This Form 10-Q may contain certain forward-looking
statements. When used in this Form 10-Q or in any other presentation, statements which are not historical in nature, including
the words “anticipate,” “estimate,” “should,” “expect,” “believe,”
“intend,” “project” and similar expressions, are intended to identify forward-looking statements. They
also include statements containing a projection of sales, earnings or losses, capital expenditures, dividends, capital structure
or other financial terms.
The forward-looking statements in this
Form 10-Q are based upon our management’s beliefs, assumptions and expectations of our future operations and economic performance,
taking into account the information currently available to us. These statements are not statements of fact. Forward-looking statements
involve risks and uncertainties, some of which are not currently known to us that may cause our actual results, performance or
financial condition to be materially different from the expectations of future results, performance or financial condition we express
or imply in any forward-looking statements. Some of the important factors that could cause our actual results, performance or financial
condition to differ materially from expectations are:
We believe these forward-looking statements
are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations.
Furthermore, forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update
or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events
or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q might
not occur. We qualify any and all of our forward-looking statements entirely by these cautionary factors.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Lakeland Industries,
Inc.
and
Subsidiaries (“Lakeland,” the “Company,” “we,”
“our” or “us”), a Delaware corporation organized in April 1986, manufactures and sells a comprehensive
line of safety garments and accessories for the industrial protective clothing market.
The unaudited condensed consolidated
financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission,
and reflect all adjustments (consisting of only normal and recurring adjustments) which are, in the opinion of management, necessary
to present fairly the unaudited condensed consolidated financial information required herein. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. While we believe that
the disclosures are adequate to make the information presented not misleading, it is suggested that these unaudited condensed consolidated
financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended January 31, 2017.
The Company’s unaudited
condensed consolidated financial statements have been prepared using the accrual method of accounting in accordance with US GAAP.
The results of operations for
the three month period ended April 30, 2017 are not necessarily indicative of the results to be expected for the full year.
In this Form 10-Q, (a) “FY”
means fiscal year; thus, for example, FY18 refers to the fiscal year ending January 31, 2018, (b) “Q” refers to quarter;
thus, for example, Q1 FY18 refers to the first quarter of the fiscal year ending January 31, 2018, (c) “Balance Sheet”
refers to the unaudited condensed consolidated balance sheet and (d) “Statement of Operations" refers to the unaudited
condensed consolidated statement of operations.
|
3.
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
The accompanying unaudited condensed
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates and assumptions
The preparation of unaudited
condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet
date, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
It is reasonably possible that events could occur during the upcoming year that could change such estimates.
Accounts Receivable, net
Trade accounts receivable are
stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The Company recognizes losses when information available
indicates that it is probable that a receivable has been impaired based on criteria noted above at the date of the financial statements,
and the amount of the loss can be reasonably estimated. Management considers the following factors when determining the collectability
of specific customer accounts: customer creditworthiness, past transaction history with the customers, current economic industry
trends and changes in customer payment terms. Past due balances over 90 days and other less creditworthy accounts are reviewed
individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting
their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides
for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding
after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit
to accounts receivable.
Inventories, net
Inventories include freight-in,
materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or net realizable value.
Provision is made for slow-moving, obsolete or unusable inventory.
Goodwill
Goodwill represents the future
economic benefits arising from other assets acquired in a business combination that are not individually identified and separately
recognized. Goodwill is evaluated for impairment at least annually; however, this evaluation may be performed more frequently when
events or changes in circumstances indicate the carrying amount may not be recoverable. Factors that the Company considers important
that could identify a potential impairment include: significant changes in the overall business strategy and significant negative
industry or economic trends. The Company measures any potential impairment on a projected discounted cash flow method. Estimating
future cash flows requires the Company’s management to make projections that can differ materially from actual results. As
of April 30, 2017 and January 31, 2017, no impairment was recorded.
Impairment of Long-Lived Assets
The Company evaluates the carrying
value of long-lived assets to be held and used when events or changes in circumstances indicate the carrying value may not be recoverable.
The Company measures any potential impairment on a projected undiscounted cash flow method. Estimating future cash flows requires
the Company’s management to make projections that can differ materially from actual results. The carrying value of a long-lived
asset is considered impaired when the total projected undiscounted cash flows from the asset is 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.
As of April 30, 2017 and January 31, 2017, no impairment was recorded.
Revenue Recognition
The Company derives its sales
primarily from its limited use/disposable protective clothing and secondarily from its sales of high-end chemical protective suits,
firefighting and heat protective apparel, gloves and arm guards and reusable woven garments. Sales are recognized when goods are
shipped, at which time title and the risk of loss pass to the customer. Sales are reduced for sales returns and allowances. Payment
terms are generally net 30 days for United States sales and net 90 days for international sales.
Income Taxes
The Company is required to estimate
its income taxes in each of the jurisdictions in which it operates as part of preparing the unaudited condensed consolidated financial
statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing
treatments for tax and financial accounting purposes. These differences, together with net operating loss carryforwards and tax
credits, are recorded as deferred tax assets or liabilities on the Company’s unaudited condensed consolidated balance sheet.
A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. A valuation
allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event
the Company determines that it may not be able to realize all or part of its deferred tax asset in the future, or that new estimates
indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged
or credited to income in the period of such determination.
The Company recognizes tax positions
that meet a “more likely than not” minimum recognition threshold. If necessary, the Company recognizes interest and
penalties associated with tax matters as part of the income tax provision and would include accrued interest and penalties with
the related tax liability in the unaudited condensed consolidated balance sheets.
Foreign Operations and Foreign
Currency Translation
The Company maintains manufacturing
operations in Mexico, Argentina, India, and the People’s Republic of China and can access independent contractors in Mexico,
Argentina and China. It also maintains sales and distribution entities located in India, Canada, the U.K., Chile, China, Argentina,
Russia, Kazakhstan and Mexico. The Company is vulnerable to currency risks in these countries. The functional currency for the
United Kingdom subsidiary is the Euro; the trading company in China, the RMB; the Canadian Real Estate subsidiary, the Canadian
dollar; and the Russian operation, the Russian Ruble and Kazakhstan Tenge. All other operations have the US dollar as its functional
currency.
Pursuant to US GAAP, assets and
liabilities of the Company’s foreign operations with functional currencies, other than the US dollar, are translated at the
exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during
the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’
equity. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement
of cash flows will not necessarily agree with changes in the corresponding balances on the unaudited condensed consolidated balance
sheet. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other
than the functional currency are included in the results of operations as incurred.
Fair Value of Financial Instruments
US GAAP defines fair value, provides
guidance for measuring fair value and requires certain disclosures utilizing a fair value hierarchy which is categorized into three
levels based on the inputs to the valuation techniques used to measure fair value.
The following is a brief description
of those three levels:
|
Level 1:
|
Observable inputs such as quoted prices (unadjusted)
in active markets for identical assets or liabilities.
|
|
Level 2:
|
Inputs other than quoted prices that are observable
for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active
markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
Level 3:
|
Unobservable inputs that reflect management’s
own assumptions.
|
Foreign currency forward and
hedge contracts are recorded in the unaudited condensed consolidated balance sheets at their fair value as of the balance sheet
dates based on current market rates as further discussed in Note 10.
The financial instruments of
the Company classified as current assets or liabilities, including cash and cash equivalents, accounts receivable, short-term
borrowings, borrowings under the revolving credit facility, accounts payable and accrued expenses, are recorded at carrying value,
which approximates fair value based on the short-term nature of these instruments.
The Company believes that the fair values of
its long-term debt approximates its carrying value based on the effective interest rate compared to the current market rate available
to the Company.
Earnings Per Share
Basic earnings per share are
based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings
per share are based on the weighted average number of common shares and common stock equivalents. The diluted earnings per share
calculation takes into account unvested restricted shares and the shares that may be issued upon exercise of stock options, reduced
by shares that may be repurchased with the funds received from the exercise, based on the average price during the period.
Reclassifications
Certain reclassifications have
been made to the prior period’s unaudited condensed consolidated financial statements to conform to the current period presentation.
Recent Accounting Pronouncements
The Company considers the applicability
and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that
are issued.
New Accounting Pronouncements
Recently Adopted
In July 2015, the Financial Accounting
Standards Board (“FASB”) issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.”
This update requires an entity that determines the cost of inventory by methods other than last-in, first-out and the retail inventory
method to measure inventory at the lower of cost and net realizable value. The Company adopted this guidance in the first quarter
of FY18 using a prospective application. The adoption of this guidance did not have a material impact to the unaudited condensed
consolidated financial statements and related disclosures.
In March 2016, the FASB issued
ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”
This update addresses several aspects of the accounting for share-based compensation transactions including: (a) income tax
consequences when awards vest or are settled, (b) classification of awards as either equity or liabilities, (c) a policy
election to account for forfeitures as they occur rather than on an estimated basis and (d) classification of excess tax impacts
on the statement of cash flows. The Company adopted this guidance in the first quarter of FY18, which did not have a material impact
to the unaudited condensed consolidated financial statements and related disclosures. The amendments requiring recognition of excess
tax benefits and tax deficiencies in the income statement will be applied prospectively. The inclusion of excess tax benefits and
deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount
of excess tax benefits or deficiencies from share-based compensation awards are dependent on our stock price at the date the awards
are exercised or settled. The Company does not expect the impact to be material to the consolidated results of operations; however,
such determination is subject to change based on facts and circumstances at the time when awards vest or settle. The Company accounts
for forfeitures of share-based awards when they occur. The Company will apply the amendments related to the presentation of excess
tax benefits on the consolidated statement of cash flows using a retrospective transition method, and as a result, excess tax benefits
related to share-based awards which had been previously classified as cash flows from financing activities will be reclassified
as cash flows from operating activities.
New Accounting Pronouncements
Not Yet Adopted
In May 2014, the FASB
issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU
2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised
goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in US GAAP when it
becomes effective and permits the use of either the retrospective or cumulative effect transition method. The guidance also
requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from
customer contracts. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date” (“ASU
2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in ASU
2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods
within those periods), which means it will be effective for the Company’s fiscal year beginning February 1, 2018.
In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue versus
Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations
in the new revenue recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance
Obligations and Licensing” (“ASU 2016-10”), which reduces the complexity when applying the guidance for
identifying performance obligations and improves the operability and understandability of the license implementation
guidance. In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients”
(“ASU 2016-12”), which amends the guidance on transition, collectability, noncash consideration and the
presentation of sales and other similar taxes. In December 2016, the FASB further issued ASU 2016-20, “Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”), which
makes minor corrections or minor improvements to the Codification that are not expected to have a significant effect on
current accounting practice or create a significant administrative cost to most entities. The amendments are intended to
address implementation and provide additional practical expedients to reduce the cost and complexity of applying the new
revenue standard. These amendments have the same effective date as the new revenue standard. The Company plans to adopt Topic
606 in the first quarter of its fiscal 2019 using the retrospective transition method, and is currently evaluating the impact
of its pending adoption of Topic 606 will have on its consolidated financial statements. While no significant
impact is expected upon adoption of the new guidance, the Company will not be able to make that
determination until the time of adoption based upon outstanding contracts at that time.
In February 2016, the FASB issued
ASU No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02
requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in
this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early
application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or
entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently
evaluating the impact of this new standard on its consolidated financial statements but has not determined the effects that the
adoption of the pronouncement may have on its unaudited condensed consolidated financial statements and related disclosures.
In February 2017, the FASB issued
ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets” to clarify the
scope of Subtopic 610-20 and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May
2014 as a part of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), provides guidance for recognizing gains and
losses from the transfer of nonfinancial assets in contracts with noncustomers. For public entities, the amendments are effective
for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2018,
and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company does not expect that
adoption of this guidance will have a material impact on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU
2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendment amends
the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms
or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718.
For all entities, the ASU is effective for annual reporting periods, including interim periods within those annual reporting periods,
beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company does not
expect that the adoption of this guidance will have a material impact on its consolidated financial statements and related disclosures.
Inventories, net consist of the following (in $000s):
|
|
April 30, 2017
|
|
|
January 31, 2017
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
12,825
|
|
|
$
|
14,312
|
|
Work-in-process
|
|
|
1,000
|
|
|
|
1,233
|
|
Finished goods
|
|
|
18,263
|
|
|
|
19,990
|
|
|
|
$
|
32,088
|
|
|
$
|
35,535
|
|
Revolving Credit Facility
On June 28, 2013, as amended
on March 31, 2015 and June 3, 2015, Lakeland Industries, Inc. and its wholly owned Canadian subsidiary, Lakeland Protective Wear
Inc. (collectively the “Borrowers”), entered into a Loan and Security Agreement (the “Senior Loan Agreement”)
with AloStar Business Credit, a division of AloStar Bank of Commerce (the “Senior Lender”). The Senior Loan Agreement
provided the Borrowers with a $15 million revolving line of credit (the “Senior Credit Facility”), at a variable interest
rate based on LIBOR, with a first priority lien on substantially all of the United States and Canada assets of the Company, except
for its Mexican plant and the Canadian warehouse. After these amendments the maturity date of the Senior Credit Facility
was extended to June 28, 2017 and the minimum interest rate floor became 4.25% per annum. On May 10, 2017, the Senior Loan Agreement
was terminated, and the existing balance due was repaid with the proceeds from a new loan agreement with SunTrust Bank. See Note
13.
Borrowings in UK
On December 31, 2014, the Company
and Lakeland Industries Europe, Ltd, (“Lakeland UK”), a wholly owned subsidiary of the Company, amended the terms of
its existing line of credit facility with Hongkong and Shanghai Banking Corporation (“HSBC”) to provide for (i) a one-year extension
of the maturity date of the existing financing facility to December 19, 2016, (ii) an increase in the facility limit from £1,250,000
(approximately USD $1.9 million, based on exchange rates at time of closing) to £1,500,000 (approximately USD $2.3 million,
based on exchange rates at time of closing), and (iii) a decrease in the annual interest rate margin from 3.46% to 3.0%. In addition,
pursuant to a letter agreement dated December 5, 2014, the Company agreed that £400,000 (approximately USD $0.6 million,
based on exchange rates at time of closing) of the note payable by the UK subsidiary to the Company shall be subordinated in priority
of payment to the subsidiary’s obligations to HSBC under the financing facility. The balance under this loan outstanding
at April 30, 2017 and January 31, 2017 was USD $0.0 million and USD $0.1 million, respectively. On December 31, 2016, Lakeland
UK entered into an extension of the maturity date of its existing financing facility with HSBC Invoice Finance (UK) Ltd. to December
19, 2017. Other than the extension of the maturity date and a small reduction of the service charge from 0.9% to 0.85%, all other
terms of the facility remain the same.
Canada
Loans
In September
2013, the Company refinanced its loan with the Development Bank of Canada (“BDC”) for a principal amount of approximately
$1.1 million in both Canadian dollars and USD (based on exchange rates at time of closing). Such loan is for a term of 240 months
at an interest rate of 6.45% per annum with fixed monthly payments of USD $6,048 (CAD $8,169) including principal and interest.
It is collateralized by a mortgage on the Company's warehouse in Brantford, Ontario. The amount outstanding at April 30, 2017 is
CAD $993,997 which is included as USD $678,000 in long term borrowings on the accompanying unaudited condensed consolidated balance
sheet, net of current maturities of USD $50,000. The amount outstanding at January 31, 2017 was USD $691,000 (CAD $1.0 million)
in long term borrowings, net of current maturities of USD $50,000.
Argentina Loan
In April 2015, Lakeland Argentina
S.R.L. (“Lakeland Argentina”), the Company’s Argentina subsidiary was granted a $300,000 line of credit denominated
in Argentine pesos, pursuant to a standby letter of credit granted by the parent company. The line of credit was paid in full during
the course of normal operations and prior to April 30, 2017, except for $9,250 noted below.
On July 1, 2016, Lakeland Argentina
and Banco de la Nación Argentina (“BNA”) entered into an agreement for Lakeland Argentina to obtain a loan in
the amount of ARS 569,000 (approximately USD $38,000, based on exchange rates at time of closing); such loan is for a term of one
year at an interest rate of 27.06% per annum. The amount outstanding at April 30, 2017 is ARS 142,250 (approximately USD $9,250)
which is included as short-term borrowings on the unaudited condensed consolidated balance sheet.
Below is a table to summarize
all of the debt amounts pursuant to the various banking arrangements described above (in 000’s):
|
|
Short-Term
|
|
|
Long-term
|
|
|
Current Maturity of
Long-term
|
|
|
Revolving Credit
Facility
|
|
|
|
4/30/2017
|
|
|
1/31/2017
|
|
|
4/30/2017
|
|
|
1/31/2017
|
|
|
4/30/2017
|
|
|
1/31/2017
|
|
|
4/30/2017
|
|
|
1/31/2017
|
|
Argentina
|
|
$
|
9
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Canada
|
|
|
—
|
|
|
|
—
|
|
|
|
678
|
|
|
|
716
|
|
|
|
50
|
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
UK
|
|
|
—
|
|
|
|
126
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
USA
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,363
|
|
|
|
4,865
|
|
TOTALS
|
|
$
|
9
|
|
|
$
|
153
|
|
|
$
|
678
|
|
|
$
|
716
|
|
|
$
|
50
|
|
|
$
|
50
|
|
|
$
|
2,363
|
|
|
$
|
4,865
|
|
Five-year Debt Payout Schedule
This schedule reflects the liabilities
as of April 30, 2017, and does not reflect any subsequent event (in 000’s):
|
|
Total
|
|
|
1 Year
or less
|
|
|
2 Years
|
|
|
3 Years
|
|
|
4 Years
|
|
|
5 Years
|
|
|
After 5
Years
|
|
Revolving credit facility
|
|
$
|
2,363
|
|
|
$
|
2,363
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Borrowings in Canada
|
|
|
728
|
|
|
|
50
|
|
|
|
29
|
|
|
|
31
|
|
|
|
33
|
|
|
|
35
|
|
|
|
550
|
|
Borrowings in UK
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Borrowings in Argentina
|
|
|
9
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
3,100
|
|
|
$
|
2,422
|
|
|
$
|
29
|
|
|
$
|
31
|
|
|
$
|
33
|
|
|
$
|
35
|
|
|
$
|
550
|
|
Credit
Risk
Financial instruments, which
potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents, and trade receivables.
Concentration of credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising
the Company’s customer base and their dispersion across geographic areas principally within the United States. The Company
routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure
is limited. The Company does not require customers to post collateral.
|
|
The Company’s foreign financial depositories are Bank of America; China Construction Bank;
Bank of China; China Industrial and Commercial Bank; HSBC; Rural Credit Cooperative of Shandong; Postal Savings Bank of China;
Punjab National Bank; HSBC in India, Argentina and UK; Raymond James in Argentina; TD Canada Trust; Banco Itaú S.A., Banco
Credito Inversione in Chile; Banco Mercantil Del Norte SA in Mexico; ZAO KB Citibank Moscow in Russia, and JSC Bank Centercredit
in Kazakhstan. The Company monitors its financial depositories by their credit rating which varies by country. In addition, cash
balances in banks in the United States of America are insured by the Federal Deposit Insurance Corporation subject to certain limitations.
There is approximately $0.8 and 1.4 million total included in the U.S. bank accounts and approximately $11.0 and $9.0 million total
in foreign bank accounts as of April 30, 2017 and January 31, 2017, respectively.
|
Major
Customer
No customer accounted for more
than 10% of net sales during the three month periods ended April 30, 2017 and 2016.
Major Supplier
No supplier accounted for more than 10% of net purchases during
the three month periods ended April 30, 2017 and 2016.
|
7.
|
Employee Stock Compensation and Stock Repurchase
Program
|
The 2012
and 2015 Plans
At the Annual Meeting of Stockholders
held on July 8, 2015, the Company’s stockholders approved the Lakeland Industries, Inc. 2015 Stock Plan (the “2015
Plan”). The executive officers and all other employees and directors of the Company and its subsidiaries are eligible to
participate in the 2015 Plan. The 2015 Plan is currently administered by the compensation committee of the Company’s Board
of Directors (“Committee”), except that with respect to all non-employee director awards, the Committee shall be deemed
to include the full Board. The 2015 Plan authorizes the issuance of awards of restricted stock, restricted stock units, performance
shares, performance units and other stock-based awards. The 2015 Plan also permits the grant of awards that qualify for “performance-based
compensation” within the meaning of Section 162(m) of the U.S. Internal Revenue Code. The aggregate number of shares of the
Company’s common stock that may be issued under the 2015 Plan may not exceed 100,000 shares. Awards covering no more than
20,000 shares of common stock may be awarded to any plan participant in any one calendar year. Under the 2015 Plan, as of April
30, 2017, the Company granted awards for up to an aggregate of 99,270 restricted shares assuming maximum award levels are achieved.
The 2015 Plan, which terminates
in July 2017, is the successor to the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The Company’s
2012 Plan authorized the issuance of up to a maximum of 310,000 shares of the Company’s common stock to employees and directors
of the Company and its subsidiaries in the form of restricted stock, restricted stock units, performance shares, performance units
and other share-based awards. Under the 2012 Plan, as of April 30, 2017, the Company issued 293,887 fully vested shares of common
stock; there are no outstanding shares to vest according to the terms of the 2012 Plan.
Under the 2012 Plan and the 2015
Plan, the Company generally awards eligible employees and directors with either performance-based or time-based restricted shares.
Performance-based restricted shares are awarded at either baseline (target), maximum or zero amounts. The number of restricted
shares subject to any award is not tied to a formula or comparable company target ranges, but rather is determined at the discretion
of the Committee at the end of the applicable performance period, which is two years under the 2015 Plan and had been three years
under the 2012 Plan. The Company recognizes expense related to performance-based restricted share awards over the requisite performance
period using the straight-line attribution method based on the most probable outcome (baseline, maximum or zero) at the end of
the performance period and the price of the Company’s common stock price at the date of grant.
In addition to the performance-based
awards, the Company also grants time-based vesting awards which vest either two or three years after date of issuance, subject
to continuous employment and certain other conditions.
As of April 30, 2017, the Company
had no unrecognized stock-based compensation expense related to share-based stock awards pursuant to the 2012 Plan and had $338,958
of unrecognized stock-based compensation expense pursuant to the 2015 Plan, before income taxes, based on the maximum performance
award level. Such unrecognized stock-based compensation expense related to restricted stock awards totaled $63,329 for the 2015
Plan at the baseline performance level. The cost of these non-vested awards is expected to be recognized over a weighted-average
period of two years for the 2015 Plan.
The Company recognized total stock-based compensation costs of $98,848 and $130,443 for
the three months ended April 30, 2017 and 2016, respectively, of which $206 and $3,795 result from the 2012 Plan, and $98,642
and $126,648 result from the 2015 Plan. These amounts are reflected in operating expenses. The total income tax benefit recognized
for stock-based compensation arrangements was $35,585 and $46,960 for the three months ended April 30, 2017 and 2016, respectively.
Shares issued under 2015
and 2012 Stock Plans
|
|
Outstanding
Unvested Grants
at Maximum at
Beginning of
FY18
|
|
|
Granted during
FY18 through
April 30, 2017
|
|
|
Becoming
Vested during
FY18 through
April 30, 2017
|
|
|
Forfeited
during
FY18 through
April 30, 2017
|
|
|
Outstanding
Unvested
Grants at
Maximum at
End of
April 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants – employees
|
|
|
67,619
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
67,619
|
|
Retainer in stock - directors
|
|
|
32,372
|
|
|
|
—
|
|
|
|
721
|
|
|
|
—
|
|
|
|
31,651
|
|
Total restricted stock
|
|
|
99,991
|
|
|
|
—
|
|
|
|
721
|
|
|
|
—
|
|
|
|
99,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$
|
10.18
|
|
|
|
—
|
|
|
$
|
9.22
|
|
|
|
—
|
|
|
$
|
10.19
|
|
Other Compensation Plans/Programs
The Company previously awarded
stock-based options to non-employee directors under its Non-employee Directors’ Option Plan (the “Directors’
Plan”) which expired on December 31, 2012. All stock option awards granted under the Directors’ Plan were fully vested
at April 30, 2017. During the three months ended April 30, 2017 there have been no forfeitures or exercises, and there were no
options outstanding.
Pursuant to the Company’s
restrictive stock program, all directors are eligible to elect to receive any director fees in shares of restricted stock in lieu
of cash. Such restricted shares are subject to a two-year vesting period. The valuation is based on the stock price at the grant
date and is amortized to expense over the two-year period, which approximates the performance period. Since the director is giving
up cash for unvested shares, the amount of shares awarded is 133% of the cash amount based on the grant date stock price. The unrecognized
stock-based compensation expense related to these restricted stock awards totaled $35,313 as of April 30, 2017. The cost of these
non-vested awards is expected to be recognized over a weighted-average period of two years.
Stock Repurchase Program
On July 19, 2016, the Company’s
board of directors approved a stock repurchase program under which the Company may repurchase up to $2,500,000 of its outstanding
common stock. The Company has not repurchased any stock under this program as of the date of this filing.
Warrants
In October 2014, the Company
issued a five-year warrant that is immediately exercisable to purchase up to 55,500 shares of the Company’s common stock
at an exercise price of $11.00 per share. As of April 30, 2017 and January 31, 2017, the warrant to purchase up to 55,500 shares
remains outstanding.
Income Tax Audits
The Company is subject to US
federal income tax, as well as income tax in multiple US state and local jurisdictions and a number of foreign jurisdictions. Returns
for the year since FY2014 are still open based on statutes of limitation only.
Chinese tax authorities have
performed limited reviews on all Chinese subsidiaries as of tax years 2008 through 2015 with no significant issues noted and we
believe our tax positions are reasonably stated as of April 30, 2017. Weifang Meiyang Products Co., Ltd. (“Meiyang”),
one of our Chinese operations, was changed to a trading company from a manufacturing company in Q1 FY16 and all direct workers
and equipment were transferred from Meiyang to Weifang Lakeland Safety Products Co., Ltd., (“WF”), another of our Chinese
operation thereby reducing our tax exposure.
Lakeland Protective Wear, Inc.,
our Canadian subsidiary, is subject to Canadian federal income tax, as well as income tax in the Province of Ontario. Income tax
return for the 2013 fiscal year and subsequent years are still within the normal reassessment period and open to examination by
tax authorities.
In connection with the exit from
Brazil (see Note 11), the Company claimed a worthless stock deduction which generated a tax benefit of approximately USD $9.5 million,
net of a USD $2.2 million valuation allowance. While the Company and its tax advisors believe that this deduction is valid, there
can be no assurance that the IRS will not challenge it and, if challenged, there is no assurance that the Company will prevail.
Except in Canada, and as set
forth in the next paragraph, it is our practice and intention to reinvest the earnings of our non-US subsidiaries in their operations.
As of April 30, 2017, the Company had not made a provision for US or additional foreign withholding taxes on approximately $25.4
million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are
essentially permanent in duration ($24.7 million at January 31, 2017). Generally, such amounts become subject to US taxation upon
remittance of dividends and under certain other circumstances. If these earnings were repatriated to the US, the deferred tax liability
associated with these temporary differences would be approximately $3.4 million at April 30, 2017.
The Company’s Board of
Directors has instituted a plan subject to declaration and approval each year to elect to pay annual dividends to the Company from
a portion of Weifang’s future profits, a portion of Meiyang’s future profits and a portion of the UK’s future
profits which started in FY15 and from a portion of Beijing’s future profits starting in FY18. All other retained earnings
are expected to be reinvested indefinitely.
Change in Valuation Allowance
We record net deferred tax assets
to the extent we believe these assets will more likely than not to be realized. The valuation allowance was $2.2 million at April
30, 2017 and January 31, 2017.
Income Tax Expense
Income tax expenses consist of
federal, state and foreign income taxes. The statutory rate is the US rate. Reconciling items to the effective rate are foreign
dividend income, Argentina income, and other permanent tax differences.
The following table sets forth
the computation of basic and diluted earnings per share at April 30, 2017 and 2016, as follows:
|
|
Three Months Ended
|
|
|
|
April 30,
(in $000s except share
information)
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,711
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
(weighted-average shares which reflect 356,441 shares in the treasury)
|
|
|
7,263,774
|
|
|
|
7,254,162
|
|
Effect of dilutive securities from restricted stock plan and from dilutive effect of stock options
|
|
|
89,886
|
|
|
|
70,421
|
|
Denominator for diluted earnings per share (adjusted weighted average shares)
|
|
|
7,353,660
|
|
|
|
7,324,583
|
|
Basic earnings per share
|
|
$
|
0.24
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.23
|
|
|
$
|
0.00
|
|
|
10.
|
Derivative Instruments and Foreign Currency Exposure
|
The Company is exposed to foreign
currency risk. Management has commenced a derivative instrument program to partially offset this risk by purchasing forward contracts
to sell the Canadian Dollar and the Euro other than the cash flow hedge discussed below. Such contracts are largely timed to expire
with the last day of the fiscal quarter, with a new contract purchased on the first day of the following quarter, to match the
operating cycle of the Company. We designated the forward contracts as derivatives but not as hedging instruments, with loss and
gain recognized in current earnings.
The Company accounts for its
foreign exchange derivative instruments by recognizing all derivatives as either assets or liabilities at fair value, which may
result in additional volatility in current period earnings or other comprehensive income, depending whether the instrument was
designated as a cash flow hedge, as a result of recording recognized and unrecognized gains and losses from changes in the fair
value of derivative instruments.
We have two types of derivatives
to manage the risk of foreign currency fluctuations.
From time to time, we enter into
forward contracts with financial institutions to manage our currency exposure related to net assets and liabilities denominated
in foreign currencies. Those forward contract derivatives, not designated as hedging instruments, are generally settled quarterly.
Gains and losses on those forward contracts are included in current earnings. There were no outstanding forward contracts at April
30, 2017 or January 31, 2017.
We may also enter into cash flow
hedge contracts with financial institutions to manage our currency exposure on future cash payments denominated in foreign currencies.
The effective portion of gain or loss on cash flow hedge is reported as a component of accumulated other comprehensive loss. The
notional amount of these contracts was $2.9 million and $1.5 million at April 30, 2017 and January 31, 2017, respectively. The
corresponding unrealized income or loss is recorded in the unaudited condensed consolidated statements of comprehensive income.
The corresponding asset (liability) amounted to approximately $15,879 and $(25,826) at April 30, 2017 and January 31, 2017, respectively.
11. Contingencies
Litigation:
The Company is involved in various
litigation proceedings arising during the normal course of business which, in the opinion of the management of the Company, will
not have a material effect on the Company’s financial position, results of operations or cash flows; however, there can be
no assurance as to the ultimate outcome of these matters. As of April 30, 2017, to the best of the Company’s knowledge, there
were no outstanding claims or litigation.
The Company’s
exit from Brazil:
Transfer of Shares Agreement
On July 31, 2015 (the “Closing
Date”), Lakeland and Lake Brasil Industria E Comercio de Roupas E Equipamentos de Protecao Individual LTDA (“Lakeland
Brazil”), completed a conditional closing of a Shares Transfer Agreement (the “Shares Transfer Agreement”) with
Zap Comércio de Brindes Corporativos Ltda (“Transferee”), a company owned by an existing Lakeland Brazil manager,
entered into on June 19, 2015. Pursuant to the Shares Transfer Agreement, the Transferee has acquired all of the shares of Lakeland
Brazil owned by the Company.
The Company understands that
under the laws of Brazil, a concept of fraudulent bankruptcy exists, which may hold a parent company liable for the liabilities
of its Brazilian subsidiary in the event some level of fraud or misconduct is shown during the period that the parent company owned
the subsidiary. While the Company believes that there has been no such fraud or misconduct relating to the proposed transfer of
stock of Lakeland Brazil and the transactions contemplated by the Shares Transfer Agreement, as evidenced by the Company’s
funding support for continuing operations of Lakeland Brazil, there can be no assurance that the courts of Brazil will not make
such a finding nonetheless. The risk of exposure to the Company continues to diminish as the Transferee continues to operate Lakeland
Brazil, as the risk of a finding of fraudulent bankruptcy lessens and pre-sale liabilities are paid off. Should the Transferee
operate Lakeland Brazil for a period of two years, the Company believes the risk of a finding of fraudulent bankruptcy is eliminated.
VAT Tax Issues in Brazil
Value Added Tax (“VAT”)
in Brazil is charged at the state level. Lakeland Brazil has three pending VAT claims totaling R$1.3 million (USD $0.5 million)
excluding interest, penalties and fees of R$2.7 million (USD $0.9 million), which our attorney informed us were likely to be successfully
defended based on state auditor misunderstanding. Any liabilities hereunder are the responsibility of Lakeland Brazil which,
as described above, is no longer owned by the Company.
Labor Claims in Brazil
The Company may continue to be
exposed to certain liabilities arising in connection with lawsuits pending in the labor courts in Brazil in which plaintiffs were
seeking, as at July 31, 2015, a total of nearly USD $8,000,000 in damages from the Company’s then Brazilian subsidiary (Lakeland
Brazil). The Company believes many of these labor court claims are without merit and the amount of damages being sought is significantly
higher than any damages which may have been incurred. Pursuant to the Shares Transfer Agreement, the Company is required to fully
fund amounts owed by Lakeland Brazil in connection with the then existing labor claims and to pay amounts potentially owed for
future labor claims up to an aggregate amount of $375,000 plus 60% of the excess of such amount until the earlier of (i) the date
all labor claims against Lakeland Brazil deriving from events prior to the sale are settled, (ii) by our mutual agreement with
Lakeland Brazil or (iii) on the two (2) year anniversary of closing of the sale. With respect to continuing claims, $167,000 is
being sought, of which management estimates the aggregate liability will be less than that amount.
Domestic and international sales
from continuing operations are as follows in millions of dollars:
|
|
Three Months Ended April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
Domestic
|
|
$
|
12.70
|
|
|
|
55.31
|
%
|
|
$
|
12.19
|
|
|
|
59.86
|
%
|
International
|
|
|
10.26
|
|
|
|
44.69
|
%
|
|
|
8.18
|
|
|
|
40.14
|
%
|
Total
|
|
$
|
22.96
|
|
|
|
100.00
|
%
|
|
$
|
20.37
|
|
|
|
100.00
|
%
|
We manage our operations by evaluating
each of our geographic locations. Our US operations include a facility in Alabama (primarily the distribution to customers of the
bulk of our products and the light manufacturing of our chemical, wovens, reflective, and fire products). The Company also maintains
one manufacturing company in China (primarily disposable and chemical suit production), a manufacturing facility in Mexico (primarily
disposable, reflective, fire and chemical suit production) and a small manufacturing facility in India. Our China facilities produce
the majority of the Company’s products and China generates a significant portion of the Company’s international revenues.
We evaluate the performance of these entities based on operating profit, which is defined as income before income taxes, interest
expense and other income and expenses. We have sales forces in the USA, Canada, Mexico, Europe, Latin America, India, Russia, Kazakhstan
and China, which sell and distribute products shipped from the United States, Mexico, India or China. The table below represents
information about reported segments for the periods noted therein:
|
|
Three Months Ended
April 30,
(in millions of dollars)
|
|
|
|
2017
|
|
|
2016
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
13.40
|
|
|
$
|
12.78
|
|
Other foreign
|
|
|
4.05
|
|
|
|
3.19
|
|
Europe (UK)
|
|
|
2.13
|
|
|
|
2.39
|
|
Mexico
|
|
|
0.92
|
|
|
|
0.76
|
|
China
|
|
|
10.52
|
|
|
|
8.41
|
|
Corporate
|
|
|
0.42
|
|
|
|
0.47
|
|
Less intersegment sales
|
|
|
(8.48
|
)
|
|
|
(7.63
|
)
|
Consolidated sales
|
|
$
|
22.96
|
|
|
$
|
20.37
|
|
External Sales:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
12.70
|
|
|
$
|
12.19
|
|
Other foreign
|
|
|
3.70
|
|
|
|
2.87
|
|
Europe (UK)
|
|
|
2.09
|
|
|
|
2.39
|
|
Mexico
|
|
|
0.57
|
|
|
|
0.37
|
|
China
|
|
|
3.90
|
|
|
|
2.55
|
|
Consolidated external sales
|
|
$
|
22.96
|
|
|
$
|
20.37
|
|
Intersegment Sales:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
0.70
|
|
|
$
|
0.59
|
|
Other foreign
|
|
|
0.35
|
|
|
|
0.32
|
|
Europe (UK)
|
|
|
0.04
|
|
|
|
—
|
|
Mexico
|
|
|
0.35
|
|
|
|
0.39
|
|
China
|
|
|
6.62
|
|
|
|
5.86
|
|
Corporate
|
|
|
0.42
|
|
|
|
0.47
|
|
Consolidated intersegment sales
|
|
$
|
8.48
|
|
|
$
|
7.63
|
|
|
|
Three Months Ended
April 30,
(in millions of dollars)
|
|
|
|
2017
|
|
|
2016
|
|
Operating Profit (Loss):
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
2.26
|
|
|
$
|
1.57
|
|
Other foreign
|
|
|
0.43
|
|
|
|
0.30
|
|
Europe (UK)
|
|
|
0.07
|
|
|
|
0.10
|
|
Mexico
|
|
|
0.03
|
|
|
|
(0.01
|
)
|
China
|
|
|
0.97
|
|
|
|
0.47
|
|
Corporate
|
|
|
(1.38
|
)
|
|
|
(2.33
|
)
|
Less intersegment profit (loss)
|
|
|
0.09
|
|
|
|
0.07
|
|
Consolidated operating profit
|
|
$
|
2.47
|
|
|
$
|
0.17
|
|
Depreciation and Amortization Expense:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
Other foreign
|
|
|
0.04
|
|
|
|
0.02
|
|
Europe (UK)
|
|
|
—
|
|
|
|
—
|
|
Mexico
|
|
|
0.03
|
|
|
|
0.03
|
|
China
|
|
|
0.06
|
|
|
|
0.09
|
|
Corporate
|
|
|
0.04
|
|
|
|
0.15
|
|
Less intersegment
|
|
|
(0.01
|
)
|
|
|
(0.04
|
)
|
Consolidated depreciation & amortization expense
|
|
$
|
0.19
|
|
|
$
|
0.29
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
USA (shown in Corporate)
|
|
$
|
—
|
|
|
$
|
—
|
|
Other foreign
|
|
|
0.02
|
|
|
|
0.04
|
|
Europe (UK)
|
|
|
—
|
|
|
|
—
|
|
Mexico
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
—
|
|
|
|
0.04
|
|
Corporate
|
|
|
0.06
|
|
|
|
0.12
|
|
Less intersegment
|
|
|
—
|
|
|
|
—
|
|
Consolidated interest expense
|
|
$
|
0.08
|
|
|
$
|
0.20
|
|
Income Tax Expense (Benefits):
|
|
|
|
|
|
|
|
|
USA (shown in Corporate)
|
|
$
|
—
|
|
|
$
|
—
|
|
Other foreign
|
|
|
0.05
|
|
|
|
0.03
|
|
Europe (UK)
|
|
|
0.01
|
|
|
|
0.01
|
|
Mexico
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
0.29
|
|
|
|
0.09
|
|
Corporate
|
|
|
0.32
|
|
|
|
(0.17
|
)
|
Less intersegment
|
|
|
0.02
|
|
|
|
0.02
|
|
Consolidated income tax expense
|
|
$
|
0.69
|
|
|
$
|
(0.02
|
)
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
—
|
|
|
$
|
—
|
|
Other foreign
|
|
|
—
|
|
|
|
—
|
|
Europe (UK)
|
|
|
—
|
|
|
|
—
|
|
Mexico
|
|
|
0.01
|
|
|
|
—
|
|
China
|
|
|
0.02
|
|
|
|
0.02
|
|
India
|
|
|
—
|
|
|
|
0.01
|
|
Corporate
|
|
|
0.11
|
|
|
|
—
|
|
Consolidated capital expenditures
|
|
$
|
0.14
|
|
|
$
|
0.03
|
|
|
|
April 30, 2017
(in millions of dollars)
|
|
|
January 31, 2017
(in millions of dollars)
|
|
Total Assets:*
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
58.16
|
|
|
$
|
56.34
|
|
Other foreign
|
|
|
19.08
|
|
|
|
18.16
|
|
Europe (UK)
|
|
|
4.13
|
|
|
|
3.61
|
|
Mexico
|
|
|
4.03
|
|
|
|
3.99
|
|
China
|
|
|
32.22
|
|
|
|
30.54
|
|
India
|
|
|
(1.35
|
)
|
|
|
(1.36
|
)
|
Corporate
|
|
|
20.78
|
|
|
|
26.00
|
|
Less intersegment
|
|
|
(53.08
|
)
|
|
|
(52.73
|
)
|
Consolidated assets
|
|
$
|
83.97
|
|
|
$
|
84.55
|
|
Total Assets Less Intersegment:*
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
27.78
|
|
|
$
|
30.94
|
|
Other foreign
|
|
|
11.22
|
|
|
|
10.17
|
|
Europe (UK)
|
|
|
4.13
|
|
|
|
3.58
|
|
Mexico
|
|
|
4.07
|
|
|
|
4.07
|
|
China
|
|
|
20.30
|
|
|
|
18.44
|
|
India
|
|
|
0.50
|
|
|
|
0.43
|
|
Corporate
|
|
|
15.97
|
|
|
|
16.92
|
|
Consolidated assets
|
|
$
|
83.97
|
|
|
$
|
84.55
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
2.06
|
|
|
$
|
2.09
|
|
Other foreign
|
|
|
1.46
|
|
|
|
1.55
|
|
Europe (UK)
|
|
|
0.03
|
|
|
|
0.03
|
|
Mexico
|
|
|
2.02
|
|
|
|
2.05
|
|
China
|
|
|
2.02
|
|
|
|
2.05
|
|
India
|
|
|
0.02
|
|
|
|
0.03
|
|
Corporate
|
|
|
0.83
|
|
|
|
0.75
|
|
Less intersegment
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
Consolidated property and equipment
|
|
$
|
8.43
|
|
|
$
|
8.53
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
0.87
|
|
|
$
|
0.87
|
|
Consolidated goodwill
|
|
$
|
0.87
|
|
|
$
|
0.87
|
|
*Negative assets reflect intersegment amounts eliminated in
consolidation
On May 10, 2017, the Company
entered into a Loan Agreement (the “Loan Agreement”) with SunTrust Bank (“Lender”). The Loan Agreement
provides the Company with a secured (i) $20 million revolving credit facility, which includes a $5 million letter of credit sub-facility,
and (ii) $1,575,000 term loan with Lender. The Company may request from time to time an increase in the revolving credit loan commitment
of up to $10 million (for a total commitment of up to $30 million). Borrowing pursuant to the revolving credit facility is subject
to a borrowing base amount calculated as (a) 85% of eligible accounts receivable, as defined, plus (b) an inventory formula amount,
as defined, minus (c) an amount equal to the greater of (i) $1,500,000 or (ii) 7.5% of the then current revolver commitment amount,
minus (d) certain reserves as determined by the Loan Agreement. The credit facility matures on May 10, 2020 (subject to earlier
termination upon the occurrence of certain events of default as set forth in the Loan Agreement). At the closing, the Company’s
existing financing facility with AloStar Bank of Commerce was fully repaid and terminated using proceeds of the revolver in the
amount of approximately $3.0 million (see Note 5). Proceeds will also be used to finance working capital and other general corporate
needs.
Borrowings under the term loan
and the revolving credit facility bear interest at an interest rate determined by reference whether the loan is a base rate loan
or Eurodollar loan, with the rate election made by the Company at the time of the borrowing or at any time the Company elects pursuant
to the terms of the Loan Agreement. The term loan is payable in equal monthly principal installments of $13,125 each, beginning
on June 1, 2017, and on the first day of each succeeding month, with a final payment of the remaining principal and interest on
May 10, 2020 (subject to earlier termination as provided in the Loan Agreement). For that portion of the term loan that consists
of Eurodollar loans, the term loan shall bear interest at the LIBOR Market Index Rate (“LIBOR”) plus 2.0% per annum,
and for that portion of the term loan that consists of base rate loans, the term loan shall bear interest at the base rate then
in effect plus 1.0% per annum. All principal and unpaid accrued interest under the revolver credit facility shall be due and payable
on the maturity date of the revolver. For that portion of the revolver loan that consists of Eurodollar loans, the revolver shall
bear interest at LIBOR plus a margin rate of 1.75% per annum for the first six months and thereafter between 1.5% and 2.0%, depending
on the Company’s “availability calculation” (as defined in the Loan Agreement) and, for that portion of the revolver
that consists of base rate loans, the revolver shall bear interest at the base rate then in effect plus a margin rate of 0.75%
per annum for the first six months and thereafter between 0.50% and 1.0%, depending on the availability calculation. As of the
closing, the Company elected all borrowings under the Loan Agreement to accrue interest at LIBOR which, as of that date, was 0.99500%.
As such, the initial rate of interest for the revolver is 2.745% per annum and the initial rate of interest for the term loan is
2.995% per annum. The Loan Agreement provides for payment of an unused line fee of between .25% and .50%, depending on the amount
by which the revolving credit loan commitment exceeds the amount of the revolving credit loans outstanding (including letters of
credit), which shall be payable monthly in arrears on the average daily unused portion of the revolver.
The Company
agreed to maintain a minimum “fixed charge coverage ratio” (as defined in the Loan Agreement) as of the end of each
fiscal quarter, commencing with the fiscal quarter ending July 31, 2017, of not less than 1.10 to 1.00 during the applicable fiscal
quarter, and agreed to certain negative covenants that are customary for credit arrangements of this type, including restrictions
on the Company’s ability to enter into mergers, acquisitions or other business combination transactions, conduct its business,
grant liens, make certain investments, incur additional indebtedness, and make stock repurchases.
In connection with the Loan Agreement,
the Company entered into a security agreement, dated May 10, 2017, with the Lender pursuant to which the Company granted to Lender
a first priority perfected security interest in substantially all real and personal property of the Company.