NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business
Lakeland
Industries, Inc. and Subsidiaries (“Lakeland,” the
“Company,” “we,” “our” or
“us”), a Delaware corporation organized in April
1986,manufacture and sell a comprehensive line of industrial
protective clothing and accessories for the industrial and public
protective clothing market. Our products are sold globally by our
in-house sales teams, our customer service group, and authorized
independent sales representatives to a network of over 1,600
global safety and industrial supply distributors. Our authorized
distributors supply end users, such as integrated oil,
chemical/petrochemical, automobile, steel, glass, construction,
smelting, cleanroom, janitorial, pharmaceutical, and high
technology electronics manufacturers, as well as scientific,
medical laboratories and the utilities industry. In addition, we
supply federal, state and local governmental agencies and
departments, such as fire and law enforcement, airport crash rescue
units, the Department of Defense, the Department of Homeland
Security and the Centers for Disease Control. Internationally, we
sell to a mixture of end users directly, and to industrial
distributors depending on the particular country and market. Sales
are made to more than 50 countries, the majority of which were into
China, the European Economic Community (“EEC”), Canada,
Chile, Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador,
India and Southeast Asia. For purposes of this Form 10-K, FY refers
to a fiscal year ended January 31; for example, FY19 refers to the
fiscal year ended January 31, 2019
Basis
of Presentation
The
Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States of
America (“US GAAP”). The following is a description of
the Company’s significant accounting policies.
Summary of Significant Accounting Policies
Principles of Consolidation
The
accompanying 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 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.
Cash and Cash Equivalents
The
Company considers highly liquid temporary cash investments with
original maturities of three months or less to be cash equivalents.
Cash equivalents consist of money market funds.
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 consolidated 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.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
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
realized value.
Property and Equipment
Property and
equipment is stated at cost. Depreciation and amortization are
provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives
on a straight-line basis. Leasehold improvements and leasehold
costs are amortized over the term of the lease or service lives of
the improvements, whichever is shorter. The costs of additions and
improvements which substantially extend the useful life of a
particular asset are capitalized. Repair and maintenance costs are
charged to expense. When assets are sold or otherwise disposed of,
the cost and related accumulated depreciation or amortization are
removed from the account, and the gain or loss on disposition is
reflected in operating income.
Assets
held for sale are measured at the lower of carrying value or fair
value less cost to sell. Gains or losses are recognized for any
subsequent changes to fair value less cost to sell. However, gains
are limited to cumulative losses previously recognized. Assets
classified as held for sale are not depreciated.
The Company
capitalizes eligible costs to acquire or develop internal-use
software that are incurred subsequent to the preliminary project
stage. Capitalized costs related to internal-use software are
amortized using the straight-line method over the estimated useful
life of the assets, which is generally three
years.
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. Management
assesses whether it is more likely than not that goodwill is
impaired and, if necessary, compares the fair value of the
reporting unit to the carrying value. Fair value is generally
determined by management either based on estimating future
discounted cash flows for the reporting unit or by estimating a
sales price for the reporting unit based on multiple of earnings.
These estimates require the Company's management to make
projections that can differ from actual results.
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 January 31, 2019, a non-cash impairment charge was recorded to
reflect the change in the carrying value from $0.2 million to $0.0
million as the Company believes there is no recoverable value of
the asset held for sale previously on the Company’s
consolidated balance sheet.
Revenue Recognition
Substantially all
the Company’s revenue is derived from product sales, which
consist of sales of the Company’s personal protective wear
products to distributors. The Company considers purchase orders to
be a contract with a customer. Contracts with customers are
considered to be short-term when the time between order
confirmation and satisfaction of the performance obligations is
equal to or less than one year, and virtually all of the
Company’s contracts are short-term. The Company recognizes
revenue for the transfer of promised goods to customers in an
amount that reflects the consideration to which the Company expects
to be entitled in exchange for those goods. The Company typically
satisfies its performance obligations in contracts with customers
upon shipment of the goods. Generally, payment is due from
customers within 30 to 90 days of the invoice date, and the
contracts do not have significant financing components. The Company
elected to account for shipping and handling activities as a
fulfillment cost rather than a separate performance obligation.
Shipping and handling costs associated with outbound freight are
included in operating expenses, and for the years ended in FY19 and
FY18 aggregated approximately $2.7 million and $2.2 million,
respectively.Taxes collected from customers relating to product
sales and remitted to governmental authorities are excluded from
revenue.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
transaction price includes estimates of variable consideration,
related to rebates, allowances, and discounts that are reductions
in revenue. All estimates are based on the Company's historical
experience, anticipated performance, and the Company's best
judgment at the time the estimate is made. Estimates for variable
consideration are reassessed each reporting period and are included
in the transaction price to the extent it is probable that a
significant reversal of cumulative revenue recognized will not
occur upon resolution of uncertainty associated with the variable
consideration. All the Company’s contracts have a single
performance obligation satisfied at a point in time and the
transaction price is stated in the contract, usually as quantity
times price per unit.
The
Company has seven revenue generating reportable geographic segments
under ASC Topic 280 “Segment Reporting” and derives its
sales primarily from its limited use/disposable protective clothing
and secondarily from its sales of reflective clothing, high-end
chemical protective suits, firefighting and heat protective
apparel, reusable woven garments and gloves and arm guards. The
Company believes disaggregation of revenue by geographic region
best depicts the nature, amount, timing, and uncertainty of its
revenue and cash flows (see table below). Net sales by geographic
region and by product line are included below:
|
Years
Ended
January
31,
(in
millions of dollars)
|
|
|
|
External
Sales by region:
|
|
|
USA
|
$
49.88
|
$
50.45
|
Other
foreign
|
3.02
|
2.40
|
Europe
(UK)
|
9.42
|
9.07
|
Mexico
|
3.51
|
2.48
|
Asia
|
18.00
|
17.12
|
Canada
|
8.56
|
8.26
|
Latin
America
|
6.62
|
6.21
|
Consolidated
external sales
|
$
99.01
|
$
95.99
|
|
Years
Ended
January
31,
(in
millions of dollars)
|
|
|
|
External
Sales by product lines:
|
|
|
Disposables
|
$
53.18
|
$
51.56
|
Chemical
|
18.03
|
17.47
|
Fire
|
5.98
|
5.80
|
Gloves
|
3.22
|
3.12
|
Hi-Vis
|
6.99
|
11.26
|
Wovens
|
11.61
|
6.78
|
Consolidated
external sales
|
$
99.01
|
$
95.99
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising Costs
Advertising costs
are expensed as incurred and included in operating expenses on the
consolidated statement of operations. Advertising and co-op costs
amounted to $802,000 and $443,000 in FY19 and FY18, respectively,
net of a co-op advertising allowance received from a
supplier.
Stock-Based Compensation
The
Company records the cost of stock-based compensation plans based on
the fair value of the award on the grant date. For awards that
contain a vesting provision, the cost is recognized over the
requisite service period (generally the vesting period of the
equity award) which approximates the performance period. For awards
based on services already rendered, the cost is recognized
immediately.
Research and Development Costs
Research and
development costs include labor, equipment and materials costs and
are expensed as incurred and included in operating expenses.
Research and development expenses aggregated were approximately
$182,000 and $280,000 in FY19 and FY18, respectively.
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
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 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 consolidated balance sheets.
Foreign Operations and Foreign Currency Translation
The Company maintains manufacturing operations in
Mexico, India, Argentina, Vietnam and the People’s Republic
of China and can access independent contractors in China, Vietnam,
Argentina and Mexico. It also maintains sales and distribution
entities located in India, Canada, the U.K., Chile, China,
Argentina, Russia, Kazakhstan, Uruguay 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; the Russian operation, the Russian
Ruble, and the Kazakhstan operation the 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 consolidated
statement of cash flows will not necessarily agree with changes in
the corresponding balances on the 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.
Foreign currency transaction (loss) gain
included in net income for the years ended January 31, 2019 and
2018, were approximately $(0.5) million and $1.1 million,
respectively.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
consolidated balance sheets at their fair value as of the balance
sheet dates based on current market rates as further discussed in
Note 11.
The
financial instruments of the Company classified as current assets
or liabilities, including cash and cash equivalents, accounts
receivable, short-term borrowings, borrowings under 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 fiscal year.
Reclassifications
Certain
reclassifications have been made to the prior year’s
consolidated financial statements accounts payable and other
accrued expenses balances to conform to the current year
presentation. These reclassifications have no effect on the
accompanying consolidated financial statements.
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 May
2017, the Financial Accounting Standards Board (“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 will apply the amendments in this update prospectively
to an award modified on or after February 1, 2018 and does not
expect that application of this guidance will have a material
impact on its consolidated financial statements and related
disclosures.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company adopted ASU 2014-09, Revenue from Contracts with Customers
(Topic 606) effective February 1, 2018 using the retrospective
transition method. This new accounting standard outlines a single
comprehensive model to use in accounting for revenue arising from
contracts with customers. This standard supersedes existing revenue
recognition requirements and eliminates most industry-specific
guidance from US GAAP. The core principle of the new accounting
standard is to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. In addition, the adoption of
this new accounting standard resulted in increased disclosure,
including qualitative and quantitative disclosures about the
nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers. Additionally, the Company
elected to account for shipping and handling activities as a
fulfillment cost rather than a separate performance obligation.
Adoption of this standard did not result in significant changes to
the Company’s accounting policies, business processes,
systems or controls, or have a material impact on the
Company’s financial position, results of operations and cash
flows or related disclosures. As such, prior period financial
statements were not recast.
New Accounting Pronouncements Not Yet Adopted
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. In July 2018, the FASB issued ASU No. 2018-10,
“Codification Improvements to Topic 842, Leases.” The
amendments in ASU 2018-10 clarify, correct or remove
inconsistencies in the guidance provided under ASU 2016-02 related
to sixteen specific issues identified. Also in July 2018, the FASB
issued ASU No. 2018-11 “Leases (Topic 842): Targeted
Improvements” which now allows entities the option of
recognizing the cumulative effect of applying the new standard as
an adjustment to the opening balance of retained earnings in the
year of adoption while continuing to present all prior periods
under previous lease accounting guidance. The effective date and
transition requirements for these two ASUs are the same as the
effective date and transition requirements as ASU 2016-02. While
the Company continues to assess all potential impacts of the
standard, the Company currently believes the most significant
impact relates to recording right-to-use assets and related
lease liabilities on the consolidated balance sheets.
The
new standard is effective for us on February 1, 2019. A modified
retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application.
An entity may choose to use either (1) its effective date or (2)
the beginning of the earliest comparative period presented in the
financial statements as its date of initial application. If an
entity chooses the second option, the transition requirements for
existing leases also apply to leases entered into between the date
of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the
disclosures required by the new standard for the comparative
periods. We expect to adopt the new standard on February 1, 2019
and use the effective date as our date of initial application.
Consequently, financial information will not be updated and the
disclosures required under the new standard will not be provided
for dates and periods before February 1, 2019.
The new
standard provides a number of optional practical expedients in
transition. We expect to elect the "package of practical
expedients", which permits us not to reassess under the new
standard our prior conclusions about lease identification, lease
classification and initial direct costs as well as the practical
expedient pertaining to land easements. We do not expect to elect
the use-of-hindsight practical expedient. The new standard also
provides practical expedients for an entity's ongoing accounting.
We currently expect to elect the short-term lease recognition
exemption for all leases that qualify. This means, for those leases
that qualify, we will not recognize ROU assets or lease
liabilities, and this includes not recognizing ROU assets or lease
liabilities for existing short-term leases of those assets in
transition. We also currently expect to elect the practical
expedient to not separate lease and non-lease components for all of
our leases.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We
expect that this standard will have a material effect on our
consolidated balance sheets, however, we do not expect a material
effect on our consolidated statements of operation, comprehensive
income, stockholders’ equity and cash flows.
While
we continue to assess all of the effects of adoption, we currently
believe the most significant effects relate to (1) the recognition
of new ROU assets and lease liabilities on our balance sheet for
our warehouse, office, and equipment operating leases; and (2)
providing significant new disclosures about our leasing
activities.
On
adoption, we currently expect to recognize additional operating
liabilities which includes the present value of the total amount
disclosed in "Note 12—Commitments and Contingencies", which
constitute the remaining minimum rental payments under current
leasing standards for our existing operating leases, discounted by
our incremental borrowing rate for borrowings of a similar duration
on a fully secured basis, with corresponding ROU assets of
approximately the same amount.
In
February 2018, the FASB issued ASU 2018-02, Income Statement
– Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects From Accumulated Other
Comprehensive Income,” which allows institutions to elect to
reclassify the stranded tax effects from AOCI to retained earnings,
limited only to amounts in AOCI that are affected by the tax reform
law. For public entities, the amendments are effective for annual
reporting periods beginning after December 15, 2018, 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, 2019,
including interim reporting periods within that reporting period.
The Company does not expect that adoption of this guidance will
have a material impact on its consolidated financial statements and
related disclosures.
2.
INVENTORIES
Inventories consist
of the following:
|
|
|
|
|
|
|
|
Raw
materials
|
$
14,986
|
$
14,767
|
Work-in-process
|
987
|
2,357
|
Finished
goods
|
26,392
|
25,795
|
|
$
42,365
|
$
42,919
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT, NET
Property and
equipment consists of the following:
|
|
|
|
|
|
|
|
(000’s
)
|
(000’s
)
|
Machinery and
equipment
|
3-10
|
$
5,070
|
$
3,932
|
Furniture and
fixtures
|
3-10
|
316
|
328
|
Leasehold
improvements
|
|
1,496
|
1,217
|
Computer
equipment
|
3
|
2,669
|
2,184
|
Software
costs
|
3
|
1,187
|
-----
|
Land and building
(China)
|
20-30
|
1,764
|
1,764
|
Land and building
(Canada)
|
30
|
1,856
|
1,982
|
Land and buildings
(USA)
|
30
|
3,487
|
3,460
|
Land and buildings
(Mexico)
|
30
|
2,070
|
2,070
|
|
|
19,915
|
16,937
|
Less accumulated
depreciation and amortization
|
|
(9,134
)
|
(8,907
)
|
Assets held for
sale
|
|
-----
|
150
|
Construction-in-progress
|
|
-----
|
759
|
|
|
$
10,781
|
$
8,939
|
Depreciation and
amortization expense for FY19 and FY18 amounted to $965,451 and
$774,742, respectively.
During
FY19, conditions in Brazil, including the economy caused management
to believe that the Company’s assets held for sale in that
country should be analyzed for impairment. The analysis resulted in
an impairment write-down of $0.2 million for assets that have been
identified as held-for-sale by the Company. The write-down is
included in operating expenses in the Company’s FY19
consolidated statement of operations. The estimated fair value less
costs to sell of the assets written down in FY19, consisting
primarily of buildings and land, was approximately $0.0
million. Of the original approximately $1.1 million, the estimated
fair value less costs to sell of the assets held for sale at
January 31, 2019 is $0.0 million.
4. GOODWILL
On
August 1, 2005, the Company purchased Mifflin Valley, Inc., a
Pennsylvania manufacturer, the operations of which now comprise the
Company’s Reflective division. This acquisition resulted in
the recording of $0.9 million in goodwill in FY06. The Company
believes that there was no impairment of goodwill for the years
ended January 31, 2019 and 2018. This goodwill is included in the
US segment for reporting purposes.
5.
LONG-TERM DEBT
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 “AloStar Loan
Agreement”) with AloStar Business Credit, a division of
AloStar Bank of Commerce (“AloStar”). The AloStar Loan
Agreement provided the Borrowers with a $15 million revolving line
of credit (the “AloStar 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
AloStar Credit Facility was extended to June 28, 2017 and the
minimum interest rate floor became 4.25% per annum. On May 10,
2017, the AloStar Loan Agreement was terminated, and the existing
balance due was repaid with the proceeds from a new loan agreement
with SunTrust Bank.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) $20.0 million revolving credit facility, which
includes a $5.0 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 $10.0 million (for a total commitment of up to $30.0 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 was fully repaid and
terminated using proceeds of the revolver in the amount of
approximately $3.0 million.
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 revolving 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 0.25% and 0.50%, 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. There was a $0 balance on the
revolver at January 31, 2019 and 2018.
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 ended 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 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.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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, 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. On December 31, 2016, Lakeland UK entered into
an extension of the maturity date of its existing 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 remained
the same. On September 4, 2017 the facility was amended to include
Algeria as an approved country. On December 4, 2017 the facility
was extended to March 31, 2018 for the next review period and, as
of March 9, 2019 the facility was extended to mature on March 31,
2020 with no additional changes to the terms. The balance under
this loan outstanding at Janaury 31, 2019 and January 31, 2018 was
USD $0.0 million and USD $0.2 million, respectively. The amount of
$0.4 million is due from HSBC, as of January 31, 2019, which is
included in other current assets on the accompanying consolidated
balance sheet as of January 31, 2019.
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 was for
a term of 240 months at an interest rate of 6.45% per annum with
fixed monthly payments of approximately USD $6,048 (CAD $8,169)
including principal and interest. It was collateralized by a
mortgage on the Company's warehouse in Brantford, Ontario. This
loan was paid in full on September 26, 2017.
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
following three loans were made under the $300,000 facility stated
above:
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 was for a term of one year at an interest rate
of 27.06% per annum. This agreement was paid in full prior to
January 31, 2018.
On May
19, 2017 Lakeland Argentina and BNA entered into an agreement for
Lakeland Argentina to obtain a loan in the amount of ARS $1.8
million (approximately USD $112,000, based on exchange rates at
time of closing); such loan is for a term of one year at an
interest rate of 20.0% per annum. This agreement was paid in full
in May 2018.
On
February 26, 2018 Lakeland Argentina and BNA entered into an
agreement for Lakeland Argentina to obtain a loan in the amount of
ARS $4.3 million (approximately USD $215,000, based on exchange
rates at time of closing); such loan is for a term of one year at
an interest rate of 32.0% per annum. This agreement was paid in
full in January 2019.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below
is a table to summarize the debt amounts above (in
000’s):
|
Short-Term
|
|
Current
Maturity of Long-term
|
|
|
|
|
|
|
|
Argentina
|
$
-----
|
$
31
|
$
-----
|
$
-----
|
$
|
$
|
UK
|
-----
|
180
|
-----
|
-----
|
-----
|
-----
|
USA
|
-----
|
-----
|
1,161
|
1,312
|
158
|
158
|
Totals
|
$
-----
|
$
211
|
$
1,161
|
$
1,312
|
$
158
|
$
158
|
Five-year Debt Payout Schedule
This
schedule reflects the liabilities as of January 31, 2019, and does
not reflect any subsequent event (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings in
USA
|
$
1,319
|
$
158
|
$
1,161
|
$
-----
|
$
-----
|
$
-----
|
$
-----
|
Total
|
$
1,319
|
$
158
|
$
1,161
|
$
-----
|
$
-----
|
$
-----
|
$
-----
|
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 (UK); 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 was approximately $5.4
million total included in the U.S. bank accounts and approximately
$7.4 million total in foreign bank accounts as of January 31,
2019.
Major Customer
No
customer accounted for more than 10% of net sales during FY19 and
FY18.
Major Supplier
Our
largest supplier, Precision Fabrics Group, accounted for 7.63%, and
11% of total purchases in FY19 and FY18, respectively. There were
no other vendors over 10% for either FY19 and FY18.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS’ EQUITY
The
2017, 2015 and 2012 Stock Plans
On June
21, 2017, the stockholders of the Company approved the Lakeland
Industries, Inc. 2017 Equity Incentive Plan (the “2017
Plan”) at the Annual Meeting of Stockholders. The executive
officers and all other employees and directors of the Company,
including its subsidiaries are eligible to participate in the 2017
Plan. The 2017 Plan is administered by the Compensation Committee
of the Board of Directors (the “Committee”), except
that with respect to all non-employee directors, the Committee
shall be deemed to include the full Board. The 2017 Plan provides
for the grant of equity-based compensation in the form of stock
options, restricted stock, restricted stock units, performance
shares, performance units, or stock appreciation rights
(“SARS”).
The
2017 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 Committee has
the authority to determine the type of award, as well as the
amount, terms and conditions of each award, under the 2017 Plan,
subject to the limitations and other provisions of the 2017 Plan.
An aggregate of 360,000 shares of the Company’s common stock
are authorized for issuance under the 2017 Plan, subject to
adjustment as provided in the 2017 Plan for stock splits,
dividends, distributions, recapitalizations and other similar
transactions or events. If any shares subject to an award are
forfeited, expire, lapse or otherwise terminate without issuance of
such shares, such shares shall, to the extent of such forfeiture,
expiration, lapse or termination, again be available for issuance
under the 2017 Plan. The following table summarizes the unvested
shares granted on September 12, 2017 and June 7, 2018, which have
been made under the 2017 Plan.
|
Number of shares
awarded total
|
|
|
|
|
|
Employees
|
42,061
|
63,095
|
84,126
|
101,001
|
Non-Employee
Directors
|
14,414
|
21,622
|
28,829
|
34,595
|
Total
|
56,475
|
84,717
|
112,995
|
135,596
|
|
Value at grant date
(numbers below are rounded to the nearest $100)
|
|
|
|
|
|
Employees
|
$
583,600
|
$
875,400
|
$
1,167,200
|
$
1,401,300
|
Non-Employee
Directors
|
200,000
|
300,000
|
400,000
|
480,000
|
Total
|
$
783,600
|
$
1,175,400
|
$
1,567,200
|
$
1,881,300
|
Of the
total number of shares awarded at Maximum, there are an aggregate
of 112,995 shares underlying restricted stock awards and in
addition in the 2017 Plan there are 6,376 shares underlying awards
of stock appreciation rights with a base price of $13.80 per share.
These stock appreciation rights are classified as liability awards
and are remeasured at fair value each reporting period until the
award is settled. As of January 31, 2019, and 2018 the Company has
recorded a liability in the amount of $25,559, and $1,913,
respectively related to these stock appreciation
rights.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
actual number of shares of common stock of the Company, if any, to
be earned by the award recipients is determined over a full three
fiscal year performance period commencing on February 1, 2017 and
ending on January 31, 2021, based on the level of earnings before
interest, taxes, depreciation and amortization
(“EBITDA”) achieved by the Company over this period.
The EBITDA targets have been set for each of the Minimum, Target,
Maximum and Cap levels, at higher amounts for each of the higher
levels. The actual EBITDA amount achieved is determined by the
Committee and may be adjusted for items determined to be unusual in
nature or infrequent in occurrence, which items may include,
without limitation, the charges or costs associated with
restructurings of the Company or any subsidiary, discontinued
operations, and the cumulative effects of accounting
changes.
Under
the 2017 Plan, as described above, the Company awarded
performance-based restricted stock and stock appreciation rights to
eligible employees and directors. Such awards were at either
Minimum, Target, Maximum or Cap levels, based on three year EBITDA
targets.
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
(Minimum, Target, Maximum, Cap or Zero) at the end of the
performance period and the price of the Company’s common
stock price at the date of grant. The Company is recognizing
expense related to awards under the 2017 Plan at Maximum, including
SARS, and these expenses were $743,757 for the year ended January
31, 2019 and $143,010 for the year ended January 31,
2018.
The
2017 Plan is the successor to 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 were eligible to participate in the 2015 Plan. The
2015 Plan authorized the issuance of awards of restricted stock,
restricted stock units, performance shares, performance units and
other stock-based awards. The 2015 Plan also permitted 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 was issuable under the 2015 Plan
was 100,000 shares. Under the 2015 Plan, as of January 31, 2019,
there were 72,221 shares vested; of which 46,319 shares were issued
and 25,902 shares were returned to the Company to pay employee
taxes. As of January 31, 2019, there are no outstanding shares to
vest according to the terms of the 2015 Plan.
The
2015 Plan, was 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 January 31, 2019, the Company issued 293,887 fully
vested shares of common stock, and at January 31, 2019, 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 awarded
eligible employees and directors with either performance-based or
time-based restricted shares. Performance-based restricted shares
were awarded at either baseline (target), maximum or zero amounts.
The number of restricted shares subject to any award was not tied
to a formula or comparable company target ranges, but rather was
determined at the discretion of the Committee at the end of the
applicable performance period, which was two years under the 2015
Plan and had been three years under the 2012 Plan. The Company
recognized 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.
As of
January 31, 2019, unrecognized stock-based compensation expense
totaled $955,075 pursuant to the 2017 Plan based on the maximum
performance award level. Such unrecognized stock-based compensation
expense totaled $521,593 for the 2017 Plan at the minimum
performance award level. The cost of these non-vested awards is
expected to be recognized over a weighted-average period of three
years for the 2017 Plan.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company recognized total stock-based compensation costs, which are
reflected in operating expenses:
|
|
|
|
|
2012
Plan
|
$
-----
|
$
206
|
2015
Plan
|
-----
|
197,284
|
2017
Plan
|
$
721,111
|
225,162
|
|
721,111
|
422,652
|
|
|
|
Stock appreciation
rights (2017 Plan)
|
$
22,646
|
$
1,913
|
Total stock-based
compensation
|
$
743,757
|
$
424,565
|
Total income tax
benefit recognized for stock-based compensation
arrangements
|
$
267,752
|
$
153,203
|
Shares issued under
2017 and 2015 Stock Plans
|
Outstanding
Unvested Grants at Maximum at Beginning of FY19
|
|
Becoming Vested
during FY19
|
|
Outstanding
Unvested Grants at Maximum at End of
January
31,
2019
|
Restricted stock
grants – employees
|
42,291
|
41,835
|
-----
|
-----
|
84,126
|
Restricted stock
grants – non-employee directors
|
14,493
|
14,336
|
-----
|
-----
|
28,829
|
Retainer in stock
– non-employee directors
|
12,789
|
17,476
|
5,221
|
-----
|
25,044
|
Total
restricted stock
|
69,573
|
73,647
|
5,221
|
-----
|
137,999
|
|
|
|
|
|
|
Weighted average
grant date fair value
|
$
13.63
|
$
13.66
|
$
10.19
|
-----
|
$
13.77
|
Other Compensation Plans/Programs
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, and is subject
to a vesting requirement, the amount of shares awarded is 133% of
the cash amount based on the grant date stock price. As of January
31, 2019, unrecognized stock-based compensation expense related to
these restricted stock awards totaled $0 for the 2015 Plan and
$55,765 for the 2017 Plan. The cost of these non-vested awards is
expected to be recognized over a two-year weighted-average period.
In addition, as of January 31, 2019, the Company issued 5,221
shares from the 2015 Plan and granted awards for up to an aggregate
of 25,044 shares for the 2017 Plan.
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
repurchased 105,649 shares of stock under this program as of the
date of this filing which amounted to $1,161,736, inclusive of
commissions.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrant
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 January 31, 2019 and 2018, the warrant to purchase up
to 55,500 shares remains outstanding.
Shelf Registration
On
March 24, 2017, the Company filed a shelf registration statement on
Form S-3 (File No. 333-216943) which was declared effective by the
SEC on April 11, 2017 (the “Shelf Registration
Statement”). The shelf registration statement permits the
Company to sell, from time to time, up to an aggregate of $30.0
million of various securities, including shares of common stock,
shares of preferred stock, debt securities, warrants to purchase
common stock, preferred stock, debt securities, and/or units,
rights to purchase common stock, preferred stock, debt securities,
warrants and/or units, units of two or more of the foregoing, or
any combination of such securities, not to exceed one-third of the
Company's public float in any 12-month period.
Public Offering
On
August 17, 2017, the Company entered into an underwriting agreement
(the “Underwriting Agreement”) with Roth Capital
Partners, LLC and Craig-Hallum Capital Group LLC, as underwriters
(collectively, the “Underwriters”), to issue and sell
725,000 shares of common stock, par value $0.01 per share
(“Common Stock”), of the Company at a public offering
price of $13.80 per share (the “Offering Price”) in a
firm commitment underwritten public offering. The underwriting
discount was $0.966 per share sold in the Offering. The Offering
with respect to the sale of the 725,000 shares of Common Stock
closed on August 22, 2017. Pursuant to the Underwriting Agreement,
the Underwriters had the option, exercisable for a period of
45-days after execution of the Underwriting Agreement, to purchase
up to an additional 108,750 shares of the Common Stock at the
Offering Price. In September 2017, the Underwriters exercised their
option to purchase 83,750 shares of Common Stock. The net proceeds
to the Company from the Offering, including the overallotment, were
approximately $10.1 million, after deducting underwriting discounts
and estimated offering expenses payable by the
Company.
The
offer and sale of shares of Common Stock in the Offering were
registered under the Securities Act of 1933, as amended, pursuant
to the Shelf Registration Statement. The offer and sale of the
shares of Common Stock in the Offering are described in the
Company’s prospectus constituting a part of the Shelf
Registration Statement, as supplemented by a final prospectus
supplement filed with the Commission on August 18,
2017.
8. INCOME TAXES
The
provision for income taxes is based on the following pretax income
(loss):
Domestic
and Foreign Pretax Income (Loss)
|
|
|
Domestic
|
$
(1,116
)
|
$
7,480
|
Foreign
|
4,597
|
863
|
|
|
|
Total
|
$
3,481
|
$
8,343
|
Income
Tax Expense (Benefit)
|
|
|
Current:
|
|
|
Federal
|
$
45
|
$
600
|
State
and other taxes
|
20
|
20
|
Foreign
|
1,667
|
1,325
|
Total Current
Tax Expense
|
$
1,732
|
$
1,945
|
|
|
|
Deferred:
|
|
|
Domestic
|
$
290
|
$
5,955
|
Valuation
allowance-deferred tax asset
|
-----
|
3
|
Foreign
|
-----
|
-----
|
Total Deferred Tax
Expense
|
290
|
5,958
|
Total
Income Taxes
|
$
2,022
|
$
7,903
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a reconciliation of the effective income tax rate to
the Federal statutory rate:
|
|
|
Statutory
rate
|
21.00
%
|
33.81
%
|
State Income Taxes,
Net of Federal Tax Benefit
|
6.89
|
2.27
|
Adjustment to
Deferred
|
(0.92
)
|
-----
|
Foreign Dividend
and Subpart F Income
|
-----
|
(17.19
)
|
Transition Tax (net
of FTC from Transition Tax)
|
-----
|
26.53
|
Argentina Flow
Through Loss
|
1.37
|
0.38
|
GILTI
|
16.85
|
-----
|
Permanent
Differences
|
0.63
|
(1.32
)
|
Valuation
Allowance-Deferred Tax Asset
|
(24.46
)
|
0.34
|
Foreign Tax
Credit
|
24.46
|
|
Foreign Rate
Differential
|
20.16
|
|
Rate
Change
|
(5.63
)
|
47.17
|
Other
|
(2.25
)
|
2.74
|
Effective
Rate
|
58.09
%
|
94.73
%
|
The tax
effects of temporary cumulative differences which give rise to
deferred tax assets at January 31, 2019 and 2018 are summarized as
follows:
|
|
|
Deferred tax
assets:
|
|
|
Inventories
|
$
849
|
$
866
|
US tax loss
carryforwards, including work opportunity credit*
|
4,290
|
4,411
|
Accounts receivable
and accrued rebates
|
233
|
242
|
Accrued
compensation and other
|
314
|
190
|
India reserves - US
deduction
|
46
|
19
|
Equity based
compensation
|
299
|
126
|
Foreign tax credit
carry-forward
|
1,348
|
2,199
|
State and local
carry-forwards
|
1,116
|
1,017
|
Argentina timing
difference
|
32
|
37
|
Depreciation and
other
|
59
|
90
|
Amortization
|
(193
)
|
(174
)
|
Brazil
write-down
|
222
|
181
|
Allowance for Note
Receivable - Brazil
|
-----
|
552
|
Deferred tax
asset
|
8,615
|
9,756
|
Less valuation
allowance
|
1,348
|
2,199
|
Net deferred tax
asset
|
$
7,267
|
$
7,557
|
*The federal net operating loss (“NOL”) that is left
after FY19 will expire after 1/31/2034 (20 years from the generated
date of 1/31/2014). The credits will begin to expire after
1/31/2020 (10 years from the 1st carryover year generated date of
1/31/2010) and will fully expire after 1/31/2028.
The state NOLs will begin to expire after 1/31/2025 and will
continue to expire at various periods up until 1/31/2038 when they
will be fully expired. The states have a larger spread because some
only carryforward for 15 years and some allow 20
years.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax Reform
On
December 22, 2017, new federal tax reform legislation was enacted
in the United States, resulting in significant changes from
previous tax law. The 2017 Tax Cuts and Jobs Act (the Tax
Act) reduces the federal corporate income tax rate to 21% from 35%
effective January 1, 2018. As a result of the Tax Act, we
applied a blended U.S. statutory federal income tax rate of 33.811%
in FY18. The Tax Act requires us to recognize the effect of
the tax law changes in the period of enactment, such as determining
the transition tax (see below), re-measuring our US deferred tax
assets as well as reassessing the net realizability of our deferred
tax assets. The Company completed this re-measurement and
reassessment in FY18. The rate change, along with certain
immaterial changes in tax basis resulting from the 2017 Tax Act,
resulted in a reduction of our net deferred tax asset to $7.6
million with related income tax expense of $5.1 million, thus
dramatically increasing our effective tax rate in the fiscal year
ended January 31, 2018. While the Tax Act provides for a modified
territorial tax system, beginning in 2018
,
it includes two new
U.S. tax base erosion provisions, the global intangible low-taxed
income (“GILTI”) provisions and the base-erosion and
anti-abuse tax (“BEAT”) provisions. The GILTI
provisions require the Company to include in its U.S. income tax
return foreign subsidiary earnings in excess of an allowable return
on the foreign subsidiary’s tangible assets. The proposed
regulations were not finalized as of January 31,
2019
and, as of this reporting date, remain
in the proposal stage. Due to this uncertainty, it is difficult to
predict the future impact, however, the Company does expect
that the GILTI income inclusion will result in significant U.S. tax
expense beginning in FY19
.
Re-measurement and reassessment
of the GILTI tax as it is currently written resulted in a charge to
tax expense of $0.6 million in FY19. The Company intends to account
for the GILTI tax in the period in which it is incurred. Though
this non-cash expense had a materially negative impact on FY19
earnings, the Tax Act also changes the taxation of foreign
earnings, and companies generally will not be subject to United
States federal income taxes upon the receipt of dividends from
foreign subsidiaries
.
The
BEAT provisions in the Tax Act pertain to companies with average
annual gross receipts of $500 million for the prior 3-year period
and eliminate the deduction of certain base-erosion payments made
to related foreign corporations and impose a minimum tax if greater
than regular tax. Based on current guidelines the Company
does not
expect
the BEAT provision to have an impact on U.S. tax
expense
Transition Tax
Upon
enactment, there was a one-time deemed repatriation tax on
undistributed foreign earnings and profits (the “transition
tax”). This tax was assessed on the U.S. Shareholder’s
share of the foreign corporation’s accumulated foreign
earnings and profits that were not previously been taxed.
Earnings in the form of cash and cash equivalents was taxed at a
rate of 15.5% and all other earnings and profits were taxed at a
rate of 8.0%. We recognized tax expense of $5,120,928 related
to the transition tax in 2017. However, foreign tax credits
were used in the amount of $5,120,928 to fully offset this
transition tax and the Company will not incur any cash outlay
related to this tax.
We
previously considered substantially all of the earnings in our
non-U.S. subsidiaries to be indefinitely reinvested outside the
U.S. and, accordingly, recorded no deferred income taxes on such
earnings. At this time, the applicable provisions of the Tax
Act have been fully analyzed and our intention with respect to
unremitted foreign earnings is to continue to indefinitely reinvest
outside the U.S. those earnings needed for working capital or
additional foreign investment. As stated above, GILTI is
recognized in the period it is incurred and is not considered with
regard to deferred income tax on unremitted E&P. All
international subsidiaries are impacted by GILTI
calculation.
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 years since FY16 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 January 31, 2019. 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 entity of our Chinese operation thereby reducing our tax
exposure.
Lakeland Industries, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 returns for the 2014 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 (Note 12), 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 in FY16. 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.
As
mentioned above, it’s the Company’s intention is to
reinvest outside the US those earnings needed for working capital
or foreign investment. As a result of the transition tax, $5.0
million of foreign income was repatriated at the end of FY18.
However, the Company has no intention to repatriate earnings with
regards with GILTI.
In the fiscal year
ended January 31, 2019, no dividends were declared. It is the
Company’s practice and intention to reinvest the earnings of
our non-US subsidiaries in their operations with the exception of
the dividend plan.
Change in Valuation
Allowance
We
record net deferred tax assets to the extent we believe these
assets will more likely than not be realized. The valuation
allowance decreased approximately $0.9 million and $0.0 for the
years ended January 31, 2019 and 2018, respectively.
9.
EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted
earnings per share for the years ended January 31, 2019 and 2018 as
follows:
|
Years Ended January
31,
(000’s except
share information)
|
|
|
|
Numerator
|
|
|
Net
income
|
$
1,459
|
$
440
|
Denominator
|
|
|
Denominator for
basic earnings per share (weighted-average shares which reflect
362,840 shares in the treasury at January 31, 2019 and 356,441
shares in the treasury at January 31, 2018)
|
8,111,458
|
7,638,264
|
Effect of dilutive
securities from restricted stock plan and from dilutive effect of
stock options
|
58,943
|
53,289
|
Denominator for
diluted earnings per share (adjusted weighted average
shares)
|
8,170,401
|
7,691,553
|
Basic earnings per
share
|
$
0.18
|
$
0.06
|
Diluted earnings
per share
|
$
0.18
|
$
0.06
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.
BENEFIT PLANS
Defined Contribution Plan
Pursuant to the
terms of the Company’s 401(k) plan, substantially all US
employees over 21 years of age with a minimum period of service are
eligible to participate. The 401(k) plan is administered by the
Company and provides for voluntary employee contributions ranging
from 1% to 100% of the employee’s compensation. Beginning in
January 2016 the Company changed to a Safe Harbor tiered matching
plan equal to 100% of the first 1% of eligible participant’s
compensation contributed to the Plan and 50% of the next 5% of
eligible participant’s compensation contributed to the Plan
(maximum Company match 3.5% of salary) and totaled approximately
$209,100 and $198,000 in the years ended January 31, 2019 and 2018,
respectively.
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 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
one type of derivatives to manage the risk of foreign currency
fluctuations.
We
entered 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, were generally
settled quarterly. Gain and loss on those forward contracts are
included in current earnings. There were no outstanding forward
contracts at January 31, 2019 or 2018.
12.
COMMITMENTS AND CONTINGENCIES
Certain
conditions may exist as of the date the consolidated financial
statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events
occur or fail to occur. The Company’s management and its
legal counsel assess such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are
pending against the Company or unasserted claims that may result in
such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims, as
well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If the
assessment of a contingency indicates that it is probable that a
material loss has been or is probable of being incurred and the
amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s consolidated
financial statements. If the assessment indicates that a
potentially material loss contingency is not probable, but is
reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, together with an estimate
of the range of possible loss if determinable and material, would
be disclosed.
Loss
contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature of the guarantee
would be disclosed.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s Exit from Brazil
On
March 9, 2015, Lakeland Brazil, S.A. 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
(“Lakeland Brazil”).
Transfer
of Shares 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. 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 USD $1,130,000, in cash, in the form of a
capital raise, on or prior to the Closing Date, and agreed to
provide an additional R$582,000 (approximately USD $188,000) (the
“Additional Amount”), in the form of a capital raise,
to be utilized by Lakeland Brazil to pay off certain specified
liabilities and other potential contingent liabilities. Pursuant to
the Shares Transfer Agreement, the Company paid R$992,000
(approximately USD $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 USD $188,000) on
the Closing Date which was paid to Lakeland Brazil in two (2)
installments of (i) R$288,300 (approximately USD $82,000) which was
paid on August 1, 2015, and (ii) R$294,500 (approximately USD
$84,000) on September 1, 2015. 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”).
Although the
Company formally completed the terms of the “Shares Transfer
Agreement”, pursuant to which our entire equity interest in
our former Brazilian subsidiary (“Lakeland Brazil”) was
transferred,during the fiscal year ended January 31, 2016, we may
continue to be exposed to certain liabilities arising in connection
with the operations of Lakeland Brazil, which was shut down in late
March 2019. The Company understands that under the laws of Brazil,
a parent company may be held liable for the liabilities of a former
Brazilian subsidiary in the event of fraud, misconduct, or under
various theories. In this respect, as regards labor claims, a
parent company could conceivably be held liable for the liabilities
of a former Brazilian subsidiary. Although the Company would have
the right of adversary system, full defense and due process, in
case of a potential litigation, there can be no assurance as to the
findings of the courts in Brazil.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan
Agreement with Transferee of Brazil Operations
The
Company had entered into a loan agreement (the “Loan
Agreement”) on December 11, 2015 with Lakeland Brazil for the
amount of R$8,584,012 (approximately USD $2.29 million) for the
purpose of providing funds necessary for Lakeland Brazil to settle
its largest outstanding VAT claim with the State of Bahia. The
Company determined that a reserve against the collection of this
loan in full was, prudent and recorded this charge in the fiscal
year ended January 31, 2016. The Company determined in the current
fiscal year ended January 31, 2019 this note would not be repaid
and therefore wrote it off in its entirety.
VAT
Tax Issues in Brazil
Value
Added Tax (“VAT”) in Brazil is charged at the state
level. We commenced operations in Brazil in May 2008 through the
acquisition of Lakeland Brazil. An audit performed on the VAT for
the 2007-2009 period was completed by the State of Bahia (state of
domicile for the Lakeland operations in
Brazil). In October 2010, the Company received four
claims for 2007-2009 from the State of Bahia, the largest of which
was for taxes of R$6.2 million (USD $2.3 million) and interest,
penalties and fees of R$8.3 million (USD $3.1 million), for a total
of R$14.6 million (USD $5.4 million). This large VAT claim
was settled in the fiscal year ended January 31, 2016 using funds
from the loan described above. Of other claims, our attorney
informed us that three claims totaling R$1.3 million (USD $0.5
million) excluding interest, penalties and fees of R$2.7 million
(USD $0.9 million) were likely to be successfully defended based on
state auditor misunderstanding.
Labor
Claims in Brazil
As
disclosed in our periodic filings with the SEC, we agreed to make
certain payments in connection with ongoing labor litigation
involving our former Brazilian subsidiary. While the vast
majority of these labor suits have been resolved, there are labor
cases that remain active and a civil case filed by a former officer
of our former Brazilian subsidiary, in which Lakeland was named as
a co-defendant.
The
first case was initially filed in 2010 claiming USD $100,000 owed
to plaintiff. This case is on its final appeal to the Brazilian
Supreme Court, having already been ruled upon in favor of Lakeland
three (3) times, most recently by the Labor Court Supreme Court.
The claimant having lost four (4) times previously, management
firmly believes that Lakeland will continue to prevail in this
case. A second case filed against Lakeland by a former
officer of Lakeland Brazil , was filed in Labor court in 2014
claiming Lakeland owed USD $300,000. The Labor court ruled
that the claimant’s case was outside of the scope of the
Labor court and the case was dismissed. The claimant is appealing
within the Labor court system. A third case filed by a former
Lakeland Brazil manager in 2014 was ruled upon in civil court and
awarded the claimant USD $100,000. Both the claimant and Lakeland
have appealed this decision. In the last case a former
officer of our former Brazilian subsidiary filed a claim seeking
approximately USD $700,000 that he alleges is due to him against an
unpaid promissory note. Lakeland has not been served with process
and no decision on the merits has been issued in this case yet.
Management firmly believes these claims to be without any merit and
does not anticipate a negative outcome resulting in significant
expense to us.
Lakeland Brazil may
face new labor lawsuits in the short term as a result of the
shutdown of its operations in March 2019. The Company has no
obligation under the Shares Transfer Agreement to make any
additional payments in connection with these potential new labor
lawsuits. The Company also understands that under the labor laws of
Brazil, a parent company may be held liable for the labor
liabilities of a former Brazilian subsidiary in the case of fraud,
misconduct, or under various theories.
Although the
Company would have the right of adversary system, full defense and
due process in case of a potential litigation, there can be no
assurance as to the findings of the courts of
Brazil.
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There
are additional cases in Labor and Civil courts against Lakeland
Brazil in which Lakeland is not a party, and other outstanding
monetary alligations of Lakeland Brazil.
In
FY19, the Company recorded an accrual of $1.2 million for
professional fees and litigation reserves associated with labor
claims in Brazil. The accrual on the balance sheet at January 31,
2019 is $1.2 million.
General litigation contingencies
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 January 31, 2019, to the best of
the Company’s knowledge, there were no outstanding claims or
litigation, except for the labor contingencies in Brazil described
above.
Employment Contracts
The
Company has employment contracts expiring through fiscal year
ending January 31, 2020, with four principal officers. Pursuant to
such contracts, the Company is committed to aggregate annual base
remuneration of $890,000 and $175,417 for FY20 and FY21,
respectively.
Leases
Total
rental costs under all operating leases are summarized as
follows:
Year
ended January 31,
|
|
|
|
2019
|
$
1,022,162
|
2018
|
$
841,235
|
Minimum
annual rental commitments for the remaining term of the
Company’s noncancelable operating leases relating to
manufacturing facilities, office space and equipment rentals at
January 31, 2019, including lease renewals subsequent to year end,
are summarized as follows:
Year ending January 31,
|
|
|
2020
|
761,350
|
2021
|
446,494
|
2022
|
435,310
|
2023
|
313,633
|
2024
|
8,418
|
and
thereafter
|
8,944
|
Total
|
$
1,974,149
|
13.
SEGMENT REPORTING
Domestic and
international sales from continuing operations are as follows in
millions of dollars:
|
|
|
|
|
Domestic
|
$
49.88
|
50.38
%
|
$
50.45
|
52.55
%
|
International
|
49.13
|
49.62
%
|
$
45.54
|
47.45
%
|
Total
|
$
99.01
|
100.00
%
|
$
95.99
|
100.00
%
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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), a
manufacturing facility in Veitnam (primarily disposable 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 years noted
therein:
|
|
|
|
|
|
|
|
USA
Operations
|
$
54.72
|
$
54.79
|
Other
foreign
|
5.52
|
3.85
|
Europe
(UK)
|
9.42
|
9.11
|
Mexico
|
4.90
|
3.87
|
Asia
|
56.36
|
52.63
|
Canada
|
8.58
|
8.26
|
Latin
America
|
7.05
|
6.50
|
Corporate
|
0.75
|
1.60
|
Less intersegment
sales
|
(48.29
)
|
(44.62
)
|
|
$
99.01
|
$
95.99
|
External
Sales
|
|
|
USA
Operations
|
$
49.88
|
$
50.45
|
Other
foreign
|
3.02
|
2.40
|
Europe
(UK)
|
9.42
|
9.07
|
Mexico
|
3.51
|
2.48
|
Asia
|
18.00
|
17.12
|
Canada
|
8.56
|
8.26
|
Latin
America
|
6.62
|
6.21
|
Consolidated
external sales
|
$
99.01
|
$
95.99
|
Intersegment
Sales
|
|
|
USA
Operations
|
$
4.84
|
$
4.34
|
Other
foreign
|
2.52
|
1.45
|
Europe
(UK)
|
-----
|
0.04
|
Mexico
|
1.38
|
1.39
|
Asia
|
38.35
|
35.51
|
Canada
|
0.02
|
-----
|
Latin
America
|
0.43
|
0.29
|
Corporate
|
0.75
|
1.60
|
Consolidated
intersegment sales
|
$
48.29
|
$
$44.62
|
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
Operating Profit
(Loss):
|
|
|
USA
Operations
|
$
7.02
|
$
10.15
|
Other
foreign
|
0.26
|
0.51
|
Europe
(UK)
|
0.20
|
0.16
|
Mexico
|
0.07
|
(0.02
)
|
Asia
|
2.63
|
3.28
|
Canada
|
1.01
|
1.42
|
Latin
America
|
0.70
|
0.61
|
Corporate
|
(8.22
)
|
(7.69
)
|
Less intersegment
profit
|
(0.10
)
|
0.06
|
Consolidated
operating profit (loss)
|
$
3.57
|
$
8.48
|
Depreciation and
Amortization Expense:
|
|
|
USA
Operations
|
$
0.22
|
$
0.12
|
Other
foreign
|
0.05
|
0.03
|
Europe
(UK)
|
0.01
|
0.01
|
Mexico
|
0.13
|
0.11
|
Asia
|
0.27
|
0.25
|
Canada
|
0.06
|
0.08
|
Latin
America
|
0.04
|
0.04
|
Corporate
|
0.22
|
0.18
|
Less
intersegment
|
(0.03
)
|
(0.05
)
|
Consolidated
depreciation and amortization expense
|
$
0.97
|
$
0.77
|
Interest
Expense:
|
|
|
Other
foreign
|
$
-----
|
$
-----
|
Europe
(UK)
|
0.01
|
0.01
|
Canada
|
-----
|
0.04
|
Latin
America
|
0.04
|
0.01
|
Corporate
|
0.08
|
0.10
|
Consolidated
interest expense
|
$
0.13
|
$
0.16
|
Income Tax Expense
(Benefit):
|
|
|
USA Operations
(shown in Corporate)
|
$
-----
|
$
-----
|
Other
foreign
|
-----
|
0.06
|
Europe
(UK)
|
0.03
|
0.05
|
Mexico
|
0.12
|
-----
|
Asia
|
1.04
|
0.60
|
Canada
|
0.23
|
0.40
|
Latin
America
|
0.26
|
0.21
|
Corporate
|
0.35
|
6.58
|
Less
intersegment
|
(0.01
)
|
$
-----
|
Consolidated income
tax expense (benefit)
|
$
2.02
|
$
7.90
|
|
|
|
|
|
|
|
|
Total Assets:
*
|
|
|
USA
Operations
|
$
67.26
|
$
67.02
|
Other
foreign
|
1.54
|
1.29
|
Europe
(UK)
|
4.37
|
4.63
|
Mexico
|
5.00
|
4.69
|
Asia
|
39.52
|
31.59
|
Canada
|
7.47
|
6.07
|
Latin
America
|
7.42
|
12.09
|
Corporate
|
25.07
|
22.27
|
Less
intersegment
|
(62.93
)
|
(55.12
)
|
Consolidated
assets
|
$
94.72
|
$
94.53
|
Total Assets Less
Intersegment:*
|
|
|
USA
Operations
|
$
29.76
|
$
33.16
|
Other
foreign
|
2.85
|
2.73
|
Europe
(UK)
|
4.36
|
4.63
|
Mexico
|
5.13
|
4.84
|
Asia
|
20.97
|
16.97
|
Canada
|
6.64
|
5.27
|
Latin
America
|
5.27
|
5.59
|
Corporate
|
19.74
|
21.34
|
Consolidated
assets
|
$
94.72
|
$
94.53
|
Property and
Equipment (excluding asset held for sale at $0.2 million at January
31, 2018):
|
|
|
USA
Operations
|
$
2.25
|
$
1.99
|
Other
foreign
|
0.19
|
0.16
|
Europe
(UK)
|
0.01
|
0.03
|
Mexico
|
2.14
|
1.99
|
Asia
|
3.17
|
1.92
|
Canada
|
1.26
|
1.38
|
Latin
America
|
0.07
|
0.11
|
Corporate
|
1.62
|
1.18
|
Less
intersegment
|
0.07
|
0.03
|
Consolidated
long-lived assets
|
$
10.78
|
$
8.79
|
Capital
Expenditures:
|
|
|
USA
Operations
|
$
0.01
|
$
0.03
|
Other
foreign
|
0.07
|
0.14
|
Europe
(UK)
|
-----
|
-----
|
Mexico
|
0.28
|
0.06
|
Asia
|
1.64
|
0.12
|
Canada
|
0.03
|
-----
|
Latin
America
|
-----
|
-----
|
Corporate
|
1.07
|
0.56
|
Consolidated
capital expenditure
|
$
3.10
|
$
0.91
|
Goodwill:
|
|
|
USA
Operations
|
$
0.87
|
$
0.87
|
Consolidated
goodwill
|
$
0.87
|
$
0.87
|
Negative assets
reflect intersegment amounts eliminated in
consolidation
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In
connection with the preparation of this report, an evaluation was
carried out by certain members of Company management, with the
participation of the Chief Executive Officer (“CEO”)
and the Chief Financial Officer (“CFO”) of the
effectiveness of the Company’s disclosure controls and
procedures (as defined in Securities and Exchange
Commission’s (SEC) Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (“Exchange Act”)) as of
January 31, 2019. Disclosure controls and procedures are designed
to ensure that information required to be disclosed in reports
filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the
SEC’s rules and forms, and that such information is
accumulated and communicated to management, including the CEO and
the CFO, to allow timely decisions regarding required
disclosures.
Due to
material weaknesses in internal control over financial reporting
described below, management concluded that the Company’s
disclosure controls and procedures were not effective as of January
31, 2019. Notwithstanding the existence of these material
weaknesses, management believes that the consolidated financial
statements in this annual report filed on Form 10-K present, in all
material respects, the Company’s financial condition as
reported, in conformity with United States Generally Accepted
Accounting Principles (“GAAP”).
Management’s Report on Internal
Control over Financial Reporting
The
Company’s management is responsible for establishing and
maintaining effective internal control over financial reporting
(ICOFR), as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange
Act. Our internal control over financial reporting is a process,
under the supervision of the CEO and CFO, designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company’s financial
statements for external purposes in accordance with
GAAP.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
Management has
completed an assessment of the effectiveness of the company’s
internal control over financial reporting as of January 31, 2019,
based on criteria established in
Internal Control – Integrated Framework
(2013)
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). As a
result of this assessment, management has concluded controls were
not effective due to identified material weaknesses in
internal control over financial reporting. A material weakness is a
control deficiency, or a combination of deficiencies, in internal
control over financial reporting such that there is a reasonable
possibility that a material misstatement of the Company’s
annual or interim financial statements will not be prevented or
detected on a timely basis. The material
weaknesses identified are disclosed below:
(i)
Revenue Recognition.
The Company did
not design, implement and consistently operate effective
process-level and information technology general control
(“ITGC”) controls over revenue
recognition;
(ii)
Inventory Valuation.
The Company
did not design, implement and consistently operate effective
process-level, ITGC and system development lifecycle controls over
the product costing and valuation process to ensure the appropriate
valuation of inventory at year-end; and
(iii)
Monitoring Entity Level Controls
. The
Company did not design, implement and consistently operate
effective entity-level monitoring and ITGC controls, including
management review controls, over the foreign locations and
consolidated entity.
As a
result of these material weaknesses, the Company’s
management has concluded that, as of January 31, 2019 the
Company’s internal control over financial reporting was not
effective based on the criteria in Internal Control –
Integrated Framework (2013) issued by the COSO.
Management
communicated the results of its assessment to the Audit Committee
of the Board of Directors. The Company’s independent
registered public accounting firm, Friedman, LLP, has expressed an
adverse opinion on our internal control over financial reporting as
of January 31, 2019 in the audit report that appears in Item 8 of
this Annual Report on Form 10-K.
Remediation Efforts
Management is
committed to the remediation of the material
weaknesses described above, as well as the continued
improvement of the Company’s internal control over financial
reporting. Management has identified and implemented, and continue
to implement, the actions described below to remediate the
underlying causes of the control deficiencies that gave rise to
the material weaknesses. Until the remediation efforts
described below, including any additional measures management
identifies as necessary, are completed, the material
weaknesses described above will continue to
exist.
To
address the material weakness associated with Revenue Recognition,
management has completed, or is in the process of:
■
implementing new
operational policies and procedures supporting pricing and sales
orders;
■
adding personnel to
eliminate segregation of duty deficiencies; and,
■
developing
enhancements to the Company’s systems and processes,
including data input controls, approval workflows, and review of
revenue transactions.
To
address the material weakness associated with inventory valuation,
management has completed, or is in the process of:
■
evaluating and
remediating inventory control design for bill of material
changes;
■
evaluating and
implementing consistent inventory valuation policies across all
subsidiaries;
■
establishing
standard costs within the enterprise resource planning system;
and,
■
educating control
owners concerning the principles and requirements of each
control.
To
address the material weakness associated with Financial Reporting
and Monitoring, management has completed, or is in the process
of:
■
developing and
documenting thresholds for monitoring controls to enhance precision
of review,
■
adding personnel to
allow for an additional level of review within the financial
reporting and monitoring functions; and,
■
developing
policies and procedures to ensure the control documentation
supports the operating effectiveness of the
control.
Relative to the
ITGC component that relates to all three of the material
weaknesses, management has completed, or is in the process
of:
■
engaging a
third-party firm which specializes in outsourced internal audit to
assist in the ITGC related remediation efforts;
■
conducting training
programs addressing ITGCs and policies, including educating control
owners concerning the principles and requirements of each control,
with a focus on those related to user access and change-management
over IT systems impacting financial reporting;
■
evaluating and
remediating IT control design for key areas such as Change
Management and Logical Access, or adding mitigating controls to
address risks associated with segregation of duties;
and,
■
developing control
documentation underlying ITGCs to promote knowledge transfer upon
personnel and function changes.
While
some of these measures have been completed as of the date of this
report, management has not completed and tested all the planned
corrective processes, enhancements, procedures and related
evaluation that necessary to determine whether the material
weaknesses have been fully remediated. Moreover, the
corrective actions and controls need to be in operation for a
sufficient period of time for management to conclude that the
control environment is operating effectively and has been
adequately tested by management. Accordingly, the material
weaknesses have not been fully remediated as of the date of
this report. As the Company continues its evaluation and
remediation efforts, management may modify the actions described
above or identify and take additional measures to address control
deficiencies. Management will continue to assess the effectiveness
of the remediation efforts in connection with its ongoing
evaluation of internal control over financial
reporting.
Changes in Internal Control over Financial Reporting
Other
than the remediation efforts described above, which were ongoing
during the last fiscal quarter ended January 31, 2019, there were
no other changes in the Company’s internal control over
financial reporting identified in management’s evaluation
pursuant to Rules 13a-15(f) and 15d-15(f) of the Exchange Act
during the quarter ended January 31, 2019 that materially affected,
or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
ITEM
9B. OTHER
INFORMATION
None
The
information required by Part III: Item 10, Directors, Executive
Officers and Corporate Governance; Item 11, Executive Compensation;
Item 13, Certain Relationships and Related Transactions and
Director Independence; and Item 14, Principal Accountant Fees and
Services is included in and incorporated by reference to
Lakeland’s definitive proxy statement in connection with its
Annual Meeting of Stockholders scheduled to be held in June 2019,
to be filed with the Securities and Exchange Commission within 120
days following the end of Lakeland’s fiscal year ended
January 31, 2019. Information relating to the executive officers of
the Registrant appears under Item 1 of this report.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS
The
information regarding security ownership of certain beneficial
owners and management that is required to be included pursuant to
this Item 12 is included in and incorporated by reference to
Lakeland’s definitive proxy statement in connection with its
Annual Meeting of Stockholders scheduled to be held in June
2019.
Equity Compensation Plans
The
following sets forth information relating to Lakeland’s
equity compensation plans as of January 31, 2019
:
|
Number of
securities to be issued upon exercise of outstanding options,
warrants and rights (1)
(a)
|
Weighted-average
exercise price per share of outstanding options, warrants and
rights
(b)
|
Number of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))(1)
(c)
|
Equity Compensation
plans approved by security holders
|
144,375
|
$
13.77
|
215,625
|
Equity compensation
plans not approved by security holders
|
-----
|
-----
|
-----
|
Total
|
144,375
|
$
13.77
|
215,625
|
(1)
The total reflected
in column (c) includes shares available for grant as any type of
equity award under our 2017 Equity Incentive Plan.
During the fourth
quarter of FY19, stock repurchases were as follows:
|
(a) Total number of
shares (or units) purchased
|
(b) Average price
paid per share (or unit)
|
(c) Total number of
shares (or units) purchased as part of publicly announced plans or
programs
|
(d) Maximum number
(or approximate dollar value) of shares (or units) that may yet be
purchased under the plans or programs
|
11/01/18 –
11/30/18
|
-----
|
$
-----
|
-----
|
$
2,500,000
|
12/19/18 –
12/31/18
|
29,469
|
$
10.35
|
29,469
|
2,200,000
|
01/02/19 –
01/31/19
|
76,179
|
$
11.25
|
76,179
|
1,300,000
|
Total
|
$
105,648
|
$
10.99
|
-----
|
$
1,300,000
|
PA
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a.
(1) Financial
Statements - Covered by Report of Independent Registered Public
Accounting Firm
(A)
Consolidated
Statements of Operations for the years ended January 31, 2019 and
2018
(B)
Consolidated
Statements of Comprehensive Income for the years ended January 31,
2019 and 2018
(C)
Consolidated
Balance Sheets at January 31, 2019 and 2018
(D)
Consolidated
Statements of Stockholders’ Equity for the years ended
January 31, 2019 and 2018
(E)
Consolidated
Statements of Cash Flows for the years ended January 31, 2019 and
2018
(F)
Notes to
Consolidated Financial Statements
(4) Exhibits
– See (b) below
b.
Exhibits
Exhibit No.
|
|
Description
|
3.1
|
|
Restated
Certificate of Incorporation of Lakeland Industries, Inc., as
amended (incorporated by reference to Exhibit 3.2 of Lakeland
Industries, Inc.’s Form 10-Q filed December 7,
2011).
|
3.2
|
|
Amended
and Restated Bylaws of Lakeland Industries Inc., (incorporated by
reference to Exhibit 3.1 of Lakeland Industries, Inc.’s Form
8-K filed April 28, 2017).
|
4.1
|
|
2015
Stock Plan (incorporated by reference to Exhibit 4.1 of Lakeland
Industries, Inc. Registration Statement on Form S-8 filed July 24,
2015).
|
4.2
|
|
Lakeland
Industries, Inc. 2017 Equity Incentive Plan (incorporated by
reference to Exhibit 4.1 of Lakeland Industries, Inc.’s Form
8-K filed June 22, 2017).
|
4.3
|
|
Form of
Registration Rights Agreement, dated October 24, 2014, by and among
Lakeland Industries, Inc. and the several purchasers signatory
thereto (incorporated by reference to Exhibit 4.1 of Lakeland
Industries, Inc.’s Form 8-K filed October 24,
2014).
|
10.1
|
|
Employment
Agreement, dated April 16, 2010, between Lakeland Industries, Inc.
and Christopher J. Ryan (incorporated by reference to Exhibit 10.5
of Lakeland Industries, Inc. Form 10-K for the fiscal year ended
January 31, 2010, filed April 16, 2010).
|
10.2
|
|
Lakeland
Industries, Inc. Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.1 to Lakeland Industries, Inc. Form 8-K
filed June 29, 2012).
|
10.3
|
|
Lease
Agreement, dated April 4, 2011, between Wallingfen Park Limited, as
lessor, and Lakeland Industries, Inc., as lessee (incorporated by
reference to Exhibit 10.1 of Lakeland Industries, Inc. Form 10-Q
for fiscal quarter ended April 30, 2015).
|
10.4
|
|
Agreement for the
Purchase of Debts, dated January 29, 2013 between HSBC Invoice
Finance (UK) Limited and Lakeland Industries Europe Limited
(incorporated by reference to Exhibit 10.1 to Lakeland Industries,
Inc. Form 8-K filed February 25, 2013).
|
10.5
|
|
Fixed
Charge on Non-vesting Debts and Floating Charge, dated January 29,
2013 between HSBC Invoice Finance (UK) Limited and Lakeland
Industries Europe Limited (incorporated by reference to Exhibit
10.2 to Lakeland Industries, Inc. Form 8-K filed February 25,
2013).
|
Exhibit No.
|
|
Description
|
10.6
*
|
|
Standard
Terms & Conditions, dated May 15, 2018, for the debt provided
by between HSBC Invoice Finance (UK) Limited and Lakeland
Industries Europe Limited
|
10.7
|
|
Securities
Purchase Agreement, dated October 24, 2014, by and among Lakeland
Industries, Inc. and the several purchasers signatory thereto
(incorporated by reference to Exhibit 10.1 of Lakeland Industries,
Inc.’s Form 8-K filed October 24, 2014).
|
10.8
|
|
Warrant
to Purchase Common Stock, dated as of October 29, 2014, issued by
Lakeland Industries, Inc. to Craig-Hallum Capital Partners LLC
(incorporated by reference to Exhibit 10.1 of Lakeland Industries,
Inc.’s Form 8-K filed October 30, 2014).
|
10.9
|
|
Amendment
to Agreement for Purchase of Debts, dated effectively as of
December 3, 2014 between HSBC Invoice Finance (UK) Limited and
Lakeland Industries Europe Limited (incorporated by reference to
Exhibit 10.1 of Lakeland Industries, Inc.’s Form 8-K filed
December 8, 2014).
|
10.10
|
|
Letter
Agreement, dated December 5, 2014, between Lakeland Industries,
Inc. and HSBC Invoice Finance (UK) Ltd. (incorporated by reference
to Exhibit 10.2 of Lakeland Industries, Inc.’s Form 8-K filed
December 8, 2014).
|
10.11
|
|
Lease
Agreement, dated May 15, 2015, between J & L Property
Investors, LLC, as Landlord and Lakeland Industries, Inc., as
tenant (incorporated by reference to Exhibit 10.2 of Lakeland
Industries, Inc. Form 10-Q for fiscal quarter ended April 30,
2015).
|
10.12
|
|
Lease
Agreement, dated February 10, 2016, between Safety Pro, LLC, as
lessor and Lakeland Industries, Inc. as lessee (incorporated by
reference to Exhibit 10.55 of Lakeland Industries, Inc. Form 10-K
filed April 21, 2016).
|
10.13
|
|
Shares
Transfer Agreement, dated as of June 19, 2015, by and among
Lakeland Industries, Inc., Brasil Industria E Comercio de Roupas E
Equipamentos de Protecao Individual Ltda, Zap Comércio de
Brindes Corporativos Ltda and Jack Nemer (incorporated by reference
to Exhibit 10.1 of Lakeland Industries, Inc. Form 8-K filed June
25, 2015).
|
10.14
|
|
Employment
Agreement, dated July 12, 2018, between Charles D. Roberson and the
Company (incorporated by reference to Exhibit 10.1 of Lakeland
Industries, Inc. Form 10-Q filed September 10, 2018).
|
Exhibit No.
|
|
Description
|
10.15
|
|
Employment
Agreement, dated November 5, 2018, between Lakeland Industries,
Inc. and Teri W. Hunt (incorporated by reference to Exhibit 10.1 of
Lakeland Industries, Inc. Form 10-Q filed December 17,
2018).
|
10.16
|
|
Employment
Agreement, dated April 22, 2017 between Lakeland Industries, Inc.
and Daniel Edwards (incorporated by reference to Exhibit 10.26 of
Lakeland Industries, Inc.’s Form 10-K for fiscal year ended
January 31, 2017).
|
10.17
|
|
Amendment
to Agreement for Purchase of Debts, dated effectively as of
December 31, 2015 between Lakeland Industries Europe Ltd. and HSBC
Invoice Finance (UK) Limited (incorporated by reference to Exhibit
10.1 of Lakeland Industries, Inc.’s Form 8-K filed December
8, 2014).
|
10.18
|
|
Loan
Agreement dated May 10, 2017, by and between Lakeland Industries,
Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.1
of Lakeland Industries, Inc.’s Form 8-K filed May 16,
2017)
|
10.19
|
|
Security
Agreement, dated May 10, 2017, by and between Lakeland Industries,
Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.2
of Lakeland Industries, Inc.’s Form 8-K filed May 16,
2017)
|
10.20*
|
|
Lease
Agreement, dated December 1, 2018, between Tamash S.A., as lessor
and Lakeland Argentina S.R.L, as lessee
|
14.1*
|
|
Lakeland
Industries, Inc. Code of Ethics, as amended on September 29,
2017
|
21
|
|
Subsidiaries of Lakeland Industries, Inc. (wholly
owned) and jurisdictions of incorporation:Lakeland Protective Wear,
Inc.Ontario, CanadaLakeland Protective Real EstateOntario,
CanadaLaidlaw, Adams & Peck, Inc. and
SubsidiaryDelaware (Weifang Meiyang
Protective Products Co., Ltd.)An Qiu City, ShandongWeifang Lakeland
Safety Products Co., Ltd.An Qiu City, ShandongLakeland Gloves and
Safety Apparel Private Ltd.New Delhi, IndiaLakeland Industries
Europe Ltd.Cardiff, UKLakeland (Beijing) Safety Products, Co.,
Ltd.Beijing & Shanghai ChinaIndustrias Lakeland S.A. de
C.V.Zacatecas, MexicoLakeland Chile, LLCSantiago, ChileLakeland
Argentina, SRLBuenos Aires, ArgentinaArt Prom, LLCUst-Kamenogorsk,
KazakhstanRussIndProtection, Ltd.Moscow, RussiaSpecProtect
LimitedSt. Petersburg, RussiaLakeland (Hong Kong) Trading Co.,
Ltd.Hong KongIndian & Pan Pacific Sales LimitedHong
KongLakeland (Vietnam) Industries, Co., LtdNam Dinh, VietnamUruguay
Migliara, S.A.Montevideo, Uruguay
|
Exhibit No.
|
|
Description
|
23.1*
|
|
Consent
of Friedman LLP, Independent Registered Public Accounting
Firm
|
31.1*
|
|
Certification
of Christopher J. Ryan, Chief Executive Officer, President and
Secretary, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2*
|
|
Certification
of Teri W. Hunt, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
32.1*
|
|
Certification
of Christopher J. Ryan, Chief Executive Officer, President and
Secretary, pursuant to Section 18 USC. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2*
|
|
Certification
of Teri W. Hunt, Chief Financial Officer, pursuant to Section 18
USC. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculations Document
|
101.DEF
|
|
XBRL
Taxonomy Extension Definitions Document
|
101.LAB
|
|
XBRL
Taxonomy Extension Labels Document
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentations Document
|
*
|
|
Filed
herewith
|