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. Computers and software are depreciated over a period of 36 months. Furniture and equipment is depreciated
over a period of 60 months. Leasehold improvements are depreciated over fifteen years or the lease term, whichever is shorter.
Maintenance and repairs are charged to expense as incurred.
Operating Leases
Rental expense for operating
leases is recognized on a straight-line basis over the term of the lease agreements including rent free periods.
Trademarks and Patents
The costs incurred to acquire
trademarks and patents, 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 and patents are capitalized and reviewed monthly for active status. Indefinite-lived intangible assets are
tested for impairment at least annually; however, these tests are performed more frequently when events or changes in circumstances
indicate that the asset may be impaired. Impairment exists when carrying value exceeds fair value. The Company's fair value methodology
is based on prices of similar assets or other valuation methodologies including discounted cash flow techniques. Definite-lived
intangible assets are amortized over their estimated useful lives. The Company continually evaluates the reasonableness of the
useful lives of these assets. Once these assets are fully amortized, they are removed from the Consolidated Balance Sheets.
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. The carrying value of a long-lived asset group is considered impaired when the total projected
undiscounted cash flows from the assets are separately identifiable and are less than its carrying value. In that event, a loss
is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Based upon the anticipated
future income and cash flow from operations and other factors, relevant in the opinion of the Company’s management, there
has been no impairment.
Operating Segment Reporting
The Company has one product line,
“gloves”. In previous years the Company had two product lines, “gloves” and “apparel”,
but as a result of the decrease in the number of performance apparel items produced and sold by the Company, the Company has determined
that it has one product line. The Company’s chief operating decision maker makes operating decisions and assesses performance
for the “gloves” product line.
Revenue Recognition
A customer is obligated to pay
for products sold to it within a specified number of days from the date that title to the products is transferred to the customer.
The Company’s standard terms are typically net 30 days from the transfer of title to the products to the customer, however,
we have negotiated special terms with certain customers and industries. The Company typically collects payment from a customer
within 30 to 60 days from the transfer of title to the products to a customer. Transfer of title occurs and risk of ownership
passes to a customer at the time of shipment or delivery, depending on the terms of the agreement with a particular customer.
The sale price of the Company’s products is substantially fixed or determinable at the date of sale based on purchase orders
generated by a customer and accepted by the Company. A customer’s obligation to pay the Company for products sold to it
is not contingent upon the resale of those products. The Company recognizes revenues when products are shipped or delivered to
customers, based on terms of agreement with the customer and collection is reasonably assured.
In June 2016, the Company entered
into a barter agreement whereby it delivered $307,837 of its inventory in exchange for future advertising credits and other items.
The credits, which expire in June 2019, are valued at the lower of the Company’s cost or market value of the inventory transferred.
The Company has recorded barter credits of $307,837 in “Other Assets - Non-current” at December 31, 2016. Under the
terms of the barter agreement, the Company is required to pay cash equal to a negotiated amount of the bartered advertising, or
other items, and use the barter credits to pay the balance. These credits are charged to expense as they are used. During the
twelve months ended December 31, 2016 $0 was charged to expense for barter credits used.
In Q2, Q3 and Q4 2016, the Company
entered into patent licensing agreements with multiple companies. The licenses are for a fixed fee and are non-cancellable by
the licensee. The Company has no significant continuing obligation with regards to the use of the patent and the license arrangements
are treated as an outright sale. The total value of these agreements was $383,500. The payment terms for these licenses varied
by licensee and, in one case, payments extend over a period of five years. The Company has recorded $41,980 in “Prepaid
expenses and other current assets” at December 31, 2016, representing the amounts that are due and payable within twelve
months of December 31, 2016. At December 31, 2016, “Other Assets - Non-current” includes $101,430 of amounts that
are due and payable in periods after December 31, 2017.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Revenue Disclosures
The Company’s revenues
are derived primarily from the sale of our core line of task specific work gloves, available to all of our customers, both domestically
and internationally through third party distributors. Below is a table outlining this breakdown for the comparative periods:
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2015
|
|
Domestic
|
|
|
$
|
19,743,090
|
|
|
$
|
16,265,891
|
|
|
International
|
|
|
|
5,243,788
|
|
|
|
7,316,128
|
|
|
Total
|
|
|
$
|
24,986,878
|
|
|
$
|
23,582,019
|
|
The Company sells product directly
to numerous international distributors, located on various continents. As the Company does not receive information from these
distributors regarding their resellers and end user customers and their respective locations, the Company is not able to specifically
disclose all the countries in which its’ products are sold.
Cost of Goods Sold
Cost of goods sold includes all
of the costs associated with producing the product by independent, third party factories (FOB costs), plus the costs of transporting,
inspecting and delivering the product to our distribution warehouse in California (landed costs). Landed costs consist primarily
of ocean/air freight, transport insurance, import duties, administrative charges and local trucking charges from the port to our
warehouse. Purchasing, warehousing and distribution costs are reported in operating expenses on the line item entitled “Purchasing,
warehousing and distribution”.
Product Returns, Allowances
and Adjustments
Product returns, allowances and
adjustments is a broad term that encompasses a number of offsets to gross sales. Included herein are warranty returns of defective
products, returns of saleable products and sales adjustments.
Warranty Returns - the Company
has a warranty policy that covers defects in workmanship. It allows customers to return damaged or defective products to us following
a customary return merchandise authorization process. Warranty returns for the years ended December 31, 2016 and 2015, were approximately
$9,000 or 0.0% and $17,000 or 0.1% of net sales, respectively.
Saleable Product Returns - the
Company may allow from time to time, depending on the customer and existing circumstances, stock adjustment returns, whereby the
customer is given the opportunity to ‘trade out’ of a style of product that does not sell well in their territory,
usually in exchange for another product, again following the customary return merchandise authorization process. In addition,
we may allow from time to time other saleable product returns from customers for other business reasons, for example, in settlement
of an outstanding accounts receivable, from a discontinued distributor customer or other customer service purpose. Saleable product
returns for the years ended December 31, 2016 and 2015, were approximately $183,000 or 0.7% and $279,000 or 1.2% of net sales,
respectively. Adjustments to the product returns reserve for the years ended December 31, 2016 and 2015 were approximately $0
or 0.0%, respectively.
Sales Adjustments - these adjustments
include pricing and shipping corrections and periodic adjustments to the product returns reserve. Pricing and shipping corrections
for the years ending December 31, 2016 and 2015 were approximately $49,000 or 0.2% and $129,000 or 0.5%, respectively.
For both warranty and saleable
product returns we utilize actual historical return rates to determine our allowance for returns in each period, adjusted for
unique, one-time events. Gross sales are reduced by estimated returns. We record a corresponding accrual for the estimated liability
associated with the estimated returns which is based on the historical gross sales of the products corresponding to the estimated
returns. This accrual is offset each period by actual product returns.
IRONCLAD
PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Reserve for Product and Warranty Returns
|
|
|
|
|
Reserve Balance
12/31/14
|
|
$
|
75,000
|
|
Payments
Recorded During the Period
|
|
|
(294,959
|
)
|
|
|
|
(219,959
|
)
|
Accrual
for New Liabilities During the Reporting Period
|
|
|
294,959
|
|
Reserve Balance 12/31/15
|
|
|
75,000
|
|
Payments
Recorded During the Period
|
|
|
(192,230
|
)
|
|
|
|
(117,230
|
)
|
Accrual
for New Liabilities During the Reporting Period
|
|
|
192,230
|
|
Reserve
Balance 12/31/16
|
|
$
|
75,000
|
|
Advertising and Marketing
Advertising and marketing costs
are expensed as incurred. Advertising expenses for the years ended December 31, 2016 and 2015 were $580,568 and $342,403, respectively.
Shipping and Handling Costs
Freight billed to customers is
recorded as sales and the related freight costs as cost of sales.
Customer Concentrations
Customer “A” accounted for approximately $957,000
or 4% of net sales for year ended December 31, 2016, Customer “B” accounted for approximately $3,764,000 or 15% of
net sales for the year ended December 31, 2016 and Customer “C” accounted for approximately $8,446,000 or 34% of net
sales for the year ended December 31, 2016. Customer “A” accounted for approximately $4,673,000 or 20% of net sales
for year ended December 31, 2015, Customer “B” accounted for approximately $2,919,000 or 12% of net sales for the
year ended December 31, 2015 and Customer “C” accounted for approximately $1,351,000 or 6% of net sales for the year
ended December 31, 2015. No other customer accounted for more than 10% of net sales. All transactions were in United States dollars.
There were no transaction gains or losses associated with sales transactions.
Accounts Receivable Concentrations
Customer “B” accounted
for approximately $1,038,000 or 13% of accounts receivable at December 31, 2016, and Customer “C” accounted for approximately
$3,058,000 or 38% of accounts receivable at December 31, 2016. Customer “B” accounted for approximately $1,372,000
or 15% of accounts receivable at December 31, 2015, Customer “C” accounted for approximately $559,000 or 6% of accounts
receivable at December 31, 2015 and Customer “D” accounted for approximately $2,132,000 or 24% of accounts receivable
at December 31, 2015. No other customer accounted for more than 10% of accounts receivable. All transactions were in United States
dollars.
Seasonality
Our glove business generally
shows an increase in sales during the third and fourth quarters due primarily to an increase in the sale of our winter glove line
during this period. We typically generate approximately 60% of our glove net sales during these months. As the overall economy
continues to experience pockets of recovery, our results have been positively impacted by the successful introduction of new products
designed specifically for the oil and gas, safety, automotive and sporting goods industries.
Our working capital, at any particular
time, reflects the seasonality of our glove business and plans to expand product lines and enter new markets. We expect inventory,
accounts payable and accrued expenses to be higher in the third and fourth quarters for these reasons.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Earnings Per Share
The Company utilizes FASB ASC
260, “
Earnings per Share
.” Basic earnings per share is computed by dividing earnings available to common stockholders
by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similar to basic earnings
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 table sets forth
the calculation of the numerators and denominators of the basic and diluted per share computations for the years ended December
31:
|
|
2016
|
|
2015
|
Numerator: Net Loss
|
|
$
|
(2,968,217
|
)
|
|
$
|
(231,315
|
)
|
Denominator: Basic EPS
|
|
|
|
|
|
|
|
|
Common shares outstanding, beginning of year
|
|
|
81,819,809
|
|
|
|
80,808,629
|
|
Weighted average common shares issued during the year
|
|
|
1,985,058
|
|
|
|
1,011,180
|
|
Denominator for basic earnings per common share
|
|
|
83,804,867
|
|
|
|
81,819,809
|
|
Denominator: Diluted EPS
|
|
|
|
|
|
|
|
|
Common shares outstanding, beginning of period
|
|
|
81,819,809
|
|
|
|
80,808,629
|
|
Weighted average common shares issued during the year
|
|
|
1,985,058
|
|
|
|
1,011,180
|
|
Denominator for diluted earnings per common share
|
|
|
83,804,867
|
|
|
|
81,819,809
|
|
The following potential common
shares have been excluded from the computation of diluted net earnings per share for the periods presented because their effect
would have been anti-dilutive:
|
|
Year
Ended December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Common Stock
Warrants
|
|
|
43,146
|
|
|
|
43,146
|
|
Stock Options
|
|
|
10,416,825
|
|
|
|
10,864,053
|
|
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Income Taxes
The Company adopted the provisions
of FASB ASC 740-10 effective January 1, 2007. Management considers the Company’s tax positions to be routine transactions
for which the law is clear and unambiguous and that there are no uncertain tax positions. Interest and penalties associated with
unrecognized tax benefits would be classified as additional income taxes in the statement of operations.
Income taxes are provided for
the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes
related primarily to the difference between the basis of the allowance for doubtful accounts, accumulated depreciation and amortization,
accrued payroll and net operating loss carryforwards for financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. If it is more likely than not that some portion or all of a deferred tax asset will not be realized,
a valuation allowance is recognized.
The significant components of
benefit of income tax expense were federal tax expense of $1,832,000 and ($8,359) for the years ended December 31, 2016 and
2015, respectively and current state provisions of ($9,885) and $2,490, for the years ended December 31, 2016 and 2015, respectively.
For the year ended December 31, 2015 we assessed the need for a valuation allowance against our deferred tax assets and concluded
that it is more likely than not that we will not be able to realize more of our deferred tax asset than estimated in 2014. Accordingly,
there is no adjustment to deferred taxes for 2015. For the year ended December 31, 2016, we reviewed current profitability and
forecasted future results and concluded that it was more likely than not that we would not be able to realize any of our deferred
tax assets. In recognition of this risk, we provided a full valuation allowance on the deferred taxes. We will continue to evaluate
if it is more likely than not that we will realize the future benefits from current and future deferred tax assets. These deferred
tax benefits are recorded on the balance sheet as long term deferred tax assets of $0 and $1,832,000 as of December 31, 2016 and
December 31, 2015, respectively.
By statute, tax years ending
in December 31, 2016 through 2011 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Use of Estimates
The preparation of financial
statements requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant estimates
and assumptions made by management are used for, but not limited to, the allowance for doubtful accounts, inventory obsolescence,
allowance for returns, income taxes and the estimated useful lives of assets and stock-based compensation.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Fair Value Measurements
Under the accounting for fair
value measurements and disclosures, a fair value hierarchy was established that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). A financial
instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value
measurement.
The company uses the following
valuation techniques to measure fair value for its assets and liabilities:
Level 1 – Quoted market
prices in active markets for identical assets or liabilities;
Level 2 – Significant other
observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar items in markets
that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated
inputs); and
Level 3 – Unobservable
inputs for the asset or liability, which are valued based on management's estimates of assumptions that market participants would
use in pricing the asset or liability.
The carrying value of financial
instruments reported in the accompanying consolidated balance sheets for cash, accounts receivable, line of credit, accounts payable
and accrued expenses payable and other liabilities approximate fair value due to the immediate or short-term nature or maturity
of these financial instruments.
Defined Contribution Plan
Obligations for contributions
to defined contribution plans are expensed as the related service is provided. Prepaid contributions are recognized as an asset
to the extent that a cash refund or a reduction in future payments is available. Employer match contributions to the Company’s
401(k) plan, for the years ended December 31, 2016 and 2015 were $91,282 and $81,206, respectively.
Contingent Losses
We record a liability for a contingent
loss when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.
Recently Issued Accounting
Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, "Revenue
from Contracts with Customers." ASU 2014-09 replaces most existing revenue recognition guidance, and requires companies to
recognize revenue based upon the transfer of promised goods and/or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods and/or services. In addition, the new guidance requires
enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant
judgments in measurement and recognition. ASU 2014-09 is effective, as amended, for annual and interim periods beginning on or
after December 15, 2017, applied retrospectively to each prior period presented or retrospectively with a cumulative effect adjustment
recognized as of the adoption date. We expect to adopt the new standard on January 1, 2018, and have not yet selected a transition
method. We are currently evaluating the overall impact this guidance will have on our consolidated financial statements. Based
on our preliminary assessment, we do not expect the adoption of ASU 2014-09 to materially change the timing of revenue recognition
and classification of transactions within our consolidated financial statements and related disclosures. We are, however, continuing
our assessment, which may identify potential impacts.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
In August 2014, the FASB issued
ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding
upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of
the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles
for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated
as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial
doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are
issued (or available to be issued). The new standard applies prospectively to annual periods ending after December 15, 2016, with
early adoption permitted. The Company adopted ASU 2014-15 for the year ended December 31, 2016 and updated the going concern disclosure
accordingly.
In April 2015, the FASB issued
ASU 2015-03,
Interest – Imputation of Interest
, requiring entities to present debt issuance costs related to a debt
liability as a reduction of the carrying amount of the liability. In August 2015, the FASB issued ASU 2015-15,
Interest –
Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,
to provide additional guidance pertaining to debt issuance costs related to line-of-credit arrangements. The guidance is effective
for fiscal years and interim periods beginning after December 15, 2015. We adopted this standard in the first quarter of 2016.
The adoption of this guidance did not have a material impact on our financial position and results of operations.
On July 22, 2015, the FASB issued
ASU 2015-11, which requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby
simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context
is defined as one of three different measures). The ASU will not apply to inventories that are measured by using either the last-in,
first-out (LIFO) method or the retail inventory method (RIM). For public business entities, the ASU is effective prospectively
for annual periods beginning after December 15, 2016, and interim periods therein. Early application of the ASU is permitted.
Upon transition, entities must disclose the nature of and reason for the accounting change. We are currently evaluating the impact
this ASU will have on our financial position and results of operations.
In November 2015, the FASB issued
ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. The amendments under the new guidance
require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting
period. The amendments in this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively
to all periods presented. The Company adopted this guidance effective January 1, 2016 on a retrospective basis. Accordingly, we
have reclassified $404,000 of deferred tax assets previously classified as current as of December 31, 2015 to non-current.
In February 2016, the FASB issued
ASU No. 2016-02 amending the accounting for leases. The new guidance requires the recognition of lease assets and liabilities
for operating leases with terms of more than 12 months, in addition to those currently recorded, on our consolidated balance sheets.
Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally
consistent with the current lease accounting guidance. The ASU is effective for reporting periods beginning after December 15,
2018, with early adoption permitted. We are currently evaluating the impact the ASU will have on our financial position and results
of operations.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
In March 2016, the FASB issued
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This guidance will change how companies account
for certain aspects of share-based payments to employees. Companies will be required to recognize the difference between the estimated
and the actual tax impact of awards within the income statement when the awards vest or are settled, and additional paid-in capital
(“APIC”) pools will be eliminated. This ASU also impacts the classification of awards as either equity or liabilities
and the classification of share-based transactions within the statement of cash flows. ASU 2016-09 is effective for annual and
interim reporting periods beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating the
impact this ASU will have on our financial position and results of operations.
In August 2016, the FASB issued
ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus
of Emerging Issues Task Force)
, ("ASU 2016-15") to reduce the existing diversity in practice in how certain cash
receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows,
and other topics. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods therein. Early
adoption is permitted. Entities will have to apply the guidance retrospectively, but if it is impracticable to do so for an issue,
the amendments related to that issue would be applied prospectively. We are currently evaluating the impact this ASU will have
on our financial position and results of operations.
3.
Inventory
At December 31, 2016 and 2015
the Company had one class of inventory - finished goods.
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
|
|
|
|
|
|
|
Finished Goods
|
|
|
|
$
|
8,930,864
|
|
|
$
|
7,229,515
|
|
Reserve for Obsolescence
|
|
|
|
|
(197,549
|
)
|
|
|
(547,800
|
)
|
Net Inventory
|
|
|
|
$
|
8,733,315
|
|
|
$
|
6,681,715
|
|
4.
Property
and equipment
Property and equipment consisted
of the following:
|
|
December 31,
2016
|
|
December 31,
2015
|
Computer hardware
and software
|
|
$
|
294,117
|
|
|
$
|
622,264
|
|
Furniture and equipment
|
|
|
343,499
|
|
|
|
308,398
|
|
Leasehold
improvements
|
|
|
140,718
|
|
|
|
174,298
|
|
|
|
|
778,334
|
|
|
|
1,104,960
|
|
Less
accumulated depreciation
|
|
|
(357,204
|
)
|
|
|
(767,047
|
)
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
421,130
|
|
|
$
|
337,913
|
|
Depreciation expense for the
years ended December 31, 2016 and 2015 was $165,525 and $125,093, respectively.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
5.
Trademarks
and patents
Trademarks and patents consisted
of the following:
|
|
December 31,
2016
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
Trademarks
and patents
|
|
$
|
316,998
|
|
|
$
|
193,989
|
|
Less:
Accumulated amortization
|
|
|
(81,260
|
)
|
|
|
(68,094
|
)
|
|
|
|
|
|
|
|
|
|
Trademarks,
net
|
|
$
|
235,738
|
|
|
$
|
125,895
|
|
Trademarks consist of definite-lived
trademarks of $239,667 and $126,890 and indefinite-lived trademarks of $77,331 and $67,099 at December 31, 2016 and 2015, respectively.
All trademark costs have been generated by the Company, and consist of initial legal and filing fees.
Amortization expense was $13,166
and $9,534 for the years ended December 31, 2016 and 2015, respectively. The Company expects to amortize approximately $10,000
in each of the next five years.
6.
Accounts
payable and accrued expenses
Accounts payable and accrued
expenses consisted of the following:
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,005,539
|
|
|
$
|
574,657
|
|
Accrued inventory
|
|
|
523,223
|
|
|
|
1,894,190
|
|
Accrued rebates and co-op
|
|
|
540,265
|
|
|
|
159,227
|
|
Accrued returns reserve
|
|
|
75,000
|
|
|
|
75,000
|
|
Customer deposits
|
|
|
—
|
|
|
|
7,722
|
|
Accrued
expenses – other
|
|
|
530,079
|
|
|
|
647,928
|
|
|
|
|
|
|
|
|
|
|
Total
accounts payable and accrued expenses
|
|
$
|
4,674,106
|
|
|
$
|
3,358,724
|
|
7.
Bank
Lines of Credit
Bank Revolving Loan
On November 28, 2014 we entered
into a Revolving Loan and Security Agreement with Capital One, N.A. which currently provides a revolving loan of up to $8,000,000.
The loan was due to expire on November 30, 2016. On September 16, 2015, pursuant to the terms of the agreement, we increased the
line limit from $6,000,000 to $8,000,000. All advances, up to the line limit of $8,000,000, are subject to a Borrowing Base report.
The term Borrowing Base means an amount equal to (a) 80% of the net amount of all eligible accounts receivable plus, (b) 50% of
the value of eligible landed inventory, plus (c) 35% of eligible in-transit inventory. In addition, the outstanding principal
amount of all advances against eligible inventory shall not exceed 50% of the total line limit. All of our assets secure amounts
borrowed under the terms of this agreement. Interest on borrowed funds accrued at LIBOR plus 2.80% until such time as the Company’s
trailing twelve month EBITDAS (Earnings Before Interest, Taxes, Depreciation, Amortization and Stock compensation expense) exceeded
$1,000,000 at which time the rate decreased to LIBOR plus 2.50%. The interest rate at December 31, 2016 was 3.023%. This agreement
contains a Minimum Debt Service Coverage Ratio covenant and a Tangible Net Worth covenant. On March 16, 2016, the Company modified
its Revolving Loan and Security Agreement with Capital One, N.A. which allowed the Company to add certain legal expenses of up
to $325,000 in the calculation of EBITDAS for the trailing twelve month periods ending March 31, June 30, September 30 and December
31, 2016 and permit including certain receivables of up to $300,000 in the definition of eligible accounts receivable in determining
the Borrowing Base.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
On August 9, 2016 and November 7, 2016
Capital One, N.A. also elected to waive the Minimum Debt Service Coverage Ratio covenant, calculated as of June 30, 2016 and September
30, 2016, respectively, in accordance with Section 7.15(a) of the Loan and Security Agreement. On November 7, 2016, Capital One,
N.A. granted the Company 90-day extensions of the maturity date from November 30, 2016 to February 28, 2017.
On April 11, 2017, Capital One, N.A.
granted the Company an extension of the maturity date from February 28, 2017 to April 17, 2018 and elected to waive the Minimum
Debt Service Coverage Ratio covenant calculated as of December 31, 2016. Capital One, N.A. also replaced the Minimum Debt Service
Coverage Ratio covenants calculated as of March 31, 2017, June 30, 2017 and September 30, 2017, with a twelve month trailing adjusted
EBITDAS covenant and reset the debt service charge covenant for September 30, 2017. Effective October 1, 2017, Capital One, N.A.
will reduce the cap on the line of credit to $5,000,000. At December 31, 2016, the Company had unused credit available under our
current facility of approximately $3,751,930.
Although we were able to obtain waivers for our loan covenant
violations we do not guarantee that we will meet the requirements of our covenants throughout the end of the extension period
of the loan.
8.
Equity
transactions
Common Stock
On February 18, 2016 the Company
issued 161,291 shares of common stock upon the exercise of stock options at an exercise price of $0.09.
On May 3, 2016 the Company issued
2,000 shares of common stock upon the exercise of stock options at an exercise price of $0.09.
On May 16, 2016 the Company issued
115,000 shares of common stock upon the exercise of stock options at an exercise price of $0.09.
On May 18, 2016 the Company issued
531,854 shares of common stock upon the exercise of stock options at an exercise price of $0.09.
On June 15, 2016 the Company
issued 253,000 shares of common stock upon the exercise of stock options at a range of exercise prices from of $0.24 to $0.25.
On August 16, 2016 the Company
issued 500,000 shares of restricted common stock with a fair value of $0.24, vesting over a period of one year.
There were 84,500,454 shares
of common stock of the Company outstanding at December 31, 2016.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Warrant Activity
A summary of warrant activity
is as follows
:
|
|
Number of Shares
|
|
Weighted Average
Exercise Price
|
|
Warrants
outstanding at December 31, 2015
|
|
|
|
43,146
|
|
|
$
|
0.19
|
|
|
Warrants
outstanding at December 31, 2016
|
|
|
|
43,146
|
|
|
$
|
0.19
|
|
Stock Based Compensation
The Company accounts for stock
based compensation under the provisions of FASB ASC 718
“Share-Based Payments
”.
Effective May 18, 2006, the Company
reserved 4,250,000 shares of its common stock for issuance to employees, directors and consultants under its 2006 Stock Incentive
Plan (the “2006 Plan”). Under the 2006 Plan, options may be granted at prices not less than the fair market value
of the Company’s common stock at the grant date. Options generally have a ten-year term and shall be exercisable as determined
by the Company’s board of directors.
Effective May 9, 2009, the Company
reserved an additional 6,750,000 shares of its common stock for issuance to employees, directors and consultants under its 2006
Stock Plan.
Effective April 11, 2011, the
Company reserved an additional 2,000,000 shares of its common stock for issuance to employees, directors and consultants under
its 2006 Stock Plan.
Effective May 21, 2013, the Company
reserved an additional 3,000,000 shares of its common stock for issuance to employees, directors and consultants under its 2006
Stock Plan.
Effective April 7, 2014, the
Company reserved an additional 5,000,000 shares of its common stock for issuance to employees, directors and consultants under
its 2006 Stock Plan.
The fair value of each stock
option granted under either the 2000 or 2006 Plan is estimated on the date of the grant using the Black-Scholes Model. The Black-Scholes
Model has assumptions for risk free interest rates, dividends, forfeitures, stock volatility and expected life of an option grant.
Forfeitures are estimated at the date of the grant based on historical experience and future expectations. The risk free interest
rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the options and on the closest day
to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The stock volatility factor
is based on historical market prices of the Company’s common stock. The expected life of an option grant is based on management’s
estimate. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a
straight line basis.
For stock options issued during
the years ended December 31, 2016 and 2015, the fair value of these options was estimated at the date of the grant using a Black-Scholes
Model with the following range of assumptions:
|
|
December 31, 2016
|
|
December 31, 2015
|
Risk free
interest rate
|
|
|
0.51%
- 1.70%
|
|
|
|
1.54
|
%
|
Dividends
|
|
|
—
|
|
|
|
—
|
|
Volatility factor
|
|
|
70.47% - 101.00%
|
|
|
|
133.9
|
%
|
Expected life
|
|
|
4.89 years
|
|
|
|
6.25 years
|
|
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
at December 31, 2014
|
|
|
|
12,674,991
|
|
|
$
|
0.16
|
|
|
Exercised
|
|
|
|
(1,395,347
|
)
|
|
$
|
0.09
|
|
|
Cancelled/Expired
|
|
|
|
(1,148,924
|
)
|
|
$
|
0.16
|
|
|
Outstanding at December
31, 2015
|
|
|
|
10,130,720
|
|
|
$
|
0.16
|
|
|
Granted
|
|
|
|
1,600,000
|
|
|
$
|
0.23
|
|
|
Exercised
|
|
|
|
(1,063,145
|
)
|
|
$
|
0.13
|
|
|
Cancelled/Expired
|
|
|
|
(250,750
|
)
|
|
$
|
0.23
|
|
|
Outstanding
at December 31, 2016
|
|
|
|
10,416,825
|
|
|
$
|
0.17
|
|
|
Exercisable at December
31, 2016
|
|
|
|
7,543,901
|
|
|
$
|
0.16
|
|
The following tables summarize
information about stock options outstanding at December 31, 2016:
Range
of Exercise Price
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Weighted
Average Exercise Price
|
|
Intrinsic
Value Outstanding Shares
|
$0.09 - $0.27
|
|
10,416,825
|
|
5.76
|
|
$0.17
|
|
$1,217,756
|
The following tables summarize
information about stock options exercisable at December 31, 2016:
Range
of Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Weighted
Average Exercise Price
|
|
Intrinsic
Value Exercisable Shares
|
$0.09 - $0.27
|
|
7,543,901
|
|
5.00
|
|
$0.16
|
|
$898,894
|
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
The following tables summarize
information about non-vested stock options:
|
|
Number of Shares
|
|
Weighted Average
Grant Date Fair Value
|
|
Non-Vested
at December 31, 2014
|
|
|
|
5,491,868
|
|
|
$
|
0.14
|
|
|
Vested
|
|
|
|
(2,243,114
|
)
|
|
$
|
0.13
|
|
|
Forfeited
|
|
|
|
(633,332
|
)
|
|
$
|
0.14
|
|
|
Non-Vested at December
31, 2015
|
|
|
|
2,615,422
|
|
|
$
|
0.16
|
|
|
Granted
|
|
|
|
1,600,000
|
|
|
$
|
0.23
|
|
|
Vested
|
|
|
|
(1,186,245
|
)
|
|
$
|
0.14
|
|
|
Forfeited
|
|
|
|
(156,253
|
)
|
|
$
|
0.22
|
|
|
Non-Vested
at December 31, 2016
|
|
|
|
2,872,924
|
|
|
$
|
0.18
|
|
From time to time, we issue awards
of restricted common stock to board members representing common stock of the Company. Generally, the awards vest over a period
of one year after the date of grant contingent upon the continued service of the recipients. Awards are valued based on the market
value of the common stock at grant date and compensation expense is recognized over the vesting period. The Company granted 500,000
restricted common stock awards in 2016 and 733,333 restricted stock awards in 2015.
The following tables summarize
information about non-vested stock awards:
|
|
Number of Shares
|
|
Weighted Average
Grant Date Fair Value
|
|
Non-Vested
at December 31, 2014
|
|
|
|
366,667
|
|
|
$
|
0.23
|
|
|
Granted
|
|
|
|
733,333
|
|
|
$
|
0.28
|
|
|
Vested
|
|
|
|
(733,335
|
)
|
|
$
|
0.26
|
|
|
Non-Vested at December
31, 2015
|
|
|
|
366,665
|
|
|
$
|
0.23
|
|
|
Granted
|
|
|
|
500,000
|
|
|
$
|
0.24
|
|
|
Vested
|
|
|
|
(616,665
|
)
|
|
$
|
0.26
|
|
|
Non-Vested
at December 31, 2016
|
|
|
|
250,000
|
|
|
$
|
0.24
|
|
The Company recorded $373,506
of compensation expense for employee stock options during the year ended December 31, 2016. There was a total of $460,714 of unrecognized
compensation costs related to non-vested share-based compensation arrangements under the 2000 and 2006 Option Plans outstanding
at December 31, 2016. This cost is expected to be recognized over a weighted average period of 2.2 years. The total fair value
of shares vested during the year ended December 31, 2016 was $324,101.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
9.
Income
Taxes
The income tax expense for the
years ended December 31, 2016 and 2015 consisted of the following:
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
$
|
(9,885
|
)
|
|
$
|
(5,869
|
)
|
|
Deferred
|
|
|
|
1,832,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,822,115
|
|
|
$
|
(5,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income
taxes differs from the amount that would result from applying the federal statutory rate for the years ended December 31, 2016
and 2015 as follows:
|
|
2016
|
|
2015
|
Statutory
regular federal income benefit rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net
of federal benefit
|
|
|
4.46
|
|
|
|
3.76
|
|
Change in valuation allowance
|
|
|
(219.10
|
)
|
|
|
(30.14
|
)
|
True-up federal income
tax liability
|
|
|
1.35
|
|
|
|
(1.30
|
)
|
Other
|
|
|
(1.57
|
)
|
|
|
(3.83
|
)
|
Total
|
|
|
(180.86
|
)%
|
|
|
2.49
|
%
|
In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of 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 not realize any of the deferred tax assets and has provided a
100% valuation allowance.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
Significant components of the
Company’s deferred tax assets and liabilities for federal incomes taxes at December 31, 2016 and 2015 consisted of the following:
|
|
2016
|
|
2015
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating
loss carryforward
|
|
$
|
2,164,760
|
|
|
$
|
1,799,777
|
|
Stock option expense
|
|
|
1,709,965
|
|
|
|
1,561,198
|
|
Allowance for doubtful
accounts
|
|
|
11,949
|
|
|
|
11,949
|
|
Allowance for product
returns
|
|
|
29,873
|
|
|
|
29,873
|
|
Inventory reserve
|
|
|
78,684
|
|
|
|
218,189
|
|
Other
|
|
|
159,847
|
|
|
|
143,884
|
|
Valuation allowance
|
|
|
(3,802,185
|
)
|
|
|
(1,594,720
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
352,893
|
|
|
|
2,170,150
|
|
Fixed Assets/Intangibles
|
|
|
(40,902
|
)
|
|
|
(32,958
|
)
|
Deferred
tax liabilities – state taxes
|
|
|
(311,991
|
)
|
|
|
(305,192
|
)
|
Total deferred tax liabilities
|
|
|
(352,893
|
)
|
|
|
(338,150
|
)
|
Net
deferred tax assets
|
|
$
|
—
|
|
|
$
|
1,832,000
|
|
As of December 31, 2016, the
Company had unused federal and state net operating loss carryforwards available to offset future taxable income of $4,885,000
and $5,701,000, respectively, that expire between 2017 and 2028.
10.
Commitments
and Contingencies
The Company entered into a five-year
lease with one option to renew for an additional five years for a corporate office and warehouse lease commencing in July 2006.
The Company exercised its five-year option to renew this lease commencing in July 2011. The facility is located in El Segundo,
California. As part of this renewal process we reduced our square footage by approximately 1,700 square feet of unneeded warehouse
space in exchange for six months of rent concessions and approximately $40,000 for tenant improvements. Rent expense for this
facility for the years ended December 31, 2016 and 2015 was $0 and $3,069, respectively. The Company has sublet this facility
for the remainder of its lease term as the Company relocated to Texas.
On June 11, 2014, the Company
entered into a 42-month lease for a new corporate office facility in Farmers Branch, Texas, commencing in the third quarter of
2014. The Company relocated its corporate headquarters to Texas in the third quarter. This new facility is approximately 13,026
square feet and the Company has negotiated six months of rent abatement. The monthly base rent is $7,653 plus $3,449 for common
area operating expenses. A security deposit of one month’s rent has been made in the amount of $11,102. As part of this
process, we were granted $60,000 for tenant improvements. Rent expense attributable to this facility for the years ended December
31, 2016 and 2015 was $109,992 and $108,768, respectively.
On November 10, 2015, the Company
entered into a 24-month lease for a new international sourcing office in Jakarta, Indonesia, commencing on January 1, 2016. The
monthly base rent is approximately $1,200 during the first year of the lease with an increase to approximately $1,325 per month
for the second year of the lease. A security deposit of three month’s rent has been made in the amount of $3,730. Rent expense
attributable to this facility for the years ended December 31, 2016 and 2015 was $17,736 and $0, respectively.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
The Company has various non-cancelable
operating leases for office equipment expiring through August, 2019. Equipment lease expense charged to operations under these
leases was $20,511 and $13,672 for the years ended December 31, 2016 and 2015, respectively.
Future minimum rental commitments
under these non-cancelable operating leases for years ending December 31 are as follows:
Year
|
|
Facility
|
|
Equipment
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
112,919
|
|
$
|
10,794
|
|
$
|
123,713
|
|
2018
|
|
|
16,175
|
|
|
7,329
|
|
|
23,504
|
|
2019
|
|
|
-
|
|
|
1,295
|
|
|
1,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
129,094
|
|
$
|
19,418
|
|
$
|
148,512
|
|
Ironclad California executed
a Consulting Agreement with Eduard Albert Jaeger, its founder and former CEO, effective in February 18, 2014. Pursuant to the
terms of this two-year Consulting Agreement, Mr. Jaeger will be paid an initial base fee of $225,000 for the first year of the
agreement and a base fee of $150,000 for the second year of the agreement. In addition, the Company will reimburse Mr. Jaeger
for 100% of the premiums for COBRA coverage for himself and his family for the first 12 months of the agreement. The Company will
also reimburse Mr. Jaeger for any travel and lodging expense incurred while rendering services to the Company. The total expense
recognized in the years ended December 31, 2016 and December 31, 2015 for Mr. Jaeger’s fees and COBRA was $0 and $188,314,
respectively.
Legal Proceedings.
On September 28, 2015, Ironclad
Performance Wear Corporation filed a Petition in the District Court of Dallas County, Texas, 193rd Judicial District, Cause No.
DC-15-11878, against Orr Safety Corporation (“Orr”), a significant customer of the Company. The Petition alleged that
Orr had materially breached an Exclusive License and Distributorship Agreement with Ironclad by, inter alia, failing to use its
best efforts to actively promote, market and sell the KONG® brand of gloves manufactured by Ironclad, and selling gloves that
were similar to, or competitive with, the KONG® brand. The Petition also alleged that Orr materially breached other agreements
between the parties, and provided notice that Ironclad was terminating the Exclusive License and Distributorship Agreement due
to Orr’s material breaches. The Petition sought damages, declaratory relief regarding Ironclad’s rights and obligations
under the relevant agreements, and all other available relief. On October 23, 2015, Orr filed an Answer and Counterclaim in the
Dallas County action, and concurrently removed the case to the United States District Court for the Northern District of Texas,
Case No. 3:15-cv-03453-D. Orr’s Counterclaim alleged that Ironclad breached the Exclusive License and Distributorship Agreement,
as well as a Sub-Distributorship Agreement between the parties by, inter alia, infringing upon Orr’s exclusive rights under
the agreements, failing to pay appropriate royalties to Orr, and failing to protect the intellectual property of the KONG®
brand of glove. The Counterclaim also alleged that Ironclad engaged in selling “counterfeit” KONG® products in
violation of the parties’ agreement. Ironclad filed an Answer to the Counterclaim on November 27, 2015 denying all material
allegations. On December 7, 2015, Orr filed an Amended Answer to Ironclad’s Petition responding to each of the allegations
pursuant to the pleading standards in federal court. On December 3, 2015, the Court entered a Scheduling Order setting deadlines
for discovery and dispositive motions. On July 13, 2016, the Company filed a motion for summary judgement.
On August 26, 2016, the
Company executed a settlement agreement to settle the lawsuit. The terms of this agreement are confidential. Orr will continue
to be an important distributor of the Company’s products, but the Company can also sell KONG® through other distribution
channels.
IRONCLAD PERFORMANCE WEAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
11. Subsequent
Events
On April 11, 2017, Capital One, N.A.
granted the Company an extension of the maturity date from February 28, 2017 to April 17, 2018 and elected to waive the Minimum
Debt Service Coverage Ratio covenant calculated as of December 31, 2016. Capital One, N.A. also replaced the Minimum Debt Service
Coverage Ratio covenants calculated as of March 31, 2017, June 30, 2017 and September 30, 2017, with a twelve month trailing adjusted
EBITDAS covenant and reset the debt service charge covenant for September 30, 2017. Effective October 1, 2017, Capital One, N.A.
will reduce the cap on the line of credit to $5,000,000.