet our capital needs;
 
·
identify and hire qualified employees or retain valued employees; or
 
·
incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.
 
Our inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating results and financial condition.
 
Substantially all of our revenues have been derived from a relatively limited product line consisting of task-specific gloves and performance apparel, and our future success depends on our ability to expand our product line and achieve broader market acceptance of our company and our products.
 
To date, our products have consisted mainly of task-specific gloves and performance apparel, targeted primarily to the construction, do-it-yourself, industrial and sporting goods markets. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance in our existing market segments as well as in new segments. In particular, our success, growth and expansion depend largely on new and increasing sales of our recently expanded performance apparel. We have little or virtually no experience in this line of business, which creates substantial uncertainty regarding our ability to succeed in this sector. We will be required to develop and execute a strategy for effectively marketing and distributing our performance apparel. We may be required to enter into new arrangements and relationships with vendors, suppliers and others. 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 spend significant amounts on promotion, marketing and advertising to increase product awareness, we cannot guarantee that these expenses will generate the desired product awareness or commensurate increase in sales of our products. If we are unable to effectively market and distribute our performance apparel or expand into new market segments, we will 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.
 
5

 
We may be unable to compete successfully against existing and future competitors, which could decrease our revenue and margins and harm our business.
 
The task-specific glove and performance apparel segments of the apparel industry are highly competitive. 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 work wear distribution channel from Gorgonz, among others. Unknown or unforeseen new entrants into our distribution channels, particularly low-cost overseas producers, will further increase the level of competition in these channels. There can be no assurance that we will be able to maintain our growth rate or increase our market share in our distribution channels at the expense of existing competitors and other apparel manufacturers choosing to enter the market segments in which we compete. In addition, there can be no assurance that we will be able to enter and achieve significant growth in other distribution channels.
 
Failure to expand into new distribution channels and new international markets could materially and adversely impact our growth plan and profitability.
 
Our sales growth depends in part on our ability to expand from the hardware and lumber retail channels and industrial distributors that we have focused on for the past eight years into new distribution channels, particularly “Big Box” home centers and work wear and sporting goods retailers. Failure to expand into these mass-market channels could severely limit our growth.
 
Our business plan also depends in part on our ability to expand into international markets. We have begun the distribution of our products in Japan, Australia and Canada and we are in the process of establishing 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 its 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.
 
6

 
Trade matters may disrupt our supply chain, which could result in increased expenses and decreased sales.
 
We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the U.S. and other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes, safeguards and customs restrictions, against apparel items, as well as U.S. or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition and results of operations. Although the quota system established by the Agreement on Textiles and Clothing was completely phased out for World Trade Organization countries effective January 1, 2005, there can be no assurances that restrictions will not be reestablished for certain categories in specific countries. We are unable to determine the impact of the changes to the quota system on our sourcing operations, particularly in China. Our sourcing operations may be adversely affected by trade limits or political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and/or other trade disruptions.
 
Our international operations and the operations of our manufacturers and suppliers in China are subject to additional risks that are beyond our control and that could harm our business.
 
Our glove products are manufactured by 3 manufacturers operating in China, Hong Kong and Indonesia. Our performance apparel products are currently manufactured in Taiwan, Mexico and the Dominican Republic. We may in the future use offshore manufacturers for all or some of these products. In addition, approximately 7% of our fiscal 2006 net revenues were generated through international sales and we plan to increase our sales to international markets in the future. As a result of our international manufacturing and sales, we are subject to additional risks associated with doing business abroad, including:
 
·
political unrest, terrorism and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured;
 
·
difficulties in managing foreign operations, including difficulties associated with inventory management and collection on foreign accounts receivable;
 
·
dependence on foreign distributors and distribution networks;
 
·
currency exchange fluctuations and the ability of our Chinese manufacturers to change the prices they charge us based on fluctuations in the value of the US dollar relative to that of the Chinese Yuan;
 
·
the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards as well as restrictions on the transfer of funds;
 
·
disruptions or delays in shipments;
 
·
changes in local economic and non-economic conditions and standards in which our manufacturers, suppliers or customers are located; and
 
·
reduced protection for intellectual property rights in jurisdictions outside the United States.
 
These and other factors beyond our control could interrupt our manufacturers’ production in offshore facilities, influence the ability of our manufacturers to export our products cost-effectively or at all, inhibit our and our unaffiliated manufacturer’s ability to produce certain materials and influence our ability to sell our products in international markets, any of which could have an adverse effect on our business, financial conditions and operations.
 
We may be unable to adequately protect our intellectual property rights.
 
We rely in part on patent, trade secret, trade dress and trademark law to protect our rights to certain aspects of our products, including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks, all of which we believe are important to the success of our products and our competitive position. There can be no assurance that any of our pending patent or trademark applications will result in the issuance of a registered patent or trademark, or that any patent or trademark granted will be effective in thwarting competition or be held valid if subsequently challenged. In addition, there can be no assurance that the actions taken by us to protect our proprietary rights will be adequate to prevent imitation of our products, that our proprietary information will not become known to competitors, that we can meaningfully protect our rights to unpatented proprietary information or that others will not independently develop substantially equivalent or better products that do not infringe on our intellectual property rights. We could be required to devote substantial resources to enforce our patent and protect our intellectual property, which could divert our resources and result in increased expenses. In addition, an adverse determination in litigation could subject us to the loss of our rights to a particular patent or other intellectual property, could require us to grant licenses to third parties, could prevent us from manufacturing, selling or using certain aspects of our products or could subject us to substantial liability, any of which could harm our business.
 
7

 
We may become subject to litigation for infringing the intellectual property rights of others.
 
Others may initiate claims against us for infringing on their intellectual property rights. We may be subject to costly litigation relating to such infringement claims and we may be required to pay compensatory and punitive damages or license fees if we settle or are found culpable in such litigation, we may be required to pay damages, including punitive damages. In addition, we may be precluded from offering products that rely on intellectual property that is found to have been infringed by us. We also may be required to cease offering the affected products while a determination as to infringement is considered. These developments could cause a decrease in our operating income and reduce our available cash flow, which could harm our business and cause our stock price to decline.
 
We may be unable to attract and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation of our business plan.
 
Our success depends to a significant degree upon our ability to attract, retain and motivate skilled and qualified personnel. If we fail to attract, train and retain sufficient numbers of these qualified people, our prospects, business, financial condition and results of operations will be materially and adversely affected. In particular, we are heavily dependent on the continued services of Eduard Jaeger and the other members of our senior management team. We do not have long-term employment agreements with any of the members of our senior management team, each of whom may voluntarily terminate his employment with us at any time. Following any termination of employment, these employees would not be subject to any non-competition covenants. The loss of any key employee, including members of our senior management team, and our inability to attract highly skilled personnel with sufficient experience in our industries could harm our business.
 
Our senior management’s limited recent experience managing a publicly traded company may divert management’s attention from operations and harm our business.
 
Our management team has relatively limited recent experience managing a publicly traded company and complying with federal securities laws, including compliance with recently adopted disclosure requirements on a timely basis. Our management will be required to design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business.
 
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. In the event we enter into a factoring relationship, a customer’s financial problems would limit the amount of customer receivables that we could assign to such factor on the receivables, and could cause us to assume more credit risk relating to those assigned receivables or to curtail business with that customer.
 
8

 
Government regulation and supervision
 
Any negative changes to international treaties and regulations such as the North American Free Trade Agreement, or NAFTA, and to the effects of international trade agreements and embargoes imposed by such entities such as the World Trade Organization which could result in a rise in trade quotas, duties, taxes and similar impositions or which could limit the countries from whom we can purchase our fabric or other component materials, or which could limit the countries where we might market and sell our products, could have an adverse effect on our business.
 
Any changes in regulation by the Federal Trade Commission, or FTC, with respect to labeling and advertising of our products could have an adverse affect on our business. The FTC requires apparel companies to provide a label clearly stating the country of origin of manufacture and the company’s apparel registration number and a second label stating washing instructions for the product. A change in these requirements could add additional cost to the production of our products, though we do not believe that this additional cost would be material, especially in relation to the cost of producing our products.
 
RISKS RELATING TO OUR COMMON STOCK
 
There is a limited trading market for our common stock and a market for our stock may not be sustained, which will adversely affect the liquidity of our common stock and could cause our market price to decline.
 
Although prices for our shares of common stock are quoted on NASDAQ’s Over-the-Counter Bulletin Board (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 Over-the-Counter Bulletin Board is not necessarily a reliable indicator of its fair market value. Further, if we cease to be quoted, holders of our common stock would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock, and the market value of our common stock would likely decline.
 
The market price of our common stock is likely to be highly volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the offering price.
 
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including announcements of new products or services by our competitors. In addition, the market price of our common stock could be subject to wide fluctuations in response to a variety of factors, including:
 
·
quarterly variations in our revenues and operating expenses;
 
·
developments in the financial markets, apparel industry and the worldwide or regional economies;
 
·
announcements of innovations or new products or services by us or our competitors;
 
·
announcements by the government that affect international trade treaties;
 
·
fluctuations in interest rates and / or the asset backed securities market;
 
·
significant sales of our common stock or other securities in the open market;
 
·
variations in interest rates; and
 
·
changes in accounting principles.
 
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.
 
On October 2, 2006 the registration statement we filed in June 2006 became effective, and up to 27,117,720 shares of common stock became eligible for sale. The sale of these shares could depress the market price of our common stock. Sales of a significant number of shares of our common stock in the open market could harm the market price of our common stock. A reduced market price for our shares could make it more difficult to raise funds through future offering of common stock.
 
9

 
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. Gemini Partners, Inc., or Gemini, and other stockholders that funded the purchase and cancellation of shares from our former stockholders have demand registration rights with respect to the resale of 3,489,444 shares they received in connection with the purchase and cancellation transaction completed immediately before the closing of the merger with Ironclad California. Brean Murray, Carret & Co., or Brean Murray, the placement agent in the private placement completed on May 9, 2006, also has demand rights with respect to the resale of its shares of common stock and common stock underlying warrants. The resale of these shares may be registered subsequently pursuant to these demand registration rights.
 
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 person who has held restricted shares for a period of one year may, upon filing with the Securities and Exchange Commission, or SEC, a notification on Form 144, sell into the market shares up to an amount equal to 1% of the outstanding shares. The resale of the 3,489,444 shares held by Gemini and the stockholders who acquired shares in connection with the purchase and cancellation transaction completed immediately before the merger with Ironclad California may be registered as discussed above, but these shares also may currently be eligible for sale under Rule 144. 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 Over-the-Counter Bulletin Board 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 NASDAQ Over-the-Counter Bulletin Board, 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 therefore.
 
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 Global 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.
 
Stockholders should be aware that, according to 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.
 
10

 
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 52% of our outstanding common stock. As a result, these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our common stock could have the effect of delaying or preventing a change of control of us or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of us. This, in turn, could have a negative effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of common stock. Moreover, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.
 
Anti-takeover provisions may limit the ability of another party to acquire us, which could cause our stock price to decline.
 
Our Articles of Incorporation, as amended, our by-laws and Nevada law contain provisions that could discourage, delay or prevent a third party from acquiring us, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.
 
Employees
 
As of December 31, 2007, Ironclad had 28 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 2. Description of Property.
 
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 27, 2008.
 
Address
 
Approximate
Floor Space
(Sq. Ft.) 
 
Monthly
Rent 
 
Use
 
2201 Park Place, Suite 101 El Segundo, CA
   
10,600
 
$
14,069
  Corporate offices  
 
We believe our facilities are adequate to meet our current and near-term needs.
 
Item 3. Legal Proceedings.
 
In September 12, 2006, American Sports Group, Inc., or ASG, filed a lawsuit against both Ironclad California and Ironclad Nevada in the Superior Court of the State of California for the County of Los Angeles, alleging causes of action for Declaratory Relief and Breach of Contract.
 
We took the position that ASG's claims were without merit and vigorously defended against these claims, denying all of the allegations and filing a Cross-Complaint for unfair business practices against ASG, Youngstown Equipment Corp., Blackstone Investment Group, Pacifica Ltd, LLC, Lakeview Canyon, LLC, or Lakeview, and Greg Thomsen, or Thomsen, among others. In December of 2007, we also filed a Federal Court complaint against Youngstown, Blackstone, Pacifica, Lakeview and Thomsen, alleging certain trademark violations.
 
11

 
In January of 2008, the parties settled their claims with respect to both lawsuits with prejudice. The settlement included a general mutual release covering all existing and potential claims between the parties arising out of the litigation.
 
Item 4. Submission of Matters to a Vote of Securities Holders.
 
On January 12, 2007, we held a Special Meeting of the Shareholders, or the Special Meeting. At the Special Meeting, there were 30,064,060 shares of common stock entitled to vote. There were 20,147,006 shares (67.014% of the shares entitled to vote) represented at the meeting in person or by proxy. The matter submitted to the shareholders at the Special Meeting was the approval or our 2006 Stock Incentive Plan, which authorizes the issuance of up to 4,250,000 shares of our common stock pursuant to grants awarded under such Plan.
 
The following summarizes vote results for the matter submitted to our shareholders for action at the Special Meeting:
 
For
Against
Withheld
18,792,774
1,353,732
500
 
12

 
PART II
 
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of equity Securities.
 
Common Stock
 
Our common stock is quoted on the Over-The-Counter Bulletin Board under the symbol “ICPW.” Prior to the second quarter of 2006, there was no established trading market for our common stock. 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 Over-the-Counter Bulletin Board, as well as the total number of shares of common stock traded during the periods indicated. The information has been adjusted to reflect a 3.454895-for-1 forward stock split of our common stock which took effect at the close of business on May 9, 2006. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
 
 
 
High
 
Low
 
Volume
 
Year Ended December 31, 2006
             
Second Quarter
 
$
2.56
 
$
1.01
   
328,862
 
Third Quarter
 
$
1.30
 
$
0.86
   
382,974
 
Fourth Quarter
 
$
0.90
 
$
0.55
   
3,123,332
 
Year Ended December 31, 2007
                   
First Quarter
 
$
0.71
 
$
0.45
   
3,612,791
 
Second Quarter
 
$
0.70
 
$
0.39
   
1,447,863
 
Third Quarter
 
$
0.60
 
$
0.41
   
3,618,063
 
Fourth Quarter
 
$
0.50
 
$
0.36
   
549,719
 

On March 27, 2008, the closing sales price of our common stock as reported on the Over-The-Counter Bulletin Board was $0.30 per share. As of March 27, 2008, there were approximately 277 shareholders of record of our common stock.
 
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19-MONTH PRICE PERFORMANCE GRAPH COMPARISON (1)

The graph below matches our cumulative 19-month total shareholder return on common stock with the cumulative total returns of the Dow Jones Wilshire MicroCap index and the DJ Wilshire Clothing & Accessories index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from 5/11/2006 to 12/31/2007.

Ironclad
 
 
 
5/06
 
5/06
 
6/06
 
7/06
 
8/06
 
9/06
 
10/06
 
11/06
 
                                   
Ironclad Performance Wear Corporation
   
100.00
   
111.11
   
73.61
   
79.86
   
71.53
   
69.44
   
51.39
   
50.00
 
Dow Jones Wilshire MicroCap
   
100.00
   
94.40
   
93.60
   
89.94
   
91.87
   
92.03
   
96.91
   
99.33
 
DJ Wilshire Clothing & Accessories
   
100.00
   
94.69
   
95.03
   
90.87
   
94.92
   
102.65
   
111.35
   
116.36
 

12/06
 
1/07
 
2/07
 
3/07
 
4/07
 
5/07
 
6/07
 
7/07
 
8/07
 
9/07
 
10/07
 
11/07
 
12/07
 
                                                   
46.53
   
47.22
   
47.92
   
31.94
   
27.78
   
33.33
   
38.19
   
32.64
   
32.64
   
34.72
   
31.25
   
27.78
   
31.25
 
100.88
   
102.70
   
102.29
   
102.49
   
104.46
   
106.59
   
105.85
   
99.58
   
98.60
   
100.78
   
102.07
   
92.93
   
92.28
 
116.89
   
120.47
   
122.77
   
124.18
   
126.08
   
128.91
   
126.37
   
119.72
   
116.89
   
119.62
   
108.83
   
101.54
   
89.48
 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.
 
Dividends
 
We have never paid dividends on our common stock. We intend to retain any future earnings for use in our business.
 
Recent Sales of Unregistered Securities
 
None.
 
(1) This section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of Ironclad Performance Wear Corporation under the Securities Act of 1933, as amended or the Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in such filing.
 
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Item 6. Management’s Discussion and Analysis or Plan of Operation.
 
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, 2007 and 2006. Except for historical information, the matters discussed in this Management’s Discussion and Analysis or Plan of Operation 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. Utilizing our brand equity, we are currently expanding our performance apparel product line (e.g. pants, jackets, shorts, reflective and polo shirts, underwear and tights) also designed to enhance the wearer’s comfort and performance. We believe that our dedication to quality and durability and focus on our client needs has created a high level of brand loyalty and has solidified substantial brand equity.
 
We plan to increase our domestic revenues by leveraging our relationships with existing retailers and industrial distributors, including “Big Box” and sporting goods retailers, increasing our product offerings in new and existing locations. We also plan to sell our expanded apparel line to work wear retailers.
 
We believe that our products have international appeal. In 2005, we began selling products in Australia and Japan through independent distributors, which accounted for approximately 4% of total sales. In 2006, we entered the Canadian market through a distributor, and international sales represented approximately 7% of total sales. In 2007 we entered the European market through a distributor and international sales represented approximately 11% 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, 2008
 
Our historical operations before May 9, 2006 reflect only the operations of Ironclad Performance Wear Corporation, a California corporation, or Ironclad California. Before May 9, 2006, we existed as a “shell company” with nominal assets whose sole business was to identify, evaluate and investigate various companies to acquire or with which to merge. On May 9, 2006, we consummated a merger transaction in which we acquired all of the shares of Ironclad California, or the Merger. Concurrently with the closing of the merger we completed a private placement financing and certain other transactions related to the Merger. Upon completion of the Merger and the private placement financing, Ironclad California became our wholly-owned subsidiary, and the former stockholders of Ironclad California and the investors in the private placement financing received in the aggregate 26,130,548 shares of our common stock, or approximately 88% of our issued and outstanding shares of common stock. Ironclad California was formed and commenced its business in 1998. Our merger with Ironclad California was accounted for as a reverse merger with Ironclad California deemed to be the accounting acquirer, and us the legal acquirer.
 
Critical Accounting Policies, Judgments and Estimates
 
Our Management’s Discussion and Analysis of Financial Condition or Plan of Operation 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.
 
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Inventory Obsolescence Allowance
 
We review the inventory level of all products quarterly. For all items 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. 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, 2007 and December 31, 2006 we adjusted our inventory reserve by ($36,000) and $88,000, respectively, to a current balance of $84,000 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. Since we have not experienced any previous payment defaults with any of our current customers, our allowance for doubtful accounts is minimal. We perform periodic credit evaluations of our customers and maintain allowances for potential credit losses based on management’s evaluation of historical experience and current industry trends. If the financial condition of our customers were to deteriorate, resulting in the impairment of their ability to make payments, additional allowances may be required. New customers are evaluated for credit worthiness before terms are established. Although we expect to collect all amounts due, actual collections may differ.
 
Product Returns
 
We have a warranty policy that covers defects in workmanship. We allow our customers to return damaged or defective products to us following a customary return merchandise authorization process. We also allow for some stock adjustments returns, typically for new customers, 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. For both types of returns we utilize actual historical return rates to determine our allowance for returns in each period. 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 1.0% and our current estimated future stock adjustment return rate is approximately 0.75%. As noted above, our return rate is based upon our past history of actual returns and we estimate amounts for product returns for a given period by applying this historical return rate and reducing actual gross sales for that period by a corresponding amount. We believe that using a trailing 12-month return rate provides us with a sufficient period of time to establish recent historical trends in product returns for two primary reasons: (i) our products useful life is approximately 3-4 months and (ii) we are able to quickly correct any significant quality issues as we learn about them. If an unusual circumstance exists, such as a product that has begun to show materially different actual return rates as compared to our average 12-month return rates, we will make appropriate adjustments to our estimated return rates. Factors that could cause materially different actual return rates as compared to the 12-month return rates include a new product line, a change in materials or product being supplied by a new factory. Although we have no specific statistical data on this matter, we believe that our practices are reasonable and consistent with those of our industry. Our warranty terms under our arrangements with our suppliers do not provide for individual products returned by retailers or retail customers to be returned to the vendor.
 
Reserve for Warranty Returns
 
Reserve balance 12/31/05
 
$
38,000
 
Payments recorded during the period
   
(186,097
)
 
   
(148,097
)
Adjustment to reserve for pre-existing liabilities
   
34,000
 
Accrual for new liabilities during the reporting period
   
186,097
 
 
     
Reserve balance 12/31/06
   
72,000
 
Payments recorded during the period
   
(486,030
)
 
   
(414,030
)
Adjustment to reserve for pre-existing liabilities
   
128,000
 
Accrual for new liabilities during the reporting period
   
486,030
 
 
       
Reserve balance 12/31/07
 
$
200,000
 
 
16

 
Stock Based Compensation
 
On January 1, 2006, we adopted the provisions of Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, 123R, “Share-Based Payments,” or 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 SFAS 123R for pro forma disclosures.
 
Income Taxes
 
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 allowances for returns and doubtful accounts and for inventory obsolescence, accrued payroll and bonus and net operating loss carry forwards 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. As we have reported losses for 2003, 2004, 2005, 2006 and 2007, we have taken the conservative approach, and fully reserved the deferred tax assets.
 
Valuation of Derivative Instruments
 
SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date in accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” to determine whether they should be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, we use the Black-Scholes-Merton Option Pricing Formula, or the Black Scholes Model. At each period end, or when circumstances indicate that we 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.”
 
Recent Accounting Pronouncements
 
SFAS No. 155
 
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133,“Accounting for Derivatives Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. Management does not expect adoption of SFAS No. 155 to have a material impact on our financial statements.
 
17

 
FIN No. 48
 
In June 2006, the FASB issued FASB Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109. This interpretation clarifies the accounting and financial statement reporting for uncertainties in income tax recognized by prescribing a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. The Interpretation is effective for fiscal years beginning after December 15, 2006. We have completed our analysis of the effects of this interpretation and have determined that the adoption of FIN 48 will not have a material effect on its financial statements.
 
SFAS No. 157
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management will evaluate the effect of this statement, if any, on its financial statements.
 
SFAS No. 159
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. As such, we are required to adopt these provisions at the beginning of the fiscal year ended December 31, 2008. We are currently evaluating the impact of SFAS No. 159 on its consolidated financial statements.
 
SFAS No. 160
 
In December 2007, the FASB issued SFAS No. 160, ”Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51.” SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, we are required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. We are currently evaluating the impact of SFAS No. 160 on our consolidated financial statements but do not expect it to have a material effect.
 
Results of Operations
 
Comparison of Years Ended December 31, 2007 and December 31, 2006
 
Net Sales increased $3,467,987, or 36.2%, to $13,049,197 in the year ended December 31, 2007 from $9,581,210 for the corresponding period in 2006. This increase was primarily due to increased sales of approximately $818,000 with new and existing “Big Box” home center customers, approximately $677,000 due to a full year of sales of our performance apparel products, approximately $855,000 of increase in international sales, and approximately $1,118,000 in growth from our existing customers. One customer accounted for approximately 21% of net sales during the year ended December 31, 2007 and approximately 17% of net sales for the year ended December 31, 2006. We expect the overall trend of increased sales to continue through existing and new retail and distribution outlets in the United States, planned international expansion, and sales of our expanded apparel line in new distribution channels, with continued increased spending on sales and marketing of our products.
 
Gross Profit increased $1,388,099 to $5,001,743 for the year ended December 31, 2007 from $3,613,644 for the year ended December 31, 2006. Gross profit as a percentage of net sales, or gross margin, increased to 38.3% in 2007 from 37.7% in 2006. The increase in gross margin was mainly attributable to a shift in product mix, increased direct sales to international distributors, aggressive sales promotion programs with new and existing customers, and improved margins on apparel sales, between the comparative periods. 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 improved margins on apparel products generated by outsourcing and increased direct factory-to-customer shipments to international customers.
 
18

 
Operating Expenses increased by $2,196,137, or 33.1%, to $8,832,283 in 2007 from $6,636,146 in 2006. As a percentage of net sales, operating expenses decreased to 67.7% in 2007 from 69.3% in the same period of 2006. The increased spending in 2007 was primarily due to increased costs associated with implementing brand development initiatives, including a NASCAR sponsorship and increased print and cooperative advertising - approximately $402,000; expenses associated with our status as public company costs of approximately $27,000; increased legal expenses of $241,000; increased cost for contracted services, primarily third party fulfillment warehouse of $318,000; increased commissions of $31,000; increased rents of $41,000; increased travel & entertainment expenses of $86,000; increased trade show and sample expenses of $37,000; Financial Accounting Standards No. 123R options expense of $32,000; salaries, temporary labor and bonus accrual expenses of approximately $832,000 (includes full year salaries & benefits for six hires from late 2006), and increased general operating expenses of $149,000. Our number of employees increased to 28 at December 31, 2007 from 26 at December 31, 2006. Sales and marketing expenses were increased to build brand recognition and increase sales. Expenses associated with being a public company included public accounting and legal fees and investor relations expenses.
 
Loss from Operations increased $808,038 or 26.7%, to $3,830,540 in 2007 from $3,022,502 in 2006. Loss from operations as a percentage of net sales decreased to 29.4% in 2007 from 31.5% in 2006. The increased loss for 2007 was primarily the result of an increase in operating expenses, as discussed above.
 
Interest Expense decreased $212,382 to $148,381 in 2007 from $360,763 in 2006. The decrease was primarily due to the reduction in the recognition of imputed warrant interest charges of $256,188, offset by additional bank borrowing.
 
Interest Income decreased $28,425 to $42,235 in 2007 from $70,660 in 2006. Interest income is a result of investment of funds from the private equity funding completed concurrent with the merger on May 9, 2006.
 
Other Income (Expense) net was $1,526 in 2007 as compared with $2,397 in 2006. Change in the fair value of warrant liability was $18,230 in 2007 as compared to ($1,082,944) for 2006. This income (expense) represents the difference in the fair value of warrants recorded as liabilities at December 31, 2007 and their issue date on May 9, 2006. The terms of the registration statement underlying 98% of the warrants were satisfied in October, 2006. The remaining warrant liability was revalued at the end of each reporting period until the terms of the registration statement for the shares underlying the warrants were satisfied in October, 2007.
 
Net Loss decreased $445,196 to $3,917,777 in 2007 from $4,362,973 in 2006. This decreased loss 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 a consistent increase in the sale of our winter glove line during this period. We typically generate 60% - 65% of our glove net sales during these months. In addition, with the introduction of our expanded performance apparel line and penetration of new international markets in the second half of 2007 we expect that our sales in the third and fourth quarter will represent 65% to 70% of our total net sales for 2008.
 
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 our 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.
 
Operating Activities. In 2006, cash used in operating activities was $4,698,717 and consisted primarily of a net loss of $4,362,973, reduced by non-cash items of $2,052,979 and increases in inventory of $1,979,830, and accounts receivable of $618,668 and decreases in deposits on inventory of $238,722, prepaid and other expenses of $11,292 and loan costs of $15,798, offset by a decrease in accounts payable and accrued expenses of $56,006.
 
In 2007, cash used in operating activities was $4,012,719 and consisted primarily of a net loss of $3,917,777, reduced by non-cash items of $754,870 and increases in inventory of $165,470, accounts receivable of $2,310,824, and prepaid and other expenses of $37,541, and decreases in deposits on inventory of $51,487, offset by an increase in accounts payable and accrued expenses of $1,612,536.
 
Investing Activities. In 2006 and 2007, investing activities were primarily the result of capital expenditures, mainly for computer equipment and trademark applications. Cash used in investing activities increased $9,159 to $167,716 for 2007 from $158,557 in 2006. Expenditures for property and equipment increased $25,522 and investment in trademarks decreased $16,363.
 
19

 
Financing Activities. Financing activities during 2006 consisted primarily of our net borrowing under our existing asset-based credit facility, payoff of an existing note payable, proceeds from the issuance of common stock, financing provided by a capital lease, proceeds from the exercise of warrants and options, and the completion of our merger and associated financing on May 9, 2006. Cash provided by financing activities was $6,839,867 for 2006. The increase in cash provided by financing activities was due to proceeds from the issuance of common stock of $507,500, the completion of the merger related equity financing of $6,036,738 (net of $1,284,453 in offering costs), proceeds from the exercise of warrants of $66,338, proceeds from the exercise of options of $30,000, and by net borrowings on our bank lines of credit of $702,066, offset by payments on an outstanding note payable of $500,000 and payments on a capital lease of $2,775.
 
Financing activities during 2007 consisted primarily of our net borrowing under our existing asset-based credit facility, proceeds from the issuance of common stock, financing provided by a capital lease, and proceeds from the exercise of options. Cash provided by financing activities was $2,754,095 for 2007. The increase in cash provided by financing activities was due to proceeds from the issuance of common stock of $2,007,363 (net of $92,637 in offering costs), proceeds from the exercise of options of $4,500, and by net borrowings on our bank lines of credit of $745,643, offset by payments on a capital lease of $3,411.
 
We believe that our cash flows from operations and borrowings available to us under our senior secured credit facility, together with additional net proceeds from future private placements 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
 
In March 2005, we renewed our existing credit facility with the bank at an interest rate of prime plus 3%. This facility allowed us to borrow 75% against eligible accounts receivable, up to $1,000,000, while maintaining a funded reserve equal to 25% of the outstanding accounts receivable. All of our assets secured amounts borrowed under the terms of this agreement and were personally guaranteed by an officer of the company. The renewed credit facility did not contain any financial covenants and matured on May 30, 2006. Proceeds from the private placement completed on May 9, 2006, were used to repay the balance on the loan facility.
 
Through May 2006 we also maintained a $250,000 revolving line of credit with our senior secured lender. We were eligible to borrow 30% against our eligible inventory, up to $250,000. Amounts borrowed under the terms of this agreement were secured by all of our assets, and were personally guaranteed by one of our executive officers. Interest on outstanding loan balances under our revolving line of credit accrued at the same interest rates as our senior secured loan facility and also matured in May 2006. Proceeds from the private placement completed on May 9, 2006, were used to repay the balance on the loan facility.
 
On September 15, 2006 we entered into a new factoring agreement with Wells Fargo Century, Inc. whereby we assigned certain of our accounts receivables with full recourse. On November 21, 2006, we entered into an amendment to this factoring agreement. This facility currently allows us to borrow the lesser of (a) $2,500,000 or (b) the sum of: (i) seventy-five percent (75%) of the net amount of 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 does not contain any financial covenants. All of our assets secure amounts borrowed under the terms of this agreement. Interest on outstanding balances accrues at the prime rate announced from time to time by Wells Fargo Bank N.A. (or such other bank as Wells Fargo Century, Inc. shall select in its discretion) as its “prime” or base rate for commercial loans and the agreement has an initial term of 24 months.
 
Subordinated Debt
 
In October 2005, we issued a promissory note in the principal amount of $500,000 to Westrec Capital Partners, LLC in exchange for $500,000 in order to fund inventory purchases for the apparel launch along with the costs associated with the Merger. The note accrues interest at a rate equal to (a) the highest prime rate of interest per annum published in the Money Rate Table of the Western Edition of The Wall Street Journal, as adjusted on a daily basis, plus 8.25% per annum, or (b) 15.00% per annum, in either case compounded annually. The note was set to mature on the earlier to occur of (i) April 21, 2006 or (ii) the date on which Ironclad has received an aggregate of $500,000 from the sale(s) of its equity securities in one or a series of transactions. We received a 30-day extension of the April 21, 2006 maturity date. Proceeds from the private placement completed on May 9, 2006, were used to retire the note.
 
20

 
Off-Balance Sheet Arrangements
 
At December 31, 2007 and December 31, 2006, 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.
 
Contractual Obligations
 
The following summarizes our contractual obligations at December 31, 2007 and the effects such obligations are expected to have on liquidity and cash flow in future periods:
 
   
 
Payments Due by Period
 
   
 
   
 
   
 
   
 
 
 
Contractual Obligations
 
Total  
 
Less than 1 Year  
 
1-3 Years  
 
4-5 Years
 
   
 
     
 
     
 
     
 
   
 
Operating Leases  
 
$
638,111
   
180,805
   
451,347
   
5,959
 
   
   
   
   
   
 
Advances from Factor  
   
2,309,321
   
2,309,321
   
-
   
-
 
   
   
   
   
   
 
Total  
 
$
2,947,432
   
2,490,126
   
451,347
   
5,959
 
 
21


Item 7. Financial Statements.
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page
 
   
Audited Financial Statements:
   
 
   
Report of Independent Registered Public Accounting Firm
23-24
 
   
Consolidated Balance Sheet at December 31, 2007
25
 
   
Consolidated Statements of Operations for each of the Twelve Months Ended December 31, 2007, and December 31, 2006
26
 
   
Consolidated Statements of Cash Flows for the Twelve Months Ended December 31, 2007, and December 31, 2006
27
 
   
Consolidated Statements of Changes in Stockholders’ Equity from December 31, 2005 to December 31, 2007
28
 
   
Notes to the Consolidated Financial Statements
29 - 44
 
22

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Ironclad Performance Wear Corporation
Los Angeles, California

We have audited the accompanying consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year ended December 31, 2006 of Ironclad Performance Wear Corporation and its subsidiary (collectively, the “Company”). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations of Ironclad Performance Wear Corporation and its subsidiary and their cash flows for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP


Los Angeles, California
March 31, 2008
 
23


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 sheet of Ironclad Performance Wear Corporation as of December 31, 2007, and the related consolidated statements of operations, cash flows and changes in stockholders’ equity for the year then ended. 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 audit.

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 consolidated 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 as of December 31, 2007, and the results of its operations and its cash flows for the year ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
 
/s/ ROTENBERG AND COMPANY, LLP
 
Rochester, New York
March 17, 2008
 
24


IRONCLAD PERFORMANCE WEAR CORPORATION
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 2007
 
 
 
December 31,
2007
 
ASSETS
       
CURRENT ASSETS
   
 
Cash and equivalents
 
$
585,826
 
Accounts receivable net of allowance for doubtful accounts of $33,000
   
4,327,616
 
Inventory, net of reserve for obsolete inventory of $84,000
   
3,129,339
 
Deposits on inventory
   
10,068
 
Prepaid and other
   
184,456
 
 
   
 
Total Current Assets
   
8,237,305
 
 
   
 
PROPERTY AND EQUIPMENT
   
 
Computer equipment and software
   
253,657
 
Vehicle
   
43,680
 
Furniture and equipment
   
128,465
 
Leasehold improvements
   
34,110
 
Less: accumulated depreciation
   
(219,517
)
 
   
 
Total Property and equipment, net
   
240,395
 
 
   
 
OTHER ASSETS
       
Trademarks, net of accumulated amortization of $9,306
   
82,748
 
Deposits and other
   
12,366
 
 
   
 
 Total Other Assets
   
95,114
 
         
TOTAL ASSETS 
 
$
8,572,814
 
 
   
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
   
 
 
   
 
CURRENT LIABILITIES
   
 
Accounts payable and accrued expenses
 
$
3,438,054
 
Bank lines of credit
   
2,309,321
 
Current portion of capital lease
   
1,642
 
 
   
 
Total current liabilities 
   
5,749,017
 
 
   
 
Total Liabilities
   
5,749,017
 
 
   
 
STOCKHOLDERS’ EQUITY
   
 
Common stock, $0.001 par value per share,172,744,750 shares authorized, 35,389,504 shares issued and outstanding
   
35,390
 
Capital in Excess of Par Value
   
13,934,051
 
Accumulated deficit
   
(11,145,644
)
 
   
 
Total Stockholders’ Equity
   
2,823,797
 
 
   
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
8,572,814
 
 
See Notes to Consolidated Financial Statements.
 
25


IRONCLAD PERFORMANCE WEAR CORPORATION
 
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2007 and 2006

 
 
2007
 
2006
 
 
 
 
 
 
 
 
 
 
 
 
 
REVENUES
   
   
 
Net sales
 
$
13,049,197
 
$
9,581,210
 
 
   
   
 
COST OF SALES
   
   
 
Cost of sales
   
8,047,454
   
5,967,566
 
 
   
   
 
GROSS PROFIT
   
5,001,743
   
3,613,644
 
               
EXPENSES
   
   
 
General and administrative
   
3,459,952
   
2,967,883
 
Sales and marketing
   
4,005,866
   
2,756,222
 
Research and development
   
502,729
   
340,589
 
Operations
   
788,997
   
531,083
 
Depreciation and amortization
   
74,739
   
40,369
 
 
   
   
 
Total operating expenses
   
8,832,283
   
6,636,146
 
 
   
   
 
LOSS FROM OPERATIONS
   
(3,830,540
)
 
(3,022,502
)
 
   
   
 
OTHER INCOME/(EXPENSE)
   
   
 
Interest expense
   
(148,381
)
 
(104,575
)
Interest expense from warrants issued as financing cost
   
-
   
(256,188
)
Interest income 
   
42,235
   
70,660
 
Unrealized gain (loss) on financing activities
   
18,230
   
(1,082,944
)
Loss on disposition of equipment
   
(974
)
 
-
 
Other income (expense), net
   
2,500
   
2,397
 
 
   
   
 
Total other income (expense)
   
(86,390
)
 
(1,370,650
)
 
   
   
 
NET LOSS BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES
   
(3,916,930
)
 
(4,393,152
)
Benefit from (provision for) income taxes
   
(847
)
 
30,179
 
 
   
   
 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
 
$
(3,917,777
)
$
(4,362,973
)
 
   
   
 
BASIC AND DILUTED NET LOSS PER COMMON SHARE
 
$
(0.12
)
$
(0.17
)
 
   
   
 
WEIGHTED AVERAGE COMMON SHARE
   
31,615,394
   
24,961,749
 
 
See Notes to Consolidated Financial Statements.

26


IRONCLAD PERFORMANCE WEAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2007 and 2006

 
 
2007
 
2006
 
CASH FLOWS FROM OPERATING ACTIVITIES
         
Net loss attributable to common shareholders
 
$
(3,917,777
)
$
(4,362,973
)
Adjustments to reconcile net loss to net cash used in operating activities
         
Allowance for bad debts
   
7,000
   
5,000
 
Depreciation
   
71,023
   
37,551
 
Amortization
   
3,716
   
2,819
 
Warrants issued as financing cost
   
-
   
256,188
 
Loss on disposition of equipment
   
974
   
-
 
Change in fair value of warrant liability
   
(18,230
)
 
1,082,944
 
Non-cash compensation:
         
Common stock issued for services
   
-
   
51,779
 
Options issued for services
   
41,875
   
-
 
Stock option expense
   
648,512
   
616,698
 
Changes in operating assets and liabilities:
         
Receivables
   
(2,310,824
)
 
(618,668
)
Inventory
   
(165,470
)
 
(1,979,831
)
Deposits on inventory
   
51,487
   
238,722
 
Prepaid and other
   
(37,541
)
 
11,262
 
Loan costs
   
-
   
15,798
 
Accounts payable and accrued expenses
   
1,612,536
   
(56,006
)
Net cash flows used in operating activities
   
(4,012,719
)
 
(4,698,717
)
 
         
CASH FLOWS FROM INVESTING ACTIVITIES
         
Property and equipment purchased
   
(158,061
)
 
(132,539
)
Investment in trademarks
   
(9,655
)
 
(26,018
)
Net cash flows used in investing activities 
   
(167,716
)
 
(158,557
)
 
         
CASH FLOWS FROM FINANCING ACTIVITIES
         
Net proceeds from bank lines of credit
   
745,643
   
702,066
 
Proceeds from (payments on) convertible note payable
   
-
   
(500,000
)
Proceeds from issuance of common stock
   
2,100,000
   
7,828,691
 
Offering costs
   
(92,637
)
 
(1,284,453
)
Proceeds from exercise of warrants
   
-
   
66,338
 
Proceeds from exercise of options
   
4,500
   
30,000
 
Payments on capital leases 
   
(3,411
)
 
(2,775
)
Net cash flows provided by financing activities
   
2,754,095
   
6,839,867
 
 
         
NET INCREASE (DECREASE) IN CASH
   
(1,426,340
)
 
1,982,593
 
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD
   
2,012,166
   
29,573
 
CASH AND CASH EQUIVALENTS END OF PERIOD
 
$
585,826
 
$
2,012,166
 
 
         
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
         
Cash (paid) received during the year for:
             
Interest paid in cash
 
$
(148,381
)
$
(88,788
)
Income taxes paid
   
(800
)
 
(800
)
Income tax refund
   
-
   
30,979
 
 
See Notes to Consolidated Financial Statements.
 
27


IRONCLAD PERFORMANCE WEAR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2007 and 2006
 
   
 Common Stock
                
   
 Shares Issued
and
Outstanding
 
Par Value
 
Capital in
Excess of
Par Value
 
 Accumulated
Deficit
 
 Total
Stockholders’ Equity
 
Balance at December 31, 2005
   
15,622,197
   
$
15,624
    
$
2,621,614
    
$
(2,864,894
)   
$
(227,656
)
 
                     
Common stock issued for cash
   
13,927,705
   
13,927
   
7,814,764
   
-
   
7,828,691
 
Offering costs
   
-
   
-
   
(1,284,453
)
 
-
   
(1,284,453
)
Common stock issued -for services
   
70,095
   
70
   
51,709
   
-
   
51,779
 
Common stock issued -exercise of warrants
   
357,772
   
413
   
65,925
   
-
   
66,338
 
Common stock issued-exercise of options
   
86,291
   
30
   
29,970
   
-
   
30,000
 
Stock option expense
   
-
   
-
   
616,698
   
-
   
616,698
 
Warrants issued as a financing cost
   
-
   
-
   
256,188
   
-
   
256,188
 
Reclassify fair value of warrant liability
   
-
   
-
   
1,017,676
   
-
   
1,017,676
 
Net loss
   
-
   
-
   
-
   
(4,362,973
)
 
(4,362,973
)
Balance at December 31, 2006
   
30,064,060
 
$
30,064
 
$
11,190,091
 
$
$(7,227,867
)
$
3,992,288
 
                                 
Common stock issued for cash
   
5,250,000
   
5,250
   
2,094,750
   
-
   
2,100,000
 
Offering costs
   
-
   
-
   
(92,639
)
 
-
   
(92,639
)
Common stock issued-exercise of options
   
12,944
   
13
   
4,487
   
-
   
4,500
 
Common stock issued for services
   
62,500
   
63
   
41,812
   
-
   
41,875
 
Stock option expense
   
-
   
-
   
648,512
   
-
   
648,512
 
Reclassify fair value of warrant liability
   
-
   
-
   
47,038
         
47,038
 
Net loss
   
-
   
-
   
-
   
(3,917,777
)
 
(3,917,777
)
Balance at December 31, 2007
   
35,389,504
 
$
35,390
 
$
13,934,051
 
$
(11,145,644
)
$
(2,823,797
)
 
See Notes to Consolidated Financial Statements
 
28


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 four patents and has three patents pending for design and technological innovations incorporated in its performance work gloves. The Company has 39 registered US trademarks, 10 registered international trademarks and 9 in-use US 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.    Reverse Merger and Financing
 
Completion of Merger
 
On April 20, 2006, Ironclad Performance Wear Corporation (formerly Europa Trade Agency Ltd.), a Nevada corporation (the “Company”), along with Ironclad Merger Corporation., a Nevada corporation and the Company’s wholly owned subsidiary (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ironclad Performance Wear Corporation, a privately held California corporation (“Ironclad California”), pursuant to which Ironclad California would be acquired by the Company in a merger transaction wherein Merger Sub would merge with and into Ironclad California, with Ironclad California being the surviving corporation (the “Merger”). On May 9, 2006, the Merger closed and Ironclad California became a wholly-owned subsidiary of the Company. At the closing, the Company changed its name to Ironclad Performance Wear Corporation.
 
Accordingly, from an historical perspective, Ironclad California was deemed to have been the acquirer in the reverse merger and Ironclad California is deemed the survivor of the reorganization. As a result, the financial statements of the Company presented reflect the historical results of Ironclad California prior to the Merger, and of the combined entities following the merger, and do not include the historical financial results of the entity formerly known as Europa Trade Agency Ltd. Common stock has been retroactively restated to reflect the number of shares received by Ironclad California equity holders in the Merger after giving effect to the difference in par value, with the offset to additional paid-in capital. The equity of the Company survives the reorganization. Upon the closing of the reorganization, the Company changed its fiscal year to December 31, beginning with the quarter ended June 30, 2006. All costs associated with the Merger were expensed as incurred.
 
Principal Terms of the Merger
 
On May 9, 2006, Merger Sub was merged with and into Ironclad California, the separate existence of Merger Sub ceased, and Ironclad California continued as the surviving corporation at the subsidiary level. The Company issued shares of its common stock pursuant to certain exchange ratios set forth in the Merger Agreement to the stockholders of Ironclad California in exchange for 100% of the issued and outstanding shares of common stock of Ironclad California. Additionally, the Company assumed options to purchase shares of common stock and warrants to purchase shares of common stock on the same terms and conditions as previously issued by Ironclad California.
 
Immediately prior to the Merger the Company canceled 2,000,000 shares of its common stock held by our former sole officer and director, Thomas Lamb, and one of its former principal stockholders Craig Lamb, pursuant to an Amended and Restated Share Cancellation Agreement dated May 8, 2006. Thomas Lamb and Craig Lamb received cash remuneration of $349,413 from third party purchasers for their agreement to cancel such shares. At the time of the payment and share cancellation the third party purchasers were also party to an Amended and Restated Share Purchase and Escrow Agreement, dated May 9, 2006 with holders of approximately 90% of our common stock. The holders of such shares of Company common stock received $765,938 in consideration for the transfer of their shares to the third party purchasers.
 
29

 
IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Immediately after the consummation of the cancellation and purchase transaction, but prior to the Merger, the Company effected a 3.454895-for-1 forward stock split of its common stock and increased the number of shares of authorized common stock to 172,744,750.
 
Immediately after the closing of the Merger, and without taking into consideration the Private Placement offering described below, the Company had outstanding 19,858,404 shares of common stock, options to purchase 2,588,314 shares of common stock and warrants to purchase 2,817,416 shares of common stock.
 
The Private Placement
 
Immediately following the closing of the Merger, the Company received gross proceeds of approximately $7.3 million in a private placement transaction (the “Private Placement”) with institutional investors and other high net worth individuals (“Investors”). Pursuant to Subscription Agreements entered into with these Investors, the Company sold 9,761,558 Investment Units, at $0.75 per Investment Unit. Each “Investment Unit” consists of one share of Company common stock, and a five year non-callable warrant to purchase three-quarters of one share of Company common stock, at an exercise price of $1.00 per share. The value of the warrants was determined to be $5,278,388 using the Black-Scholes option pricing model with the following assumptions: a volatility rate of 185.5%, risk free interest rate of 5.13%, an expected life of five years and zero dividends. They have been recorded as a warrant liability in accordance with SFAS No. 133 and EITF 00-19. On October 2, 2006, the common shares underlying the warrants were registered satisfying the warrant liability. The value of the warrant liability on October 2, 2006 was determined to be $6,275,422. This amount was reclassified to Stockholders’ Equity and a credit to income of $997,034 was recorded on October 2, 2006.
 
As partial consideration for services rendered further to the Private Placement, one of the Company’s placement agents was issued warrants to purchase 390,464 shares of Company common stock at an exercise price of $0.75 per share and warrants to purchase 292,848 shares of Company common stock at an exercise price of $1.00 per share. The value of the warrants was determined to be $494,182 using the Black-Scholes option pricing model with the following assumptions: a volatility rate of 185.5%, risk free interest rate of 5.13%, an expected life of five years and zero dividends. They have been recorded as a warrant liability in accordance with SFAS No. 133 and EITF 00-19. On October 2, 2006 the common shares underlying the warrants were registered satisfying the warrant liability. The value of the warrant liability on October 2, 2006 was determined to be $586,923. This amount was reclassified to Stockholders’ Equity and a credit to income of $92,741 was recorded on October 2, 2006.
 
30


IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
3.    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 $100,000. From time to time, the Company maintains cash in excess of the FDIC limit.
 
Accounts Receivable
 
Trade receivables are carried at the original invoice amount less an estimate made for doubtful accounts. The allowance for doubtful accounts is based on management’s regular evaluation of individual customer receivables and consideration of a customer’s financial condition and credit history. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Interest is not charged on past due accounts.
 
Inventory
 
Inventory is stated at the lower of average cost (which approximates first in, first out) or market and consists primarily of finished goods. The Company regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on management’s estimated forecast of product demand and production requirements.
 
Property and Equipment
 
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are depreciated over fifteen years or the lease term, whichever is shorter. Maintenance and repairs are charged to expense as incurred.
 
Trademarks
 
The costs incurred to acquire trademarks, which are active and relate to products with a definite life cycle, are amortized over the estimated useful life of fifteen years. Trademarks, which are active and relate to corporate identification, such as logos, are not amortized. Pending trademarks are capitalized and reviewed monthly for active status.
 
31


IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
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.
 
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.
 
Returns Policy
 
The Company has a warranty policy that covers defects in workmanship. The Company also periodically accepts stock adjustments from certain customers. Stock adjustment returns are typically for new customers who are given the opportunity to ‘trade out’ of a style of product that does not sell in their territory, usually in exchange for another product. Historically, warranty returns have averaged 1.25% a year and stock adjustment returns have averaged approximately 0.75% of gross sales. The Company records an estimate for these returns at the time of sale.
 
Reserve for Warranty Returns
     
Reserve Balance 12/31/05
 
$
38,000
 
Payments Recorded During the Period
   
(186,097
)
 
   
(148,097
)
Adjustment to Reserve for Pre-existing Liabilities
   
34,000
 
Accrual for New Liabilities During the Reporting Period
   
186,097
 
 
     
Reserve Balance 12/31/06
   
72,000
 
Payments Recorded During the Period
   
(486,030
)
 
   
(414,030
)
Adjustment to Reserve for Pre-existing Liabilities
   
128,000
 
Accrual for New Liabilities During the Reporting Period
   
486,030
 
 
       
Reserve Balance 12/31/07
 
$
200,000
 
 
32


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, 2007 and 2006 were $1,221,590 and $844,023, 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
 
One customer accounted for approximately 21% of net sales for year ended December 31, 2007 and the same customer accounted for approximately 17% of net sales for year ended December 31, 2006.
 
Supplier Concentrations
 
One supplier, which is located overseas, accounted for approximately 56% of total purchases during the year ended December 31, 2007 and 68% of total purchases during the year ended December 31, 2006.
 
Loss Per Share
 
The Company utilizes SFAS No. 128, “Earnings per Share.” Basic loss per share is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.
 
The following potential common shares have been excluded from the computation of diluted net loss per share for the periods presented because the effect would have been anti-dilutive:
 
 
 
Year
Ended December 31,
 
 
 
2007
 
2006
 
 
 
 
 
 
 
Options outstanding under the Company’s stock option plans
   
6,016,944
   
5,003,343
 
Common Stock Warrants
   
10,454,522
   
10,454,522
 

Income Taxes

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.

33


IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
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, 2007 and 2006 were $800 and $800, respectively, for the current state provision. There was no state deferred and federal tax provision. Due to its current net loss position, the Company has provided a valuation allowance in full on its net deferred tax assets in accordance with SFAS 109 and in light of the uncertainty regarding ultimate realization of the net deferred tax assets.
 
Use of Estimates
 
The preparation of financial statements requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant estimates and assumptions made by management are used for, but not limited to, the allowance for doubtful accounts, inventory obsolescence, allowance for returns and the estimated useful lives of long-lived assets.
 
Valuation of Derivative Instruments
 
SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date in accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” to determine whether they should be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes-Merton Option Pricing Formula (the “Black Scholes Model”). At each period end, or when circumstances indicate that the Company reevaluate the accounting for the derivative liability, derivative liabilities are adjusted to reflect changes in fair value, with any increase or decrease in the fair value being recorded in results of operations as Adjustments to Fair Value of Derivatives.
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. Management does not expect adoption of SFAS No. 155 to have a material impact on our financial statements.
 
34


IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This statement is effective for fiscal years beginning after December 15, 2006. Management has determined that the adoption of FIN 48 does not have a material effect on our results of operations and financial position.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management will evaluate the effect of this statement, if any, on its financial statements.
 
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2008. The Company is currently evaluating the impact of SFAS 159 on its consolidated financial statements.
 
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements but does not expect it to have a material effect.

35


IRONCLAD PERFORMANCE WEAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
4.    Inventory
 
At December 31, 2007 the Company had one class of inventory - finished goods.
 
   
 
December 31, 
2007 
 
   
 
   
 
Finished Goods
 
$
3,129,339
 
 
5.    Property and equipment
 
Property and equipment consisted of the following:

 
 
December 31,
2007
 
Computer hardware and software
 
$
253,657
 
Furniture and equipment
   
128,465
 
Vehicle
   
43,680
 
Leasehold improvements
   
34,110
 
 
   
459,312
 
Less accumulated depreciation
   
(219,517
)
 
     
Property and equipment, net 
 
$
240,395
 
 
Depreciation expense for the years ended December 31, 2007 and 2006 was $71,023 and $37,550, respectively.
 
36


IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
6.    Trademarks
 
Trademarks consisted of the following:
 
 
 
December 31,
2007
 
 
 
   
 
Trademarks
 
$
92,054
 
Less: Accumulated amortization
   
(9,306
)
 
     
Trademarks, net
 
$
82,748
 

Trademarks consist of definite-lived trademarks of $60,452 and indefinite-lived trademarks of $31,602 at December 31, 2007. All trademark costs have been generated by the Company, and consist of initial legal and filing fees.
 
Amortization expense was $3,716 and $2,819 for the years ended December 31, 2007 and 2006, respectively. The Company expects to amortize $3,950 in each of the next five years.
 
7.    Accounts payable and accrued expenses
 
Accounts payable and accrued expenses consisted of the following at December 31, 2007: 
 
 
 
December 31,
2007
 
 
 
     
 
Accounts payable
 
$
2,217,758
 
Accrued inventory
   
110,094
 
Accrued rebates and co-op
   
339,932
 
Accrued bonus
   
86,000
 
Accrued warranty reserve
   
200,000
 
Accrued expenses – other
   
484,270
 
 
     
Total accounts payable and accrued expenses
 
$
3,438,054
 

8.    Note Payable and Bank Lines of Credit
 
Notes Payable
 
In April 2006, Westrec Capital Partners, LLC agreed to extend its existing $550,000 bridge financing loan to the Company for up to thirty (30) days under the same terms and conditions in exchange for a warrant for 100,000 shares of the Company’s common stock, exercisable at $1.00 per share.

The value of the 100,000 warrants was determined to be $72,097 using the Black-Scholes Option Pricing Model with the following assumptions: risk-free interest rate of 5.13%, volatility factor of 185.5%, five-year life and zero dividends. They have been recorded as a warrant liability in accordance with SFAS No. 133 and EITF 00-19. On October 2, 2007 the Company revalued this liability with the following assumptions: risk free interest rate of 4.2%, volatility factor of 222.2%, five year life and zero dividends, adjusted the current value of this warrant liability to $47,038. On this date the terms and conditions of the warrant were fully satisfied and the Company converted this warrant liability to equity in accordance with SFAS No. 133 and EITF 00-19.
 
37


IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Factoring Agreement
 
On September 15, 2006 the Company entered into a factoring agreement with Wells Fargo Century, Inc. whereby it assigned certain of its accounts receivables with full recourse. On November 21, 2006, the Company entered into an amendment to this factoring agreement. This facility allows the Company to borrow the lesser of (a) $2,500,000 or (b) the sum of (i) seventy-five percent (75%) of the net amount of eligible accounts receivable and (ii) 40% of the value of eligible inventory, which amount shall not exceed the lesser of $750,000 and the net amount of eligible accounts receivable. All of the Company’s assets secure amounts borrowed under the terms of this agreement. Interest on outstanding balances accrues at the prime rate announced from time to time by Wells Fargo Bank N.A. (or such other bank as Wells Fargo Century, Inc. shall select in its discretion) as its “prime” or base rate for commercial loans and the agreement has an initial term of twenty-four (24) months. As of December 31, 2007, total amount due to Wells Fargo Century was $2,309,321.
 
9.    Equity transactions
 
Common Stock
 
On August 7, 2007 the Company issued 12,944 shares of common stock upon the exercise of a stock option at an exercise price of $0.348.
 
In September 2007, 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 5,250,000 shares of common stock, at $0.40 per share. In accordance with the terms of the subscription agreements the Company was required to file a registration statement for resale of the common stock sold within forty-five (45) days of the closing date of the offering, use commercially reasonable efforts to cause such registration statement to become effective within one hundred fifty (150) days after the closing date and maintain such registration for twenty-four (24) months after the closing date. The Company has timely filed an SB-2 Registration Statement which became effective on November 9, 2007. After commissions and expenses, the Company received net proceeds of approximately $2.0 million in the private placement

Warrant Activity

A summary of warrant activity is as follows:
 
 
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Warrants outstanding at December 31, 2005
   
749,079
 
$
0.23
 
Warrants issued 
   
10,072,852
 
$
0.93
 
Warrants expired 
   
(9,637
)
$
0.67
 
Warrants exercised 
   
(357,772
)
$
0.19
 
Warrants outstanding at December 31, 2006 
   
10,454,522
 
$
0.91
 
Warrants issued 
   
-
 
$
-
 
Warrants expired 
   
-
 
$
-
 
Warrants exercised 
   
-
 
$
-
 
Warrants outstanding at December 31, 2007 
   
10,454,522
 
$
0.91
 
 
38


IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
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 Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “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 Board of Directors.
 
Effective May 18, 2006, the Company reserved 4,250,000 shares of its common stock for issuance to employees, directors and consultants under its 2006 Stock Incentive Plan (the “2006 Plan”). Under the 2006 Plan, options may be granted at prices not less than the fair market value of the Company’s common stock at the grant date. Options generally have a ten-year term and shall be exercisable as determined by the Board of Directors.
 
The fair value of each stock option granted under either the 2000 or 2006 Plan is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based the U.S. Treasury Bill rate with a maturity based on the expected life of the options and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on historical market prices of the Company’s common stock. The expected life of an option grant is based on management’s estimate. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a straight line basis.
 
For stock options issued during the years ended December 31, 2007 and 2006, the fair value of these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following range of assumptions:
 
 
 
December 31, 2007
    
December 31, 2006
 
Risk free interest rate
   
4.06% - 4.83%
 
 
5.12% - 5.16%
 
Dividends
   
-
   
-
 
Volatility factor
   
203% - 224%
 
 
170% - 185%
 
Expected life
   
4 – 6.25 years
   
4 years
 
 
39


IRONCLAD PERFORMANCE WEAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of stock option activity is as follows:
 
 
 
  Number of
Shares
 
Weighted
Average
Exercise Price
 
Outstanding December 31, 2005 
   
2,584,000
 
$
0.35
 
Granted 
   
2,511,134
 
$
0.88
 
Exercised 
   
(86,291
)
$
0.35
 
Cancelled/Expired 
   
(5,500
)
$
1.05
 
Outstanding at December 31, 2006 
   
5,003,343
 
$
0.65
 
Granted 
   
1,808,300
 
$
0.43
 
Exercised 
   
(12,944
)
$
0.35
 
Cancelled/Expired 
   
(781,755
)
$
0.71
 
Outstanding at December 31, 2007 
   
6,016,944
 
$
0.58
 
Exercisable at December 31, 2007 
   
3,534,557
 
$
0.55
 
 
40


IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
The following tables summarize information about stock options outstanding at December 31, 2007:
 
Range of Exercise Price
 
Number Outstanding
 
Weighted Average
Remaining Contractual
Life (Years)
 
Weighted Average
Exercise Price
 
Intrinsic Value
Outstanding Shares
$0.19 - $0.35
 
2,413,353
 
6.17
 
$0.35
 
$252,931
$0.38 - $1.05
 
3,603,591
 
8.45
 
$0.74
 
$73,800
 
The following tables summarize information about stock options exercisable at December 31, 2007:
 
Range of Exercise Price
 
Number Exercisable
 
Weighted Average
Remaining Contractual
Life (Years)
 
Weighted Average
Exercise Price
 
Intrinsic Value
Exercisable Shares
$0.19 - $0.35
 
2,253,714
 
6.09
 
$0.35
 
$236,594
$0.38 - $1.05
 
1,280,343
 
6.88
 
$0.91
 
$-0-
 
The Company recorded $648,512 of compensation expense for employee stock options during the year ended December 31, 2007. These compensation expense charges were recorded in the following operating expense categories, general and administrative - $428,890; sales and marketing - $149,956; research and development - $41,587; and operations - $28,079. There was a total of $1,461,663 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan outstanding at December 31, 2007. This cost is expected to be recognized over a weighted average period of 3.0 years. The total fair value of shares vested during the year ended December 31, 2007 was $931,119.
 
10.    Income Taxes
 
The provision (benefit) for income taxes for the years ended December 31, 2007 and 2006 consisted of the following:
 
 
 
 2007
 
 2006
 
 
 
   
 
   
 
Current 
 
$
800
 
$
800
 
Deferred 
   
-
   
-
 
Refund 
   
-
   
(30,979
)
 
         
 
 
$
800
 
$
(30,179
)

The provision for income taxes differs from the amount that would result from applying the federal statutory rate for the years ended December 31, 2007 and 2006 as follows:
 
41


IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
 
 2007
 
2006
 
 
 
     
 
   
 
Statutory regular federal income benefit rate 
   
(34.0
)%
 
(34.0
)%
State income taxes, net of federal benefit 
   
(5.7
)
 
(4.4
)
Unrealized loss on financing activities  
   
0.2
   
8.4
 
Return to provision adjustment 
   
-
   
(7.1
)
Change in valuation allowance 
   
39.2
   
36.9
 
Other 
   
0.3
   
0.2
 
 
         
Total 
   
0
%
 
0
%
 
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.
 
Significant components of the Company’s deferred tax assets and liabilities for federal incomes taxes at December 31, 2007 consisted of the following:
 
 
 
2007
 
Deferred tax assets
     
Net operating loss carryforward
 
$
3,484,495
 
Stock option expense
   
542,015
 
Allowance for doubtful accounts
   
14,137
 
Allowance for product returns
   
85,680
 
Accrued compensation
   
90,316
 
Inventory
   
18,850
 
Other
   
3,134
 
Valuation allowance
   
(3,945,622
)
 
     
Total deferred tax assets
   
293,005
 
 
     
Total deferred tax liabilities
   
(293,005
)
 
     
Net deferred tax assets/liabilities
 
$
-
 
 
As of December 31, 2007, the Company had unused federal and state contribution carryovers of $6,680 that expire in 2009 through 2011.
 
As of December 31, 2007, the Company had unused federal and state net operating loss carryforwards available to offset future taxable income of $8,179,000 and $8,555,000, respectively, that expire between 2009 and 2027.

42


IRONCLAD PERFORMANCE WEAR CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
11.    Commitments and Contingencies
 
The Company relocated to a temporary facility in November 2005. Rent expense for the period January 1, 2006 through June 30, 2006 for this temporary facility was $40,500.
 
The Company entered into a new five-year lease with one option to renew for an additional five years for a corporate office and warehouse lease commencing in July 2006. The facility is located in El Segundo, California. Rent expense for this facility for the years ended December 31, 2007 and 2006 for this facility were $166,926 and $82,512, respectively.
 
The Company has various non-cancelable operating leases for office equipment expiring through December 31, 2012. Equipment lease expense charged to operations under these leases was $7,619 and $6,290 for the years ended December 31, 2007 and 2006, respectively.
 
Future minimum rental commitments under these non-cancelable operating leases for years ending December 31 are as follows:
 
Year
 
Facility
 
Equipment
 
Total
 
2008
   
173,526
   
7,279
   
180,805
 
2009
   
174,720
   
6,949
   
181,669
 
2010