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” or the “Company”), 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 principal
market for the Company’s products is in the United States. No customer accounted for more than 10% of net sales during the
three month periods ending April 30, 2016 and 2015. In April 2015, the Company decided to exit operations in Brazil. See Note
17 for further description.
The condensed consolidated financial
statements included herein have been prepared by us, without audit, 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 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
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, 2016.
Our 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, 2016 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, FY17 refers to the fiscal year ending January 31, 2017, (b) “Q” refers to quarter;
thus, for example, Q1 FY17 refers to the first quarter of the fiscal year ending January 31, 2017, (c) “Balance Sheet”
refers to the condensed consolidated balance sheet and (d) “Statement of Operations" refers to the condensed consolidated
statement of operations.
|
3.
|
Principles of Consolidation
|
The accompanying condensed consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Inventories of continuing operations consist of the
following (in $000s):
|
|
April
30, 2016
|
|
|
January
31, 2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
14,694
|
|
|
$
|
15,435
|
|
Work-in-process
|
|
|
1,276
|
|
|
|
784
|
|
Finished goods
|
|
|
22,921
|
|
|
|
24,622
|
|
|
|
$
|
38,891
|
|
|
$
|
40,841
|
|
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 market. Provision
is made for slow-moving, obsolete or unusable inventory.
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 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.
The following table sets forth
the computation of basic and diluted earnings per share for “income from continuing operations” at April 30, 2016
and 2015, as follows:
|
|
Three Months Ended
|
|
|
|
April 30,
(in $000s)
|
|
|
|
2016
|
|
|
2015
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net income from
continuing operations
|
|
$
|
3
|
|
|
$
|
2,160
|
|
Net income (loss) from discontinued
operations
|
|
|
—
|
|
|
|
(931
|
)
|
Net income
|
|
$
|
3
|
|
|
$
|
1,229
|
|
Denominator
|
|
|
|
|
|
|
|
|
Denominator for basic earnings
per share
(weighted-average shares which reflect 356,441 shares in the treasury as a result of the stock repurchase program
that ended in 2011, and 0 and 566,015 weighted average common equivalents relating to the warrant issued with the FY14 subordinated
debt financing)
|
|
|
7,254,162
|
|
|
|
7,062,144
|
|
Effect
of dilutive securities from restricted stock plan and from dilutive effect of stock options
|
|
|
70,421
|
|
|
|
173,241
|
|
Denominator for diluted earnings per share (adjusted
weighted average shares)
|
|
|
7,324,583
|
|
|
|
7,235,385
|
|
Basic earnings per share from
continuing operations
|
|
$
|
0.00
|
|
|
$
|
0.31
|
|
Basic earnings per share from
discontinued operations
|
|
$
|
0.00
|
|
|
$
|
(0.14
|
)
|
Basic earnings per share
|
|
$
|
0.00
|
|
|
$
|
0.17
|
|
Diluted earnings per share from
continuing operations
|
|
$
|
0.00
|
|
|
$
|
0.30
|
|
Diluted earnings per share from
discontinued operations
|
|
$
|
0.00
|
|
|
$
|
(0.13
|
)
|
Diluted earnings per share
|
|
$
|
0.00
|
|
|
$
|
0.17
|
|
|
6.
|
Long-Term Debt
and Subsequent Event
|
Revolving Credit Facility
On June 28, 2013, the Company
and its wholly-owned subsidiary, Lakeland Protective Wear Inc. (collectively with the Company, 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 provides the Borrowers with a three-year $15 million
revolving line of credit, 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 the Canadian warehouse.
On March 31, 2015, the Borrowers
entered into a First Amendment to Loan and Security Agreement with the Senior Lender (the “Amendment”) relating to
their senior revolving credit facility. Pursuant to the Amendment, the parties agreed to (i) reduce the rate of interest on the
revolving loans by 200 basis points and correspondingly lower the minimum interest rate floor from 6.25% to 4.25% per annum, and
(ii) extend the maturity date of the credit facility to June 28, 2017.
On June 3, 2015, the Borrowers
entered into a Second Amendment (the “Second Amendment”) to the Senior Loan Agreement. The primary purposes of the
Second Amendment are to (i) modify the definition of Permitted Asset Disposition to provide the Company with the ability to transfer
the stock of the Company’s then wholly-owned Brazilian subsidiary, Lake Brasil Indústria e Comércio de Roupas
e Equipamentos de Proteção Individual Ltda. (“Lakeland Brazil”), and (ii) allow the Borrowers to transfer
funds to Lakeland Brazil for the specific purposes of settling arbitration claims, paying contractual expenses, and paying expenses
incurred in connection with a transfer of the stock of Lakeland Brazil so long as, after giving effect to any such transfer, the
amount Borrowers have as excess availability under the revolver loans, excluding the $15 million facility cap for this purpose
only, calculated pursuant to and under the Senior Loan Agreement, is at least $3.0 million. Also, as part of the Second Amendment,
Lender consented to the sale of the Company’s corporate offices in Ronkonkoma, New York on the condition that the net cash
proceeds from the sale in the amount of at least $450,000 are used by the Company to pay down the Borrower’s obligations
to Lender under the Senior Loan Agreement.
On October 29, 2014, with the
proceeds from a private placement of 1,110,000 shares of its common stock, the Company repaid in full subordinated debt issued
in June 2013, together with a warrant to purchase common stock of the Company. The early extinguishment of the subordinated debt
resulted in a one-time pretax non-cash charge of approximately $1.6 million for the remaining unamortized original issue discount
on the subordinated debt and a pretax non-cash charge of approximately $0.6 million for the remaining unamortized fees paid at
the closing of the subordinated debt financing. These charges were included in the Company’s financial results for the third
fiscal quarter ended October 31, 2014 and the fiscal year ended January 31, 2015. The $0.6 million of unamortized fees attributable
to the Senior Debt will remain on the Company’s books and continue to be amortized over the remaining term of the Senior
Debt through June 2017 as amended.
The following is a summary of
the material terms of the Senior Credit Facility:
$15 million Senior Credit
Facility
|
·
|
Borrowers
are Lakeland Industries, Inc. and its Canadian operating subsidiary Lakeland Protective
Wear Inc.
|
|
·
|
Borrowing
pursuant to a revolving credit facility subject to a borrowing base calculated as the
sum of:
|
|
o
|
85%
of eligible accounts receivable as defined
|
|
o
|
The
lesser of 60% of eligible inventory as defined or 85% of net orderly liquidation value
of inventory
|
|
o
|
In
transit inventory in bound to the US up to a cap of $1,000,000
|
|
o
|
Receivables
and inventory held by the Canadian operating subsidiary to be included, up to a cap of
$2 million of availability
|
|
·
|
On
April 30, 2016, there was $5.7 million available under the senior credit facility.
|
|
o
|
A
perfected first security lien on all of the Borrowers United States and Canadian assets,
other than its Mexican plant and the Canadian warehouse
|
|
o
|
Pledge
of 65% of Lakeland Industries, Inc. stock in all foreign subsidiaries other than 100%
pledge of stock of its Canadian subsidiaries
|
|
o
|
All
customers of Borrowers must remit to a lockbox controlled by Senior Lender or into a
blocked account with all collection proceeds applied against the outstanding loan balance.
|
|
o
|
An
initial term of three years from June 28, 2013 (the “Closing Date”), which
has been extended to June 28, 2017 pursuant to the Amendment
|
|
o
|
Prepayment
penalties of 2% if prior to the second anniversary of the Closing Date and 1% thereafter
|
|
o
|
Rate
equal to LIBOR rate plus 525 basis points, reduced to 325 basis points on March 31, 2015
per the Amendment
|
|
o
|
Rate
at April 30, 2016 of 4.25% per annum
|
|
o
|
Floor
rate of 6.25%, reduced to 4.25% on March 31, 2015 per annum per the Amendment
|
|
·
|
Fees:
Borrowers shall pay to the Lender the following fees:
|
|
o
|
Origination
fee of $225,000, paid on the Closing Date and being amortized over the term of loans
and is included in “intangibles, prepaid bank fees and other assets, net”
in the accompanying condensed consolidated balance sheet
|
|
o
|
0.50%
per annum on unused portion of commitment
|
|
o
|
A
non-refundable collateral monitoring fee in the amount of $3,000 per month
|
|
o
|
All
legal and other out of pocket costs
|
|
o
|
Borrowers
covenanted that, from the Closing Date until the commitment termination date and full
payment of the obligations to Senior Lender, Lakeland Industries, Inc. (the parent company),
together with its subsidiaries on a consolidated basis, excluding its Brazilian subsidiary
(which has since been transferred to a third party), shall comply with the following
additional covenants:
|
|
·
|
Fixed
Charge Coverage Ratio. At the end of each fiscal quarter of Borrowers, Borrowers shall
maintain a Fixed Charge Coverage Ratio of not less than 1.1 to 1.00 for the four quarter
period then ending.
|
|
·
|
Minimum
Quarterly Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”).
Borrowers shall achieve, on a rolling four quarter basis excluding the operations of
the Borrower’s then Brazilian subsidiary, EBITDA of not less than $4.1 million.
|
|
·
|
Capital
Expenditures. Borrowers shall not during any fiscal year make capital expenditures in
an amount exceeding $1 million in the aggregate.
|
|
·
|
The
Company is in compliance with all loan covenants of the Senior Debt at April 30, 2016.
|
|
o
|
Standard
financial reporting requirements as defined
|
|
o
|
Limitation
on amounts that can be advanced to or on behalf of Brazilian operations, limited to one
aggregate total of $200,000 for the term of the loan
|
|
o
|
Limitation
on total net investment in foreign subsidiaries of a maximum of $1.0 million per annum
|
Borrowings in UK
On December 31, 2014, the Company
and its UK subsidiary amended the terms of its existing financing facility with HSBC Bank 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) to £1,500,000 (approximately USD $2.3 million), 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) 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. There was nothing outstanding under this facility
at April 30, 2016. The per annum interest rate was 3.44% and the term was for a minimum period of one year renewable on December
19, 2016. On December 31, 2015, Lakeland Industries Europe, Ltd., a wholly owned subsidiary of Lakeland Industries, Inc., entered
into an extension of the maturity date of its existing financing facility with HSBC Invoice Finance (UK) Ltd. to December 19,
2016. Other than the extension of the maturity date, all other terms of the facility as previously reported by the Company in
its Current Report on Form 8-K dated December 3, 2014 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 Canadian and US $1.1 million
(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 approximately US $6,048 (C$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, 2016 is C$1,026,756 which is included as
US $767,937 long term borrowings on the accompanying condensed consolidated balance sheet, net of current maturities of US $50,000.
China Loan
On March 28, 2016 Weifang Lakeland
Safety Products Co., Ltd., (“WF”), the Company’s Chinese subsidiary and Chinese Rural Credit Cooperative Bank
(“CRCCB”) completed an agreement for WF to obtain a line of credit for financing in the amount of US $1.3 million,
with interest at 120% of the benchmark rate supplied by CRCCB (which is currently 4.6% per annum). The effective per annum interest
rate is currently 5.35%. The loan is collateralized by inventory owned by WF. CRCCB had hired a professional firm to supervise
WF’s inventory flow. The balance under this loan outstanding at April 30, 2016 was US $1.3 million and is included in short-term
borrowings on the condensed consolidated balance sheet. The line of credit is due within a one year period.
On December 1, 2015 WF and CRCCB
completed an agreement for WF to obtain a line of credit for financing in the amount of RMB 6,000,000 (approximately USD $0.9
million), with interest at 120% of the benchmark rate supplied by CRCCB (which is currently 4.6% per annum). The effective per
annum interest rate is currently 5.52%. The loan is collateralized by inventory owned by WF. CRCCB had hired a professional firm
to supervise WF’s inventory flow. The balance under this loan outstanding at April 30, 2016 was USD $0.9 million and is
included in short-term borrowings on the condensed consolidated balance sheet. The line of credit is due within a one year period.
On October 10, 2015, WF and
Bank of China Anqiu Branch completed an agreement for WF to obtain a line of credit for financing in the amount RMB 5,000,000
(approximately USD $0.8 million). The effective per annum interest rate is currently 7%. The loan is collateralized by inventory
owned by WF. The balance under this loan outstanding at April 30, 2016 was RMB 5,000,000 (approximately USD $0.8 million) and
is included in short-term borrowings on the condensed consolidated balance sheet. The line of credit is due within a one year
period.
Argentina Loan
In April 2015, 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. There are several drawdowns each with six month terms at an annual rate of 34%. The balance under
this loan outstanding at April 30, 2016 was US $0.2 million and is included in short-term borrowings on the condensed consolidated
balance sheet.
No supplier accounted for more
than 10% of cost of sales during the three-month period ended April 30, 2016 and 2015.
|
8.
|
Employee
Stock Compensation
|
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, 2016, the Company granted awards for up to an aggregate of 99,429 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, 2016, the Company issued 287,490 fully vested shares of common
stock and 8,897 restricted shares which will continue 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, 2016, unrecognized
stock-based compensation expense related to share-based stock awards totaled $8,507 pursuant to the 2012 Plan and $633,241 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 $8,507 for the 2012 Plan and $335,682 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 three years for the 2012
Plan and two years for the 2015 Plan. The performance based awards are not considered stock equivalents for earnings per share
(“EPS”) calculation purposes.
The Company recognized total
stock-based compensation costs of $130,443 and $127,652 for the three months ended April 30, 2016 and 2015, respectively, of which
$3,795 and $127,652 result from the 2012 Plan, and $126,648 and $0 result from the 2015 Plan. These amounts are reflected in operating
expenses. The total income tax benefit recognized for stock-based compensation arrangements was $46,960 and $45,955 for the three-
months ended April 30, 2016 and 2015, respectively.
Shares under 2015 and 2012
Stock Plan
|
|
Outstanding
Unvested Grants
at Maximum at
Beginning
of
FY17
|
|
|
Granted during
FY17 through
April 30, 2016
|
|
|
Becoming
Vested during
FY17 through
April 30,
2016
|
|
|
Forfeited
during
FY17 through
April 30, 2016
|
|
|
Outstanding
Unvested
Grants at
Maximum at
End of
April 30, 2016
|
|
Restricted stock grants – employees
|
|
|
72,999
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,999
|
|
Matching award program
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
Bonus in stock - employees
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,500
|
|
Retainer in stock - directors
|
|
|
30,764
|
|
|
|
—
|
|
|
|
937
|
|
|
|
—
|
|
|
|
29,827
|
|
Total restricted stock plans
|
|
|
109,263
|
|
|
|
—
|
|
|
|
937
|
|
|
|
—
|
|
|
|
108,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$
|
9.93
|
|
|
|
—
|
|
|
$
|
7.10
|
|
|
|
—
|
|
|
$
|
9.96
|
|
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, 2016. During the three-months ending April 30, 2016 there have been zero forfeitures or options exercised, and there
were options outstanding to purchase an aggregate of 5,000 shares at a weighted-average exercise price of $8.28 per share. All
outstanding stock options have a weighted average remaining contractual term of 0.82 years.
The Company currently utilizes
a matching award program pursuant to which all employees are entitled to receive one share of restricted stock for each two shares
of the Company’s common stock purchased on the open market. Such restricted shares are subject to a one year vesting period.
The valuation is based on the stock price at the grant date and is amortized to expense over the vesting period, which approximates
the performance period.
Pursuant to the Company’s
bonus-in-stock program, all employees are eligible to elect to receive any cash bonus in shares of restricted stock. 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 employee is giving up cash for unvested
shares, the amount of shares awarded is 133% of the cash amount based on the stock price at the date of grant.
Pursuant to the Company’s
director restrictive stock program, all directors are eligible to elect to receive any director fees in shares of restricted stock.
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.
|
|
Domestic and international sales from continuing operations are as
follows in millions of dollars:
|
|
|
Three Months Ended April 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
Domestic
|
|
$
|
12.19
|
|
|
|
59.86
|
%
|
|
$
|
12.84
|
|
|
|
51.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
8.18
|
|
|
|
40.14
|
%
|
|
|
11.98
|
|
|
|
48.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20.37
|
|
|
|
100.00
|
%
|
|
$
|
24.82
|
|
|
|
100.00
|
%
|
We manage our operations by
evaluating each of our geographic locations. Our US operations include our facilities in Alabama (primarily the distribution to
customers of the bulk of our products and the light manufacturing of our chemical, reflective, and fire products). We also maintain
two manufacturing companies in China (primarily disposable and chemical suit production) and a manufacturing facility in Mexico
(primarily disposable, glove, woven and chemical suit production). Our China facilities produce the majority of the Company’s
products and China generates a significant portion of the Company’s international revenues. The accounting policies of these
operating entities are the same as those described in Note 1. 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
Canada, 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 manufacturing segments for the years noted
therein:
|
|
Three Months Ended
April 30,
(in millions of dollars)
|
|
|
|
2016
|
|
|
2015
|
|
Net Sales from continuing operations:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
12.78
|
|
|
$
|
13.65
|
|
Other foreign
|
|
|
3.19
|
|
|
|
3.08
|
|
Europe (UK)
|
|
|
2.39
|
|
|
|
5.61
|
|
Mexico
|
|
|
0.76
|
|
|
|
0.86
|
|
China
|
|
|
8.41
|
|
|
|
11.26
|
|
Corporate
|
|
|
0.47
|
|
|
|
0.62
|
|
Less intersegment
sales
|
|
|
(7.63
|
)
|
|
|
(10.26
|
)
|
Consolidated
sales
|
|
$
|
20.37
|
|
|
$
|
24.82
|
|
External Sales from continuing operations:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
12.19
|
|
|
$
|
12.84
|
|
Other foreign
|
|
|
2.87
|
|
|
|
3.01
|
|
Europe (UK)
|
|
|
2.39
|
|
|
|
5.60
|
|
Mexico
|
|
|
0.37
|
|
|
|
0.31
|
|
China
|
|
|
2.55
|
|
|
|
3.06
|
|
Consolidated
external sales
|
|
$
|
20.37
|
|
|
$
|
24.82
|
|
Intersegment Sales from continuing operations:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
0.59
|
|
|
$
|
0.81
|
|
Other foreign
|
|
|
0.32
|
|
|
|
0.07
|
|
Europe (UK)
|
|
|
—
|
|
|
|
0.01
|
|
Mexico
|
|
|
0.39
|
|
|
|
0.55
|
|
China
|
|
|
5.86
|
|
|
|
8.20
|
|
Corporate
|
|
|
0.47
|
|
|
|
0.62
|
|
Consolidated
intersegment sales
|
|
$
|
7.63
|
|
|
$
|
10.26
|
|
|
|
Three Months Ended
April 30,
(in millions of dollars)
|
|
|
|
2016
|
|
|
2015
|
|
Operating Profit (Loss) from continuing operations:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
1.57
|
|
|
$
|
2.57
|
|
Other foreign
|
|
|
0.30
|
|
|
|
(0.10
|
)
|
Europe (UK)
|
|
|
0.10
|
|
|
|
1.79
|
|
Mexico
|
|
|
(0.01
|
)
|
|
|
(0.05
|
)
|
China
|
|
|
0.47
|
|
|
|
0.77
|
|
Corporate
|
|
|
(2.33
|
)
|
|
|
(1.62
|
)
|
Less intersegment
profit (loss)
|
|
|
0.07
|
|
|
|
(0.14
|
)
|
Consolidated
operating profit
|
|
$
|
0.17
|
|
|
$
|
3.22
|
|
Depreciation and Amortization Expense from continuing
operations:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Other foreign
|
|
|
0.02
|
|
|
|
0.02
|
|
Europe (UK)
|
|
|
—
|
|
|
|
—
|
|
Mexico
|
|
|
0.03
|
|
|
|
0.03
|
|
China
|
|
|
0.09
|
|
|
|
0.08
|
|
Corporate
|
|
|
0.15
|
|
|
|
0.10
|
|
Less intersegment
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
Consolidated
depreciation & amortization expense
|
|
$
|
0.29
|
|
|
$
|
0.24
|
|
Interest Expense from continuing operations:
|
|
|
|
|
|
|
|
|
USA (shown
in Corporate)
|
|
$
|
—
|
|
|
$
|
—
|
|
Other foreign
|
|
|
0.04
|
|
|
|
0.02
|
|
Europe (UK)
|
|
|
—
|
|
|
|
—
|
|
Mexico
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
0.04
|
|
|
|
0.04
|
|
Corporate
|
|
|
0.12
|
|
|
|
0.12
|
|
Less intersegment
|
|
|
—
|
|
|
|
—
|
|
Consolidated
interest expense
|
|
$
|
0.20
|
|
|
$
|
0.18
|
|
Income Tax Expense (Benefits) from continuing operations:
|
|
|
|
|
|
|
|
|
USA (shown
in Corporate)
|
|
$
|
—
|
|
|
$
|
—
|
|
Other foreign
|
|
|
0.03
|
|
|
|
0.05
|
|
Europe (UK)
|
|
|
0.01
|
|
|
|
0.40
|
|
Mexico
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
0.09
|
|
|
|
0.17
|
|
Corporate
|
|
|
(0.17
|
)
|
|
|
0.30
|
|
Less intersegment
|
|
|
0.02
|
|
|
|
(0.03
|
)
|
Consolidated
income tax expense
|
|
$
|
(0.02
|
)
|
|
$
|
0.89
|
|
|
|
April
30, 2016
(in millions of
dollars)
|
|
|
January
31, 2016
(in millions of
dollars)
|
|
Total Assets:*
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
49.37
|
|
|
$
|
48.18
|
|
Other foreign
|
|
|
19.57
|
|
|
|
17.55
|
|
Europe (UK)
|
|
|
5.19
|
|
|
|
5.05
|
|
Mexico
|
|
|
3.98
|
|
|
|
4.25
|
|
China
|
|
|
27.36
|
|
|
|
29.92
|
|
India
|
|
|
(1.40
|
)
|
|
|
(1.35
|
)
|
Corporate
|
|
|
34.35
|
|
|
|
37.18
|
|
Less intersegment
|
|
|
(47.38
|
)
|
|
|
(52.52
|
)
|
Consolidated
assets
|
|
$
|
91.04
|
|
|
$
|
88.26
|
|
Total Assets Less Intersegment:*
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
32.49
|
|
|
$
|
33.63
|
|
Other foreign
|
|
|
11.59
|
|
|
|
9.91
|
|
Europe (UK)
|
|
|
5.18
|
|
|
|
5.03
|
|
Mexico
|
|
|
3.89
|
|
|
|
4.23
|
|
China
|
|
|
20.11
|
|
|
|
17.63
|
|
India
|
|
|
0.43
|
|
|
|
0.44
|
|
Corporate
|
|
|
17.35
|
|
|
|
17.39
|
|
Consolidated
assets
|
|
$
|
91.04
|
|
|
$
|
88.26
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
2.15
|
|
|
$
|
2.20
|
|
Other foreign
|
|
|
1.70
|
|
|
|
1.57
|
|
Europe (UK)
|
|
|
0.05
|
|
|
|
0.06
|
|
Mexico
|
|
|
2.08
|
|
|
|
2.11
|
|
China
|
|
|
2.29
|
|
|
|
2.37
|
|
India
|
|
|
0.03
|
|
|
|
0.03
|
|
Corporate
|
|
|
0.90
|
|
|
|
1.00
|
|
Less intersegment
|
|
|
(0.06
|
)
|
|
|
(0.07
|
)
|
Consolidated
property and equipment
|
|
$
|
9.14
|
|
|
$
|
9.27
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
—
|
|
|
$
|
0.06
|
|
Other foreign
|
|
|
—
|
|
|
|
0.08
|
|
Europe (UK)
|
|
|
—
|
|
|
|
—
|
|
Mexico
|
|
|
—
|
|
|
|
0.04
|
|
China
|
|
|
0.02
|
|
|
|
0.16
|
|
India
|
|
|
0.01
|
|
|
|
—
|
|
Corporate
|
|
|
—
|
|
|
|
0.50
|
|
Consolidated
capital expenditures
|
|
$
|
0.03
|
|
|
$
|
0.84
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
0.87
|
|
|
$
|
0.87
|
|
Consolidated
goodwill
|
|
$
|
0.87
|
|
|
$
|
0.87
|
|
* Negative assets reflect intersegment
accounts eliminated in consolidation
Income Tax Audits/Change in Accounting
Estimate
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.
The Company has received a final “No Change Letter” from the IRS for FY07 dated August 20, 2009. The Company has not
had any recent US corporate income tax returns examined by the IRS. Returns for the year since 2011 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, 2009, 2010, 2011, 2012, 2013, 2014 and 2015 with no
significant issues noted and we believe our tax positions are reasonably stated as of April 30, 2016. 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 machines were transferred from Meiyang to Weifang Lakeland Safety Products Co., Ltd., (“WF”),
another of our Chinese operation thereby reducing our tax exposure. Management believes there is no material risk in our China
tax position.
Lakeland Protective Wear, Inc.,
our Canadian subsidiary, follows Canada tax regulatory framework recording its tax expense and tax deferred assets or liabilities.
As of this statement filing date, we believe the Lakeland Protective Wear, Inc.’s tax situation is reasonably stated in
accordance with accounting principles generally accepted in the United States of America, and we do not anticipate future tax
liability.
In connection with the exit
from Brazil as described in Note 17, the Company claimed a worthless stock deduction which generated a tax benefit of approximately
US $9.5 million, net of a US $2.9 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, it is our
practice and intention to reinvest the earnings of our non-US subsidiaries in their operations. As of April 30, 2016, the Company
had not made a provision for US or additional foreign withholding taxes on approximately $22.8 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 ($21.6
million at January 31, 2015). Generally, such amounts become subject to US taxation upon remittance of dividends and under certain
other circumstances. If theses earnings were repatriated to the US, the deferred tax liability associated with these temporary
differences would be approximately $3.2 million at April 30, 2016.
The Company’s Board of
Directors has instituted a plan to pay annual dividends of $1.0 million to the Company from Weifang’s future profits, 33%
of Meiyang’s future profits and 50% of the UK’s future profits starting in FY15. All other retained earnings are expected
to be reinvested indefinitely.
Change in Accounting Estimate/Valuation
Allowance
We record net deferred tax assets
to the extent we believe these assets will more likely than not be realized. In making such determination, we considered all available
positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax
planning strategies and recent financial operations. The valuation allowance was $2.2 million at April 30, 2016 and January 31,
2016.
Income Tax Expense
Income tax expenses consist
of federal, state and foreign income taxes. The income tax benefit was $0.1 million for the three months ended April 30, 2016,
as compared to income tax expense of $0.8 million for the three months ended April 30, 2015.
|
11.
|
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 both current period earnings and other comprehensive income 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.
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. Gain and loss on those
forward contracts are included in current earnings. There were no outstanding forward contracts at April 30, 2016 or 2015.
We enter 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 income. The notional
amount of these contracts was $0 and $3.3 million at April 30, 2016 and 2015, respectively. The corresponding asset and income
recorded in the condensed consolidated statements of other comprehensive income is $0 and 115,482 at April 30, 2016 and in April
30, 2015 the amount is immaterial to the condensed consolidated financial statements.
|
12.
|
VAT
Tax Issue in Brazil
|
Asserted Claims
VAT (i.e. Value Added Tax) tax
in Brazil is at the state level. We commenced operations in Brazil in May 2008 through an acquisition of Qualytextil, S.A., which
subsequently became Lake Brasil Indústria e Comércio de Roupas e Equipamentos de Proteção Individual
Ltda., (referred to in this footnote as “Qualytextil” and sometimes referred to in this Form 10-Q as “Lakeland
Brazil”) . At the time of the acquisition, and going back to 2004, the acquired company used a port facility in a neighboring
state (Recife-Pernambuco), rather than its own, in order to take advantage of incentives, in the form of a discounted VAT tax,
to use such neighboring port facility. We continued this practice until April 2009. The practice was stopped largely for economic
reasons, resulting from additional trucking costs and longer lead time. The Bahia state auditors (state of domicile for the Lakeland
operations in Brazil) initially reviewed the period from 2004-2006 and filed a claim for unpaid VAT taxes in October 2009. The
claim asserted that the state VAT taxes are owed to the state of domicile of the ultimate importer/user and disregarded the fact
that the VAT taxes had already been paid to the neighboring state.
The audit notice claimed that
the taxes paid to Recife-Pernambuco should have been paid to Bahia in the amount of R$4.8 million and assessed fines and interest
of an additional R$5.6 million for a total of R$10.4 million (approximately US$3.0 million, $3.5 million and $6.5 million, respectively
based on exchange rates at the time of the claim).
Bahia had announced an amnesty
for this tax whereby R$3.5 million (US$1.9 million) of the taxes claimed were paid by Qualytextil by the end of the month of May
2010, and the interest and penalties related thereto were forgiven. According to fiscal regulation of Brazil, R$2.1 million (US$1.1
million) of this amnesty payment has since been recouped as credits against future taxes due.
An audit for the 2007-2009 period
has been completed by the State of Bahia. In October 2010, the Company received five claims for 2007-2009 from the State
of Bahia, the largest of which was for taxes of R$6.2 (US$2.3) million and fines and interest currently at R$8.3 million (US$3.1
million), for a total of R$14.6 (US$5.5) million. The Company had intended to defend itself through a regulatory process
and wait for the next amnesty period. Of other claims, our attorney informed us that three claims totaling R$1.3 (US$0.5)
million in respect of fines and penalties were likely to be successfully defended based on state auditor misunderstanding.
As more fully described in Note
17, Lakeland and Qualytextil entered into a Shares Transfer Agreement pursuant to which, effective July 31, 2015, Zap Comércio
de Brindes Corporativos Ltda (“Transferee”), a company owned by an existing Qualytextil manager, acquired all of the
shares of Qualytextil and assumed liabilities of Qualytextil, including VAT tax liabilities.
VAT Tax Amnesty and Loan
Agreement with Transferee of Brazil Operations
The Bahia State Tax Department
has commenced an audit of VAT taxes for the period from 2011-2014 in October 2015. The State of Bahia declared an amnesty beginning
November 1, 2015 and expiring December 18, 2015. The Company had entered into a loan agreement (the “Loan Agreement”)
on December 11, 2015 with Qualytextil for the amount of R$8,584,012 (approximately USD $2.29 million) for the purpose of providing
funds necessary for Qualytextil to settle the two largest outstanding VAT claims with the State of Bahia. As described under “Shares
Transfer Agreement” in Note 17, the Company may be exposed to certain liabilities arising in connection with the prior operations
of Qualytextil, including, without limitation, from lawsuits pending in the labor courts in Brazil and VAT taxes. Settlement of
the VAT claims under amnesty would benefit the Company in that it eliminates these large VAT claims, which the Company believes
will render the continued viability of Qualytextil immaterial to the Company. It should also eliminate the possibility of the
transfer of shares of Qualytextil being found fraudulent on the basis of evading VAT claims and would subsequently eliminate the
possibility of future encumbrance of the real estate by the state of Bahia subsequent to VAT claims. Qualytextil completed the
amnesty agreement with the State of Bahia on December 18, 2015. USD $250,000 in continuing business incentives provided by Lakeland
to Qualytextil in the Shares Transfer Agreement will be waived by Qualytextil as partial payment of the debt.
Repayment of the loan
by Qualytextil to the Company will include the following elements
R$ 3,395,947 (approximately
USD $900,000) in VAT credits will become available to Qualytextil from the State of Bahia to be used against future VAT payments.
Qualytextil has agreed to pay amounts equal to this credit to the Company in accordance with monthly sales volume. Qualytextil
will transfer the rights to a judicial deposit on a tax claim to the Company. There is a judicial deposit of R$ 3,012,326 (approximately
USD $800,000), however, Qualytextil will continue to make monthly deposits to the judicial account until the case is ruled upon
by the Supreme Court of Brazil or the deposit is fully funded. Attorney’s success fee will be deducted before any disbursements
to the Company or Qualytextil. However, while the lawyer handling this case tells us it is probable Qualytextil will win this
case, it may take years to resolve. Credits of R$ 1,025,739 (approximately USD $275,000) relating to the above case may be generated
if and when the case is resolved. Qualytextil has agreed to pay amounts equal to this credit to the Company in accordance with
monthly sales volume. A minimum quarterly payment of R$ 300,000 (approximately USD $80,000) will be required commencing October
2016. The Company has determined that a reserve against the collection of this loan in full is prudent; which resulted in an additional
charge to the loss on disposal of discontinued operations of $2,286,022 in the fourth quarter of the fiscal year ended January
31, 2016, net of tax benefits of $834,398. Such additional losses will be available as additional tax loss carryforwards to offset
cash taxes payable against future taxable income in the USA.
A table summarizing all four
different VAT claims remaining open and their status is listed below:
|
|
Principal
(tax only)
|
|
|
Total
fines
and fees
|
|
|
Total
of
the Debt
|
|
|
Negotiated
fines
and fees
|
|
|
Not
included in
amnesty
settlement
|
|
|
Amnesty
settlement
|
|
|
Status of unsettled
items
|
R$
|
|
|
305,897
|
|
|
|
572,264
|
|
|
|
878,161
|
|
|
|
92,853
|
|
|
|
|
|
|
|
398,750
|
|
|
|
USD ¹
|
|
$
|
80,499
|
|
|
$
|
150,596
|
|
|
$
|
231,095
|
|
|
$
|
24,435
|
|
|
|
|
|
|
$
|
104,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R$
|
|
|
573,457
|
|
|
|
1,416,106
|
|
|
|
1,989,563
|
|
|
|
236,290
|
|
|
|
809,747
|
|
|
|
|
|
|
The new owner will continue
litigation as it is expected to be decided in management favor
|
USD ¹
|
|
$
|
150,910
|
|
|
$
|
372,660
|
|
|
$
|
523,569
|
|
|
$
|
62,182
|
|
|
$
|
213,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R$
|
|
|
6,081,597
|
|
|
|
10,638,172
|
|
|
|
16,719,769
|
|
|
|
1,903,665
|
|
|
|
|
|
|
|
7,985,262
|
|
|
|
USD ¹
|
|
$
|
1,600,420
|
|
|
$
|
2,799,519
|
|
|
$
|
4,399,939
|
|
|
$
|
500,964
|
|
|
|
|
|
|
$
|
2,101,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R$
|
|
|
402,071
|
|
|
|
876,589
|
|
|
|
1,278,660
|
|
|
|
139,858
|
|
|
|
541,929
|
|
|
|
|
|
|
The new owner will continue
litigation as it is expected to be decided in management favor
|
USD ¹
|
|
$
|
105,808
|
|
|
$
|
230,681
|
|
|
$
|
336,489
|
|
|
$
|
36,805
|
|
|
$
|
142,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
R$
|
|
|
7,363,022
|
|
|
|
13,503,131
|
|
|
|
20,866,154
|
|
|
|
2,372,666
|
|
|
|
1,351,676
|
|
|
|
8,384,012
|
|
|
|
Total
USD
|
|
$
|
1,937,637
|
|
|
$
|
3,553,456
|
|
|
$
|
5,491,093
|
|
|
$
|
624,386
|
|
|
$
|
355,704
|
|
|
$
|
2,206,319
|
|
|
|
Legal
Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
|
|
Total
Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,256,319
|
|
|
|
¹ USD amounts based on exchange rate
of as of settlement on December 18, 2015 at 3.80.
Values updated as of December 1, 2015,
according to the Brazil internal finance department.
Numbers may not add due to rounding.
Balance Sheet Treatment
in Brazil after Discontinued Operations
The Company has reflected
the above items on its April 30, 2016, balance sheet as follows:
|
|
|
|
R$ millions
|
|
|
US$ millions
|
|
Liabilities of discontinued operations
|
|
Taxes payable
|
|
|
6.2
|
|
|
|
2.1
|
|
There was no impairment of goodwill
during Q1 fiscal year 2017.
|
14.
|
Recent
Accounting Pronouncements
|
The Company considers the applicability
and impact of all accounting standards updates (“ASUs”). Management has determined that recent accounting developments
are either not applicable or have a minimal impact on the consolidated financial statements. Management periodically reviews new
accounting standards that are issued. In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. This guidance is
effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for annual
periods after December 31, 2016. This guidance permits the use of one of two retrospective transition methods. The Company has
neither selected a transition method, nor determined the effects that the adoption of the pronouncement may have on its consolidated
financial statements.
In March 2016, the FASB Issued
ASU No. 2016-09, Compensation–Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The
guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early
adoption is permitted for an entity in any interim or annual period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects
early adoption must adopt all of the amendments in the same period. The company is currently evaluating the impact this guidance
will have on the Consolidated Financial Statements and related disclosures.
The Company does not have any
subsequent events to report.
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 and results of operations or cash flows; however, there can
be no assurance as to the ultimate outcome of these matters.
On March 9, 2015, Lakeland Brazil
changed its legal form to a Limitada and changed its name to Lake Brasil Industria E Comercio de Roupas E Equipamentos de Protecao
Individual LTDA.
Settlement Agreement –
Arbitration Debt
On June 18, 2015, Lakeland and
its then wholly-owned subsidiary Lakeland Brazil (together with Lakeland, the “Brazil Co”), entered into an Amendment
(the “Amendment”) to a Settlement Agreement, dated as of September 11, 2012 (the “Settlement Agreement”),
with two former officers (the “former officers”) of Lakeland Brazil. As part of the original Settlement Agreement,
the parties resolved all alleged outstanding claims against the Brazil Co arising from an arbitration proceeding in Brazil involving
Brazil Co and the former officers of Brazil Co for an aggregate amount of approximately US $8.5 million payable by Brazil Co to
the former officers over a period of six (6) years. As of the June 18, 2015 settlement date, there was a balance of US $3.750
million (the “Outstanding Amount”) owed under the Settlement Agreement, which Outstanding Amount was to be paid by
the Company in quarterly installments of US $250,000 through December 31, 2018.
Pursuant to the Amendment, the
former officers agreed to fully and finally settle the Outstanding Amount owed by the Company for an aggregate lump sum payment
of US $3.413 million, resulting in a gain of US $224,000 after allowing for imputed interest on the original Settlement Agreement.
Within five days of receipt of such payment, the former officers provided to Lakeland Brazil the documents needed to have their
lien securing payment of the Outstanding Amount removed on certain real estate owned by Lakeland Brazil and such lien was removed.
The Amendment also contains a general release of claims by the former officers in favor of the Company and its past or present
officers, directors, and other affiliates. The Company’s senior lender, Alostar Bank of Commerce, has consented to the transactions
contemplated by the Amendment.
Shares Transfer Agreement
On July 31, 2015 (the “Closing
Date”), Lakeland and 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. Pursuant to the Shares Transfer Agreement, Transferee
paid R$1.00 to the Company and assumed all liabilities and obligations of Lakeland Brazil, whether arising prior to, on or after
the Closing Date, including, without limitation (i) liabilities, such as severance obligations, in respect of the current and
former employees of Lakeland Brazil, (ii) liabilities arising from any labor claims already existing or which may thereafter be
filed against Lakeland Brazil and its current or former affiliates, officers and shareholders, (iii) liabilities with respect
to taxes imposed on the Brazilian business, including Value Added Tax (“VAT”) tax liabilities, (iv) liabilities arising
under leases, contracts, licenses or governmental permits pursuant to which Lakeland Brazil is a party or otherwise bound, (v)
product warranty liabilities, product return obligations pursuant to any stock balancing program and rebates pursuant to any marketing
program, to the extent such liabilities arose from sales of products made in the course of the Brazilian business, (vi) accounts
payable of Lakeland Brazil, whether or not invoiced, and (vii) all other obligations and liabilities with respect to the Brazilian
business of Lakeland Brazil (collectively, the “Brazilian Liabilities”). In order to help enable Lakeland Brazil to
have sufficient funds to continue to operate for a period of at least two years following the Closing Date, the Company provided
funding to Lakeland Brazil in the aggregate amount of US $1,130,000, in cash, in the form of a capital raise, on or prior to the
Closing Date, and has agreed to provide an additional R$582,000 (approximately US $188,000) (the “Additional Amount”),
in the form of a capital raise, to be utilized by Lakeland Brazil to pay off the Brazilian Liabilities and other potential contingent
liabilities. Pursuant to the Shares Transfer Agreement, the Company paid R$992,000 (approximately US $320,000) in cash, on July
1, 2015 and issued a non-interest bearing promissory note for the payment to be due for the Additional Amount (R$582,000) (approximately
US $188,000) on the Closing Date which was paid to Lakeland Brazil in two (2) installments of (i) R$288,300 (approximately US
$82,000) which was paid on August 1, 2015, and (ii) R$294,500 (approximately US $84,000) on September 1, 2015.
In addition, we may continue
to be exposed to certain liabilities arising in connection with the prior operations of Lakeland Brazil, including, without limitation,
from lawsuits pending in the labor courts in Brazil in which plaintiffs were seeking, as at July 31, 2015, a total of nearly US
$8,000,000 in damages from our then Brazilian subsidiary. We believe 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, we are required to fully fund amounts owed by Lakeland Brazil in connection with the then existing labor claims by
Lana dos Santos 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. As of April 30, 2016, the Lana dos Santos claim was settled for $272,000 and $79,000 was paid in respect of other
labor claims. With respect to continuing claims, $278,000 is being sought, of which management estimates the aggregate liability
will be less than that amount.
The Company believes that these
amounts contributed to its now former subsidiary Lakeland Brazil will be more than offset by a benefit for USA taxes of approximately
US $9.5 million generated by a worthless stock deduction for Brazil that the Company claimed on its corporate tax returns. Although
the Company’s tax advisors believe that the worthless stock deduction is valid, there can be no assurance that the IRS will
not challenge it and, if challenged, that the Company will prevail.
The closing of this agreement
was subject to Brazilian government approval of the shares transfer, which was received in October 2015 (The “Final Closing
Date”). Even after the Final Closing Date for transactions contemplated by the Shares Transfer Agreement, the Company may
be exposed to certain liabilities arising in connection with the prior operations of Lakeland Brazil, including, without limitation,
from lawsuits pending in the labor courts in Brazil and VAT taxes, as more fully described in Note 12. 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.
The Company believes that the loan transaction with its former Brazilian subsidiary resulting in a substantial reduction of the
VAT tax liability, as described in Note 12, significantly reduced such potential liability. In addition, as discussed above in
this Note, the potential labor claims liability has substantially diminished. The Shares Transfer Agreement, which is governed
by United States law, contains customary representations, warranties and covenants of the parties for a transaction of this type.
The Company and Transferee have agreed to indemnify each other from and against certain liabilities, subject to certain exceptions.
Under the Shares Transfer Agreement, the Company will be subject to certain non-solicitation provisions for a period of two years
following the Closing Date.
The Company estimated that the
transactions involved with the completion of its exit from Brazil result in a loss of approximately $1.2 million (net of tax benefit
of $0.7) reflected on its statement of operations and a decrease of approximately $0.5 million to stockholders equity as a result
of recording the exit transactions. This included a reclassification of approximately $1.3 million from Accumulated Other Comprehensive
Loss to the Statement of Operations and Retained Earnings which did not impact net stockholders equity. Further losses on the
sale were reflected in Q4 FY16 as a result of the reserves against the loans related to the VAT taxes as described elsewhere in
Note 12. Since this is a resolution of contingencies that arise from and that are directly related to the operations of the Brazil
component prior to its disposal, it has been accounted for as discontinued operations.
The following tables summarize
the results of the Brazil business included in the statements of operations for the years ended April 30, 2016 and April 30, 2015.
|
|
Statement of Operations
(000’s)
|
|
|
|
Years Ended April 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net sales from discontinuing operations
|
|
$
|
—
|
|
|
$
|
444
|
|
Gross profit from discontinuing operations
|
|
|
—
|
|
|
|
32
|
|
Operating expenses from discontinuing operations
|
|
|
—
|
|
|
|
484
|
|
Operating loss from discontinuing operations
|
|
|
—
|
|
|
|
(452
|
)
|
Other (income) expense from discontinuing operations, net
|
|
|
—
|
|
|
|
(479
|
)
|
Loss from operation of discontinuing operations before
income tax
|
|
|
—
|
|
|
|
(931
|
)
|
Net loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
(931
|
)
|