This Form 10-Q may contain certain forward-looking
statements. When used in this Form 10-Q or in any other presentation, statements which are not historical in nature, including
the words “anticipate,” “estimate,” “should,” “expect,” “believe,”
“intend,” “project” and similar expressions, are intended to identify forward-looking statements. They
also include statements containing a projection of sales, earnings or losses, capital expenditures, dividends, capital structure
or other financial terms.
The forward-looking statements in this
Form 10-Q are based upon our management’s beliefs, assumptions and expectations of our future operations and economic performance,
taking into account the information currently available to us. These statements are not statements of fact. Forward-looking statements
involve risks and uncertainties, some of which are not currently known to us that may cause our actual results, performance or
financial condition to be materially different from the expectations of future results, performance or financial condition we
express or imply in any forward-looking statements. Some of the important factors that could cause our actual results, performance
or financial condition to differ materially from expectations are:
We believe these forward-looking statements
are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations.
Furthermore, forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update
or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events
or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q might
not occur. We qualify any and all of our forward-looking statements entirely by these cautionary factors.
The accompanying
notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Lakeland Industries, Inc. and
Subsidiaries (“Lakeland,” the “Company,” “we,” “our” or “us”), a Delaware
corporation organized in April 1986, manufactures and sells a comprehensive line of safety garments and accessories for the industrial
protective clothing market. The principal market for the Company’s products is in the United States. No customer accounted
for more than 10% of net sales during the three and six month periods ending July 31, 2016 and 2015. In April 2015, the Company
decided to exit operations in Brazil. See Note 15 for further description.
The condensed consolidated
financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission,
and reflect all adjustments (consisting of only normal and recurring adjustments) which are, in the opinion of management, necessary
to present fairly the condensed consolidated financial information required herein. Certain information and note disclosures normally
included in financial statements prepared in accordance with accounting principles generally accepted in the United States of
America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. While we believe that the
disclosures are adequate to make the information presented not misleading, it is suggested that these unaudited condensed consolidated
financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended January 31, 2016.
The Company’s unaudited
condensed consolidated financial statements have been prepared using the accrual method of accounting in accordance with US GAAP.
The results of operations for
the three and six month period ended July 31, 2016 are not necessarily indicative of the results to be expected for the full year.
In this Form 10-Q, (a) “FY”
means fiscal year; thus, for example, FY17 refers to the fiscal year ending January 31, 2017, (b) “Q” refers to quarter;
thus, for example, Q2 FY17 refers to the second quarter of the fiscal year ending January 31, 2017, (c) “Balance Sheet”
refers to the unaudited condensed consolidated balance sheet and (d) “Statement of Operations" refers to the unaudited
condensed consolidated statement of operations.
|
3.
|
Summary
of Significant Accounting Policies
|
Principles of Consolidation
The accompanying condensed
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Revenue Recognition
The Company derives its sales
primarily from its limited use/disposable protective clothing and secondarily from its sales of high-end chemical protective suits,
firefighting and heat protective apparel, gloves and arm guards and reusable woven garments. Sales are recognized when goods are
shipped, at which time title and the risk of loss pass to the customer. Sales are reduced for sales returns and allowances. Payment
terms are generally net 30 days for United States sales and net 90 days for international sales.
Allowance for Doubtful Accounts
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
before the unaudited condensed consolidated financial statements are issued or are available to be issued indicates that it is
probable that an asset has been impaired based on criteria noted above at the date of the financial statements, and the amount
of the loss can be reasonably estimated. Management considers the following factors when determining the collectability of specific
customer accounts: 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.
Customer creditworthiness, past transaction history with the customers, current economic industry trends and changes in customer
payment terms are factors used in the credit decision.
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 market. Provision
is made for slow-moving, obsolete or unusable inventory.
Goodwill and Intangible
Assets
Goodwill represents the future
economic benefits arising from other assets acquired in a business combination that are not individually identified and separately
recognized. Goodwill and indefinite lived intangible assets are 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 current value of the entity acquired 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 a multiple of earnings. These estimates require the Company’s management to
make projections that can differ materially 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.
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 unaudited condensed consolidated balance sheet. A judgment
must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. A valuation allowance
may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event the Company
determines that it may not be able to realize all or part of its deferred tax asset in the future, or that new estimates indicate
that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited
to income in the period of such determination.
The Company recognizes
tax positions that meet a “more likely than not” minimum recognition threshold. The Company has not had any
recent U.S. corporate income tax returns examined by the Internal Revenue Service. Returns for the years since 2012 are
still open based on statutes of limitation only.
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 year-end 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.
Foreign Operations and Foreign
Currency Translation
The Company maintains manufacturing
operations in Mexico, Argentina and the People’s Republic of China and can access independent contractors in Mexico, Argentina
and China. It also maintains sales and distribution entities located in India, Canada, the U.K., Chile, China, Argentina, Russia,
Kazakhstan and Mexico. The Company is vulnerable to currency risks in these countries. The functional currency of foreign subsidiaries
is the US dollar, except for the UK operation (Euro), trading companies in China (RenminBi), Russia (Russian Ruble), Kazakhstan
(Tenge) and the Canadian Real Estate (Canadian dollar) subsidiary.
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.
Fair Value of Financial
Instruments
US GAAP defines fair value,
provides guidance for measuring fair value and requires certain disclosures utilizing a fair value hierarchy which is categorized
into three levels based on the inputs to the valuation techniques used to measure fair value.
The following is a brief description
of those three levels:
|
Level 1:
|
Observable
inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
Level 2:
|
Inputs
other than quoted prices that are observable for the asset or liability, either directly
or indirectly. These include quoted prices for similar assets or liabilities in active
markets and quoted prices for identical or similar assets or liabilities in markets that
are not active.
|
|
Level 3:
|
Unobservable
inputs that reflect management’s own assumptions.
|
Foreign currency forward and
hedge contracts are recorded in the unaudited condensed consolidated balance sheets at their fair value as of the balance sheet
dates based on current market rates using Level 1 inputs, as further discussed in Note 11.
Reclassification
Liabilities of discontinued
operations in Brazil in the January 31, 2016 unaudited condensed consolidated balance sheet have been grouped as a single line
item, other accrued expenses, to conform to the current period presentation. This reclassification has no effect on the accompanying
unaudited condensed consolidated financial statements.
Inventories, net consist of the following (in $000s):
|
|
July 31, 2016
|
|
|
January 31, 2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
14,454
|
|
|
$
|
15,435
|
|
Work-in-process
|
|
|
1,945
|
|
|
|
784
|
|
Finished goods
|
|
|
22,840
|
|
|
|
24,622
|
|
|
|
$
|
39,239
|
|
|
$
|
40,841
|
|
Inventories include freight-in,
materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or market. Provision
is made for slow-moving, obsolete or unusable inventory.
Basic earnings per share are
based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings
per share are based on the weighted average number of common shares and common stock equivalents. The diluted earnings per share
calculation takes into account unvested restricted shares and the shares that may be issued upon exercise of stock options, reduced
by shares that may be repurchased with the funds received from the exercise, based on the average price during the period.
The following table sets forth
the computation of basic and diluted earnings per share for “income from continuing operations” and “discontinued
operations” at July 31, 2016 and 2015, as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
July 31,
(in $000s)
|
|
|
July 31,
(in $000s)
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1,431
|
|
|
$
|
3,588
|
|
|
$
|
1,434
|
|
|
$
|
5,748
|
|
Net loss from discontinued operations
|
|
|
—
|
|
|
|
(1,554
|
)
|
|
|
—
|
|
|
|
(2,485
|
)
|
Net income
|
|
$
|
1,431
|
|
|
$
|
2,034
|
|
|
$
|
1,434
|
|
|
$
|
3,263
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share (weighted-average shares which
reflect 356,441 shares in the treasury as a result of the stock repurchase program that ended in 2011)
|
|
|
7,254,999
|
|
|
|
7,145,418
|
|
|
|
7,254,585
|
|
|
|
7,104,471
|
|
Effect of dilutive securities from restricted stock
plan and from dilutive effect of stock options
|
|
|
56,167
|
|
|
|
21,705
|
|
|
|
61,282
|
|
|
|
86,998
|
|
Denominator for diluted earnings per share (adjusted weighted average shares)
|
|
|
7,311,166
|
|
|
|
7,167,123
|
|
|
|
7,315,867
|
|
|
|
7,191,469
|
|
Basic earnings per share from continuing operations
|
|
$
|
0.20
|
|
|
$
|
0.50
|
|
|
$
|
0.20
|
|
|
$
|
0.81
|
|
Basic loss per share from discontinued operations
|
|
$
|
—
|
|
|
$
|
(0.22
|
)
|
|
$
|
—
|
|
|
$
|
(0.35
|
)
|
Basic earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.28
|
|
|
$
|
0.20
|
|
|
$
|
0.46
|
|
Diluted earnings per share from continuing operations
|
|
$
|
0.20
|
|
|
$
|
0.50
|
|
|
$
|
0.20
|
|
|
$
|
0.80
|
|
Diluted loss per share from discontinued operations
|
|
$
|
—
|
|
|
$
|
(0.22
|
)
|
|
$
|
—
|
|
|
$
|
(0.35
|
)
|
Diluted earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.28
|
|
|
$
|
0.20
|
|
|
$
|
0.45
|
|
Revolving Credit Facility
On June 28, 2013, the Lakeland
Industries, Inc. and its wholly-owned Canadian subsidiary, Lakeland Protective Wear Inc. (collectively the “Borrowers”),
entered into a Loan and Security Agreement (the “Senior Loan Agreement”) with AloStar Business Credit, a division
of AloStar Bank of Commerce (the “Senior Lender”). The Senior Loan Agreement provides the Borrowers with a three-year
$15 million revolving line of credit, at a variable interest rate based on LIBOR, with a first priority lien on substantially
all of the United States and Canada assets of the Company, except for the Canadian warehouse and Mexican plant.
On March 31, 2015, the Borrowers
entered into a First Amendment to the Senior Loan Agreement with the Senior Lender (the “Amendment”) relating to their
senior revolving credit facility. Pursuant to the Amendment, the parties agreed to (i) reduce the rate of interest on the revolving
loans by 200 basis points and correspondingly lower the minimum interest rate floor from 6.25% to 4.25% per annum, and (ii) extend
the maturity date of the credit facility to June 28, 2017.
On June 3, 2015, the Borrowers
entered into a Second Amendment (the “Second Amendment”) to the Senior Loan Agreement. The primary purposes of the
Second Amendment are to (i) modify the definition of Permitted Asset Disposition to provide the Company with the ability to transfer
the stock of the Company’s then wholly-owned Brazilian subsidiary, Lake Brasil Indústria e Comércio de Roupas
e Equipamentos de Proteção Individual Ltda. (“Lakeland Brazil”), and (ii) allow the Borrowers to transfer
funds to Lakeland Brazil for the specific purposes of settling arbitration claims, paying contractual expenses, and paying expenses
incurred in connection with a transfer of the stock of Lakeland Brazil so long as, after giving effect to any such transfer, the
amount Borrowers have as excess availability under the revolver loans, excluding the $15 million facility cap for this purpose
only, calculated pursuant to and under the Senior Loan Agreement, is at least $3.0 million. Also, as part of the Second Amendment,
Senior Lender consented to the sale of the Company’s corporate offices in Ronkonkoma, New York on the condition that the
net cash proceeds from the sale in the amount of at least $450,000 are used by the Company to pay down the Borrower’s obligations
to Lender under the Senior Loan Agreement.
The $0.6 million of unamortized
fees attributable to the Senior Debt will remain on the Company’s books and continue to be amortized over the remaining
term of the Senior Debt through June 2017 as amended.
The following is a summary
of the material terms of the Senior Credit Facility:
$15 million Senior Credit
Facility
|
·
|
Borrowing
pursuant to a revolving credit facility subject to a borrowing base calculated as the
sum of:
|
|
o
|
85%
of eligible accounts receivable as defined
|
|
o
|
The
lesser of 60% of eligible inventory as defined or 85% of net orderly liquidation value
of inventory
|
|
o
|
In
transit inventory in bound to the US up to a cap of $1,000,000
|
|
o
|
Receivables
and inventory held by the Canadian operating subsidiary to be included, up to a cap of
$2 million of availability
|
|
·
|
On
July 31, 2016, there was $8.8 million available for further borrowings under the senior
credit facility.
|
|
o
|
A
perfected first security lien on all of the Borrowers’ United States and Canadian assets,
other than its Mexican plant and the Canadian warehouse
|
|
o
|
Pledge
of 65% of Lakeland Industries, Inc. stock in all foreign subsidiaries other than 100%
pledge of stock of its Canadian subsidiaries
|
|
o
|
All
customers of Borrowers must remit to a lockbox controlled by Senior Lender or into a
blocked account with all collection proceeds applied against the outstanding loan balance.
|
|
o
|
An
initial term of three years from June 28, 2013 (the “Closing Date”), which
has been extended to June 28, 2017 pursuant to the Amendment
|
|
o
|
Prepayment
penalties of 2% if prior to the second anniversary of the Closing Date and 1% thereafter
|
|
o
|
Rate
equal to LIBOR rate plus 525 basis points, reduced to 325 basis points on March 31, 2015
per the Amendment
|
|
o
|
Rate
at July 31, 2016 of 4.25% per annum
|
|
o
|
Floor
rate of 6.25%, reduced to 4.25% on March 31, 2015 per annum per the Amendment
|
|
·
|
Fees:
Borrowers shall pay to the Lender the following fees:
|
|
o
|
Origination
fee of $225,000, paid on the Closing Date and being amortized over the term of loans
|
|
o
|
0.50%
per annum on unused portion of commitment
|
|
o
|
A
non-refundable collateral monitoring fee in the amount of $3,000 per month
|
|
o
|
All
legal and other out of pocket costs
|
|
o
|
Borrowers
covenanted that, from the Closing Date until the commitment termination date and full
payment of the obligations to Senior Lender, Lakeland Industries, Inc. (the parent company),
together with its subsidiaries on a consolidated basis, excluding its Brazilian subsidiary
(which has since been transferred to a third party), shall comply with the following
additional covenants:
|
|
·
|
Fixed
Charge Coverage Ratio. At the end of each fiscal quarter of Borrowers, Borrowers shall
maintain a Fixed Charge Coverage Ratio of not less than 1.1 to 1.00 for the four quarter
period then ending.
|
|
·
|
Minimum
Quarterly Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”).
Borrowers shall achieve, on a rolling four quarter basis excluding the operations of
the Borrower’s then Brazilian subsidiary, EBITDA of not less than $4.1 million.
|
|
·
|
Capital
Expenditures. Borrowers shall not during any fiscal year make capital expenditures in
an amount exceeding $1 million in the aggregate.
|
|
·
|
The
Company is in compliance with all loan covenants of the Senior Debt at July 31, 2016.
|
|
o
|
Standard
financial reporting requirements as defined
|
|
o
|
Limitation
on amounts that can be advanced to or on behalf of Brazilian operations, limited to one
aggregate total of $200,000 for the term of the loan and as amended on June 3, 2015 to
facilitate the transfer of the then Brazilian subsidiary to a third party.
|
|
o
|
Limitation
on total net investment in foreign subsidiaries of a maximum of $1.0 million per annum
|
Borrowings in UK
On December 31, 2014, the Company
and its UK subsidiary amended the terms of its existing financing facility with HSBC Bank to provide for (i) a one-year extension
of the maturity date of the existing financing facility to December 19, 2016, (ii) an increase in the facility limit from £1,250,000
(approximately USD $1.9 million) to £1,500,000 (approximately USD $2.3 million), and (iii) a decrease in the annual interest
rate margin from 3.46% to 3.0%. In addition, pursuant to a letter agreement dated December 5, 2014, the Company agreed that £400,000
(approximately USD $0.6 million) of the note payable by the UK subsidiary to the Company shall be subordinated in priority of
payment to the subsidiary’s obligations to HSBC under the financing facility. The balance under this loan outstanding at
July 31, 2016 was US $0.1 million and is included in short-term borrowings on the unaudited condensed consolidated balance sheet.
The per annum interest rate was 3.00% and the term was for a minimum period of one year renewable on December 19, 2016. On December
31, 2015, Lakeland Industries Europe, Ltd., a wholly owned subsidiary of Lakeland Industries, Inc., entered into an extension
of the maturity date of its existing financing facility with HSBC Invoice Finance (UK) Ltd. to December 19, 2016. Other than the
extension of the maturity date, all other terms of the facility remain the same.
Canada
Loans
In September 2013, the Company
refinanced its loan with the Development Bank of Canada (“BDC”) for a principal amount of approximately $1.1 million
in both Canadian and USD (based on exchange rates at time of closing). Such loan is for a term of 240 months at an interest rate
of 6.45% per annum with fixed monthly payments of approximately US $6,048 (C$8,169) including principal and interest. It is collateralized
by a mortgage on the Company's warehouse in Brantford, Ontario. The amount outstanding at July 31, 2016 is C$1,018,763 which is
included as USD $731,499 long term borrowings on the accompanying unaudited condensed consolidated balance sheet, net of current
maturities of US $50,000.
China Loans
On March 28, 2016, Weifang
Lakeland Safety Products Co., Ltd., (“WF”), the Company’s Chinese subsidiary and Chinese Rural Credit Cooperative
Bank (“CRCCB”) completed an agreement for WF to obtain a line of credit for financing in the amount of US $1.3 million,
with interest at 120% of the benchmark rate supplied by CRCCB (which is currently 4.6% per annum). The effective per annum interest
rate is currently 5.35%. The loan is collateralized by inventory owned by WF. CRCCB had hired a professional firm to supervise
WF’s inventory flow. The balance under this loan outstanding at July 31, 2016 was USD $1.3 million and is included in short-term
borrowings on the unaudited condensed consolidated balance sheet. The line of credit is due within a one year period.
On December 1, 2015, WF and
CRCCB completed an agreement for WF to obtain a line of credit for financing in the amount of RMB 6,000,000 (approximately USD
$0.9 million), with interest at 120% of the benchmark rate supplied by CRCCB (which is currently 4.6% per annum). The effective
per annum interest rate is currently 5.52%. The loan is collateralized by inventory owned by WF. CRCCB had hired a professional
firm to supervise WF’s inventory flow. The balance under this loan outstanding at July 31, 2016 was USD $0.9 million and
is included in short-term borrowings on the unaudited condensed consolidated balance sheet. The line of credit is due within a
one year period.
On October 10, 2015, WF and
Bank of China Anqiu Branch completed an agreement for WF to obtain a line of credit for financing in the amount RMB 5,000,000
(approximately USD $0.8 million). The effective per annum interest rate is currently 7%. The loan is collateralized by inventory
owned by WF. The balance under this loan outstanding at July 31, 2016 was RMB 5,000,000 (approximately USD $0.8 million) and is
included in short-term borrowings on the unaudited condensed consolidated balance sheet. The line of credit is due within a one
year period.
Argentina Loan
In April 2015, the Company’s
Argentina subsidiary was granted a $300,000 line of credit denominated in Argentine pesos, pursuant to a standby letter of credit
granted by the parent company. There are several drawdowns each with six month terms at an annual rate of 34%. The balance under
this loan outstanding at July 31, 2016 was US $0.1 million and is included in short-term borrowings on the unaudited condensed
consolidated balance sheet.
No supplier accounted for more
than 10% of cost of sales during the three and six month periods ended July 31, 2016 and 2015.
|
8.
|
Employee Stock Compensation and Stock Repurchase Program
|
The
2012 and 2015 Plans
At the Annual Meeting of Stockholders
held on July 8, 2015, the Company’s stockholders approved the Lakeland Industries, Inc. 2015 Stock Plan (the “2015
Plan”). The executive officers and all other employees and directors of the Company and its subsidiaries are eligible to
participate in the 2015 Plan. The 2015 Plan is currently administered by the compensation committee of the Company’s Board
of Directors (“Committee”), except that with respect to all non-employee director awards, the Committee shall be deemed
to include the full Board. The 2015 Plan authorizes the issuance of awards of restricted stock, restricted stock units, performance
shares, performance units and other stock-based awards. The 2015 Plan also permits the grant of awards that qualify for “performance-based
compensation” within the meaning of Section 162(m) of the U.S. Internal Revenue Code. The aggregate number of shares of
the Company’s common stock that may be issued under the 2015 Plan may not exceed 100,000 shares. Awards covering no more
than 20,000 shares of common stock may be awarded to any plan participant in any one calendar year. Under the 2015 Plan, as of
July 31, 2016, the Company granted awards for up to an aggregate of 94,049 restricted shares assuming maximum award levels are
achieved.
The 2015 Plan, which terminates
in July 2017, is the successor to the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The Company’s
2012 Plan authorized the issuance of up to a maximum of 310,000 shares of the Company’s common stock to employees and directors
of the Company and its subsidiaries in the form of restricted stock, restricted stock units, performance shares, performance units
and other share-based awards. Under the 2012 Plan, as of July 31, 2016, the Company issued 288,896 fully vested shares of common
stock and 4,991 restricted shares which will continue to vest according to the terms of the 2012 Plan.
Under the 2012 Plan and the
2015 Plan, the Company generally awards eligible employees and directors with either performance-based or time-based restricted
shares. Performance-based restricted shares are awarded at either baseline (target), maximum or zero amounts. The number of restricted
shares subject to any award is not tied to a formula or comparable company target ranges, but rather is determined at the discretion
of the Committee at the end of the applicable performance period, which is two years under the 2015 Plan and had been three years
under the 2012 Plan. The Company recognizes expense related to performance-based restricted share awards over the requisite performance
period using the straight-line attribution method based on the most probable outcome (baseline, maximum or zero) at the end of
the performance period and the price of the Company’s common stock price at the date of grant.
In addition to the performance-based
awards, the Company also grants time-based vesting awards which vest either two or three years after date of issuance, subject
to continuous employment and certain other conditions.
As of July 31, 2016, unrecognized
stock-based compensation expense related to share-based stock awards totaled $990 pursuant to the 2012 Plan and $616,996 pursuant
to the 2015 Plan, before income taxes, based on the maximum performance award level. Such unrecognized stock-based compensation
expense related to restricted stock awards totaled $990 for the 2012 Plan and $341,367 for the 2015 Plan at the baseline performance
level. The cost of these non-vested awards is expected to be recognized over a weighted-average period of three years for the
2012 Plan and two years for the 2015 Plan.
The Company recognized total
stock-based compensation costs of $77,933 and $254,826 for the six months ended July 31, 2016 and 2015, respectively, of which
$(10,137) and $254,826 result from the 2012 Plan, and $88,070 and $0 result from the 2015 Plan. These amounts are reflected in
operating expenses. The total income tax benefit recognized for stock-based compensation arrangements was $33,072 and $91,737
for the six months ended July 31, 2016 and 2015, respectively.
Shares under 2015 and 2012 Stock Plan
|
|
Outstanding
Unvested Grants
at Maximum at
Beginning of
FY17
|
|
|
Granted during
FY17 through
July 31, 2016
|
|
|
Becoming
Vested during
FY17 through
July 31, 2016
|
|
|
Forfeited
during
FY17 through
July 31, 2016
|
|
|
Outstanding
Unvested
Grants at
Maximum at
End of
July
31, 2016
|
|
Restricted stock grants – employees
|
|
|
72,999
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,380
|
|
|
|
67,619
|
|
Matching award program
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
Bonus in stock - employees
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,500
|
|
|
|
—
|
|
Retainer in stock - directors
|
|
|
30,764
|
|
|
|
—
|
|
|
|
2,343
|
|
|
|
—
|
|
|
|
28,421
|
|
Total restricted stock plans
|
|
|
109,263
|
|
|
|
—
|
|
|
|
2,343
|
|
|
|
7,880
|
|
|
|
99,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$
|
9.93
|
|
|
|
—
|
|
|
$
|
6.53
|
|
|
$
|
9.68
|
|
|
$
|
10.04
|
|
Other
Compensation Plans/Programs
The Company previously awarded
stock-based options to non-employee directors under its Non-employee Directors’ Option Plan (the “Directors’
Plan”) which expired on December 31, 2012. All stock option awards granted under the Directors’ Plan were fully vested
at July 31, 2016. During the six months ended July 31, 2016 there have been zero forfeitures or options exercised, and there were
options outstanding to purchase an aggregate of 5,000 shares at a weighted-average exercise price of $8.28 per share. All outstanding
stock options have a weighted average remaining contractual term of 0.57 years.
The Company currently utilizes
a matching award program pursuant to which all employees are entitled to receive one share of restricted stock for each two shares
of the Company’s common stock purchased on the open market. Such restricted shares are subject to a one year vesting period.
The valuation is based on the stock price at the grant date and is amortized to expense over the vesting period, which approximates
the performance period.
Pursuant to the Company’s
bonus-in-stock program, all employees are eligible to elect to receive any cash bonus in shares of restricted stock. Such restricted
shares are subject to a two year vesting period. The valuation is based on the stock price at the grant date and is amortized
to expense over the two year period, which approximates the performance period. Since the employee is giving up cash for unvested
shares, the amount of shares awarded is 133% of the cash amount based on the stock price at the date of grant.
Pursuant to the Company’s
director restrictive stock program, all directors are eligible to elect to receive any director fees in shares of restricted stock.
Such restricted shares are subject to a two year vesting period. The valuation is based on the stock price at the grant date and
is amortized to expense over the two year period, which approximates the performance period. Since the director is giving up cash
for unvested shares, the amount of shares awarded is 133% of the cash amount based on the grant date stock price.
Stock Repurchase Program
On July 19, 2016, the
Company’s board of directors approved a stock repurchase program under which the Company may repurchase up to $2,500,000
of its outstanding common stock. The Company has not repurchased any stock under this program.
|
|
Domestic and international sales from continuing operations are as
follows in millions of dollars:
|
|
|
Three Months Ended July 31,
|
|
|
Six Months Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
11.79
|
|
|
|
52.94
|
%
|
|
$
|
18.48
|
|
|
|
62.71
|
%
|
|
$
|
23.98
|
|
|
|
56.24
|
%
|
|
$
|
31.33
|
|
|
|
57.72
|
%
|
International
|
|
|
10.48
|
|
|
|
47.06
|
%
|
|
|
10.99
|
|
|
|
37.29
|
%
|
|
|
18.66
|
|
|
|
43.76
|
%
|
|
|
22.95
|
|
|
|
42.28
|
%
|
Total
|
|
$
|
22.27
|
|
|
|
100.00
|
%
|
|
$
|
29.47
|
|
|
|
100.00
|
%
|
|
$
|
42.64
|
|
|
|
100.00
|
%
|
|
$
|
54.28
|
|
|
|
100.00
|
%
|
We manage our operations by evaluating
each of our geographic locations. Our US operations include a facility in Alabama (primarily the distribution to customers of
the bulk of our products and the light manufacturing of our chemical, wovens, reflective, and fire products). The Company also
maintains two manufacturing companies in China (primarily disposable and chemical suit production) and a manufacturing facility
in Mexico (primarily disposable, reflective, fire and chemical suit production). Our China facilities produce the majority of
the Company’s products and China generates a significant portion of the Company’s international revenues. 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:
|
|
Three Months Ended
July 31,
(in millions of dollars)
|
|
|
Six Months Ended
July 31,
(in millions of dollars)
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net Sales from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
12.56
|
|
|
$
|
19.51
|
|
|
$
|
25.34
|
|
|
$
|
33.16
|
|
Other foreign
|
|
|
3.72
|
|
|
|
3.76
|
|
|
|
6.91
|
|
|
|
6.84
|
|
Europe (UK)
|
|
|
2.67
|
|
|
|
3.45
|
|
|
|
5.06
|
|
|
|
9.06
|
|
Mexico
|
|
|
0.81
|
|
|
|
0.90
|
|
|
|
1.57
|
|
|
|
1.75
|
|
China
|
|
|
11.55
|
|
|
|
15.93
|
|
|
|
19.96
|
|
|
|
27.19
|
|
Corporate
|
|
|
0.70
|
|
|
|
0.61
|
|
|
|
1.17
|
|
|
|
1.23
|
|
Less intersegment sales
|
|
|
(9.74
|
)
|
|
|
(14.69
|
)
|
|
|
(17.37
|
)
|
|
|
(24.95
|
)
|
Consolidated sales
|
|
$
|
22.27
|
|
|
$
|
29.47
|
|
|
$
|
42.64
|
|
|
$
|
54.28
|
|
External Sales from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
11.79
|
|
|
$
|
18.48
|
|
|
$
|
23.98
|
|
|
$
|
31.33
|
|
Other foreign
|
|
|
3.53
|
|
|
|
3.61
|
|
|
|
6.40
|
|
|
|
6.61
|
|
Europe (UK)
|
|
|
2.67
|
|
|
|
3.45
|
|
|
|
5.06
|
|
|
|
9.05
|
|
Mexico
|
|
|
0.36
|
|
|
|
0.35
|
|
|
|
0.73
|
|
|
|
0.65
|
|
China
|
|
|
3.92
|
|
|
|
3.58
|
|
|
|
6.47
|
|
|
|
6.64
|
|
Consolidated external sales
|
|
$
|
22.27
|
|
|
$
|
29.47
|
|
|
$
|
42.64
|
|
|
$
|
54.28
|
|
Intersegment Sales from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
0.77
|
|
|
$
|
1.03
|
|
|
$
|
1.36
|
|
|
$
|
1.83
|
|
Other foreign
|
|
|
0.19
|
|
|
|
0.15
|
|
|
|
0.51
|
|
|
|
0.23
|
|
Europe (UK)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
Mexico
|
|
|
0.45
|
|
|
|
0.55
|
|
|
|
0.84
|
|
|
|
1.10
|
|
China
|
|
|
7.63
|
|
|
|
12.35
|
|
|
|
13.49
|
|
|
|
20.55
|
|
Corporate
|
|
|
0.70
|
|
|
|
0.61
|
|
|
|
1.17
|
|
|
|
1.23
|
|
Consolidated intersegment sales
|
|
$
|
9.74
|
|
|
$
|
14.69
|
|
|
$
|
17.37
|
|
|
$
|
24.95
|
|
|
|
Three Months Ended
July 31,
(in millions of dollars)
|
|
|
Six Months Ended
July 31,
(in millions of dollars)
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Operating Profit (Loss) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
2.47
|
|
|
$
|
5.12
|
|
|
$
|
4.04
|
|
|
$
|
7.69
|
|
Other foreign
|
|
|
0.25
|
|
|
|
0.41
|
|
|
|
0.55
|
|
|
|
0.31
|
|
Europe (UK)
|
|
|
0.18
|
|
|
|
0.41
|
|
|
|
0.28
|
|
|
|
2.20
|
|
Mexico
|
|
|
0.02
|
|
|
|
(0.04
|
)
|
|
|
0.01
|
|
|
|
(0.09
|
)
|
China
|
|
|
1.31
|
|
|
|
1.41
|
|
|
|
1.78
|
|
|
|
2.18
|
|
Corporate
|
|
|
(1.59
|
)
|
|
|
(1.64
|
)
|
|
|
(3.92
|
)
|
|
|
(3.26
|
)
|
Less intersegment profit (loss)
|
|
|
(0.01
|
)
|
|
|
0.03
|
|
|
|
0.06
|
|
|
|
(0.11
|
)
|
Consolidated operating profit
|
|
$
|
2.63
|
|
|
$
|
5.70
|
|
|
$
|
2.80
|
|
|
$
|
8.92
|
|
Depreciation and Amortization Expense from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
Other foreign
|
|
|
0.06
|
|
|
|
0.01
|
|
|
|
0.08
|
|
|
|
0.03
|
|
Europe (UK)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
Mexico
|
|
|
0.03
|
|
|
|
0.04
|
|
|
|
0.06
|
|
|
|
0.07
|
|
China
|
|
|
0.08
|
|
|
|
0.08
|
|
|
|
0.17
|
|
|
|
0.16
|
|
Corporate
|
|
|
0.14
|
|
|
|
0.10
|
|
|
|
0.29
|
|
|
|
0.20
|
|
Less intersegment
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
|
|
(0.08
|
)
|
|
|
(0.07
|
)
|
Consolidated depreciation and amortization expense
|
|
$
|
0.31
|
|
|
$
|
0.23
|
|
|
$
|
0.60
|
|
|
$
|
0.47
|
|
Interest Expense from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA (shown in Corporate)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other foreign
|
|
|
0.02
|
|
|
|
0.04
|
|
|
|
0.06
|
|
|
|
0.06
|
|
Europe (UK)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
Mexico
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
0.04
|
|
|
|
0.04
|
|
|
|
0.09
|
|
|
|
0.07
|
|
Corporate
|
|
|
0.12
|
|
|
|
0.13
|
|
|
|
0.22
|
|
|
|
0.25
|
|
Less intersegment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consolidated interest expense
|
|
$
|
0.18
|
|
|
$
|
0.21
|
|
|
$
|
0.37
|
|
|
$
|
0.39
|
|
Income Tax Expense (Benefits) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA (shown in Corporate)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other foreign
|
|
|
0.08
|
|
|
|
0.07
|
|
|
|
0.11
|
|
|
|
0.12
|
|
Europe (UK)
|
|
|
0.02
|
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.42
|
|
Mexico
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
China
|
|
|
0.36
|
|
|
|
0.31
|
|
|
|
0.45
|
|
|
|
0.48
|
|
Corporate
|
|
|
0.54
|
|
|
|
1.50
|
|
|
|
0.37
|
|
|
|
1.80
|
|
Less intersegment
|
|
|
(0.01
|
)
|
|
|
—
|
|
|
|
0.01
|
|
|
|
(0.03
|
)
|
Consolidated income tax expense
|
|
$
|
0.99
|
|
|
$
|
1.90
|
|
|
$
|
0.97
|
|
|
$
|
2.79
|
|
|
|
July 31, 2016
(in millions of dollars)
|
|
|
January 31, 2016
(in millions of dollars)
|
|
Total Assets:*
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
51.87
|
|
|
$
|
48.18
|
|
Other foreign
|
|
|
19.13
|
|
|
|
17.55
|
|
Europe (UK)
|
|
|
5.09
|
|
|
|
5.05
|
|
Mexico
|
|
|
3.97
|
|
|
|
4.25
|
|
China
|
|
|
28.61
|
|
|
|
29.92
|
|
India
|
|
|
(1.36
|
)
|
|
|
(1.35
|
)
|
Corporate
|
|
|
31.18
|
|
|
|
37.18
|
|
Less intersegment
|
|
|
(49.80
|
)
|
|
|
(52.52
|
)
|
Consolidated assets
|
|
$
|
88.69
|
|
|
$
|
88.26
|
|
Total Assets Less Intersegment:*
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
32.34
|
|
|
$
|
33.63
|
|
Other foreign
|
|
|
10.71
|
|
|
|
9.91
|
|
Europe (UK)
|
|
|
5.08
|
|
|
|
5.03
|
|
Mexico
|
|
|
3.95
|
|
|
|
4.23
|
|
China
|
|
|
19.22
|
|
|
|
17.63
|
|
India
|
|
|
0.43
|
|
|
|
0.44
|
|
Corporate
|
|
|
16.96
|
|
|
|
17.39
|
|
Consolidated assets
|
|
$
|
88.69
|
|
|
$
|
88.26
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
2.11
|
|
|
$
|
2.20
|
|
Other foreign
|
|
|
1.61
|
|
|
|
1.57
|
|
Europe (UK)
|
|
|
0.04
|
|
|
|
0.06
|
|
Mexico
|
|
|
2.05
|
|
|
|
2.11
|
|
China
|
|
|
2.21
|
|
|
|
2.37
|
|
India
|
|
|
0.04
|
|
|
|
0.03
|
|
Corporate
|
|
|
0.79
|
|
|
|
1.00
|
|
Less intersegment
|
|
|
(0.04
|
)
|
|
|
(0.07
|
)
|
Consolidated property and equipment
|
|
$
|
8.81
|
|
|
$
|
9.27
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
—
|
|
|
$
|
0.06
|
|
Other foreign
|
|
|
0.01
|
|
|
|
0.08
|
|
Europe (UK)
|
|
|
—
|
|
|
|
—
|
|
Mexico
|
|
|
—
|
|
|
|
0.04
|
|
China
|
|
|
0.02
|
|
|
|
0.16
|
|
India
|
|
|
0.02
|
|
|
|
—
|
|
Corporate
|
|
|
—
|
|
|
|
0.50
|
|
Consolidated capital expenditures
|
|
$
|
0.05
|
|
|
$
|
0.84
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
0.87
|
|
|
$
|
0.87
|
|
Consolidated goodwill
|
|
$
|
0.87
|
|
|
$
|
0.87
|
|
* Negative assets reflect intersegment
accounts eliminated in consolidation
Income Tax Audits
The Company is subject to US
federal income tax, as well as income tax in multiple US state and local jurisdictions and a number of foreign jurisdictions.
Returns for the year since 2012 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 July 31, 2016. Weifang Meiyang Products Co., Ltd., (“Meiyang”),
one of our Chinese operations, was changed to a trading company from a manufacturing company in Q1 FY16 and all direct workers
and equipment were transferred from Meiyang to Weifang Lakeland Safety Products Co., Ltd., (“WF”), another of our
Chinese operation thereby reducing our tax exposure.
Lakeland Protective Wear, Inc.,
our Canadian subsidiary, follows Canada tax regulatory framework recording its tax expense and tax deferred assets or liabilities.
As of this statement filing date, we believe the Lakeland Protective Wear, Inc.’s tax situation is reasonably stated in
accordance with US GAAP, and we do not anticipate future tax liability.
In connection with the exit
from Brazil as described in Note 15, the Company claimed a worthless stock deduction which generated a tax benefit of approximately
US $9.5 million, net of a US $2.9 million valuation allowance. While the Company and its tax advisors believe that this deduction
is valid, there can be no assurance that the IRS will not challenge it and, if challenged, there is no assurance that the Company
will prevail.
Except in Canada, and as set
forth in the next paragraph, it is our practice and intention to reinvest the earnings of our non-US subsidiaries in their operations.
As of July 31, 2016, the Company had not made a provision for US or additional foreign withholding taxes on approximately $23.1
million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are
essentially permanent in duration ($22.3 million at January 31, 2016). Generally, such amounts become subject to US taxation upon
remittance of dividends and under certain other circumstances. If theses earnings were repatriated to the US, the deferred tax
liability associated with these temporary differences would be approximately $3.2 million at July 31, 2016.
The Company’s Board of
Directors has instituted a plan to pay annual dividends of $1.0 million to the Company from Weifang’s future profits, 33%
of Meiyang’s future profits and 50% of the UK’s future profits starting in FY15 and $1.0 million from Beijing’s
future profits starting 2016. All other retained earnings are expected to be reinvested indefinitely.
Change in Valuation Allowance
We record net deferred tax
assets to the extent we believe these assets will more likely than not be realized. The valuation allowance was $2.9 million at
July 31, 2016 and January 31, 2016.
Income Tax Expense
Income tax expenses consist
of federal, state and foreign income taxes.
|
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 two types of derivatives
to manage the risk of foreign currency fluctuations.
We enter into forward contracts
with financial institutions to manage our currency exposure related to net assets and liabilities denominated in foreign currencies.
Those forward contract derivatives, not designated as hedging instruments, are generally settled quarterly. Gain and loss on those
forward contracts are included in current earnings. There were no outstanding forward contracts at July 31, 2016 or 2015 or January
31, 2016.
We also enter into
cash flow hedge contracts with financial institutions to manage our currency exposure on future cash payments denominated
in foreign currencies. The effective portion of gain or loss on cash flow hedge is reported as a component of accumulated
other comprehensive income. The notional amount of these contracts was $2.4 million, and $1.0 million at July 31, 2016 and
January 31, 2016, respectively. The corresponding unrealized income or loss is recorded in the unaudited condensed
consolidated statements of other comprehensive income (loss). The corresponding (liability) asset amounted to approximately
$(3,000), and $(26,252) at July 31, 2016 and January 31, 2016, respectively.
|
12.
|
VAT
Tax Issue in Brazil
|
Asserted Claims
Value Added Tax (“VAT”)
tax in Brazil is at the state level. We commenced operations in Brazil in May 2008 through an acquisition of Qualytextil, S.A.,
which subsequently became Lake Brasil Indústria e Comércio de Roupas e Equipamentos de Proteção Individual
Ltda., (referred to in this footnote as “Qualytextil” and also referred to in this Form 10-Q as “Lakeland Brazil”).
At the time of the acquisition, and going back to 2004, the acquired company used a port facility in a neighboring state (Recife-Pernambuco),
rather than its own, in order to take advantage of incentives, in the form of a discounted VAT tax, to use such neighboring port
facility. We continued this practice until April 2009. The practice was stopped largely for economic reasons, resulting from additional
trucking costs and longer lead times. The Bahia state auditors (state of domicile for the Lakeland operations in Brazil) initially
reviewed the period from 2004-2006 and filed a claim for unpaid VAT taxes in October 2009. The claim asserted that the state VAT
taxes are owed to the state of domicile of the ultimate importer/user and disregarded the fact that the VAT taxes had already
been paid to the neighboring state.
The audit notice claimed that
the taxes paid to Recife-Pernambuco should have been paid to Bahia in the amount of R$4.8 million and assessed fines and interest
of an additional R$5.6 million for a total of R$10.4 million (approximately US $3.0 million, $3.5 million and $6.5 million, respectively
based on exchange rates at the time of the claim).
Bahia had announced an amnesty
for this tax whereby R$3.5 million (US$1.9 million) of the taxes claimed were paid by Qualytextil by the end of the month of May
2010, and the interest and penalties related thereto were forgiven. According to fiscal regulation of Brazil, R$2.1 million (US$1.1
million) of this amnesty payment has since been recouped as credits against future taxes due.
An audit for the 2007-2009
period has been completed by the State of Bahia. In October 2010, the Company received five claims for 2007-2009 from
the State of Bahia, the largest of which was for taxes of R$6.2 million (US$2.3 million) and fines and interest currently at R$8.3
million (US$3.1 million), for a total of R$14.6 million (US$5.5 million). The Company had intended to defend itself through
a regulatory process and waited for the next amnesty period. Of other claims, our attorney informed us that three claims
totaling R$1.3 million (US$0.5 million) in respect of fines and penalties were likely to be successfully defended based on state auditor
misunderstanding.
As more fully described in
Note 15, Lakeland and Qualytextil entered into a Shares Transfer Agreement pursuant to which, effective July 31, 2015, Zap Comércio
de Brindes Corporativos Ltda (“Transferee”), a company owned by an existing Qualytextil manager, acquired all of the
shares of Qualytextil and assumed liabilities of Qualytextil, including VAT tax liabilities.
VAT Tax Amnesty and Loan
Agreement with Transferee of Brazil Operations
The Bahia State Tax Department
has commenced an audit of VAT taxes for the period from 2011-2014 in October 2015. The State of Bahia declared an amnesty beginning
November 1, 2015 and expiring December 18, 2015. The Company had entered into a loan agreement (the “Loan Agreement”)
on December 11, 2015 with Qualytextil for the amount of R$8,584,012 (approximately US $2.29 million) for the purpose of providing
funds necessary for Qualytextil to settle the two largest outstanding VAT claims with the State of Bahia. As described under “Shares
Transfer Agreement” in Note 15, the Company may be exposed to certain liabilities arising in connection with the prior operations
of Qualytextil, including, without limitation, from lawsuits pending in the labor courts in Brazil and VAT taxes. Settlement of
the VAT claims under amnesty would benefit the Company in that it eliminates these large VAT claims, which the Company believes
will render the continued viability of Qualytextil immaterial to the Company. It should also eliminate the possibility of the
transfer of shares of Qualytextil being found fraudulent on the basis of evading VAT claims and would subsequently eliminate the
possibility of future encumbrance of the real estate by the state of Bahia subsequent to VAT claims. Qualytextil completed the
amnesty agreement with the State of Bahia on December 18, 2015. US $250,000 in continuing business incentives provided by Lakeland
to Qualytextil in the Shares Transfer Agreement were waived by Qualytextil as partial payment of the debt.
Repayment of the loan
by Qualytextil to the Company will include the following elements
R$ 3,395,947 (approximately
US $900,000) in VAT credits will become available to Qualytextil from the State of Bahia to be used against future VAT payments.
Qualytextil has agreed to pay amounts equal to this credit to the Company in accordance with monthly sales volume. Qualytextil
will transfer the rights to a judicial deposit on a tax claim to the Company. There is a judicial deposit of R$ 3,012,326 (approximately
US $800,000), however, Qualytextil will continue to make monthly deposits to the judicial account until the case is ruled upon
by the Supreme Court of Brazil or the deposit is fully funded. Attorney’s success fee will be deducted before any disbursements
to the Company or Qualytextil. However, while the lawyer handling this case tells us it is probable Qualytextil will win this
case, it may take years to resolve. Credits of R$ 1,025,739 (approximately US $275,000) relating to the above case may be generated
if and when the case is resolved. Qualytextil has agreed to pay amounts equal to this credit to the Company in accordance with
monthly sales volume. A minimum quarterly payment of R$ 300,000 (approximately US $80,000) will be required commencing October
2016. The Company has determined that a reserve against the collection of this loan in full is prudent; which resulted in an additional
charge to the loss on disposal of discontinued operations of $2,286,022 in the fourth quarter of the fiscal year ended January
31, 2016, net of tax benefits of $834,398. Such additional losses will be available as additional tax loss carryforwards to offset
cash taxes payable against future taxable income in the USA.
A table summarizing all four
different VAT claims remaining open and their status is listed below:
|
|
Principal
(tax only)
|
|
|
Total fines
and fees
|
|
|
Total of the
Debt
|
|
|
Negotiated
fines
and fees
|
|
|
Not included in
amnesty
settlement
|
|
|
Amnesty
settlement
|
|
Status of unsettled items
|
R$
|
|
|
305,897
|
|
|
|
572,264
|
|
|
|
878,161
|
|
|
|
92,853
|
|
|
|
|
|
|
398,750
|
|
|
USD ¹
|
|
$
|
80,499
|
|
|
$
|
150,596
|
|
|
$
|
231,095
|
|
|
$
|
24,435
|
|
|
|
|
|
$
|
104,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R$
|
|
|
573,457
|
|
|
|
1,416,106
|
|
|
|
1,989,563
|
|
|
|
236,290
|
|
|
|
809,747
|
|
|
|
|
The new owner will continue litigation as it is expected to be decided in management favor
|
USD ¹
|
|
$
|
150,910
|
|
|
$
|
372,660
|
|
|
$
|
523,569
|
|
|
$
|
62,182
|
|
|
$
|
213,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R$
|
|
|
6,081,597
|
|
|
|
10,638,172
|
|
|
|
16,719,769
|
|
|
|
1,903,665
|
|
|
|
|
|
|
7,985,262
|
|
|
USD ¹
|
|
$
|
1,600,420
|
|
|
$
|
2,799,519
|
|
|
$
|
4,399,939
|
|
|
$
|
500,964
|
|
|
|
|
|
$
|
2,101,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R$
|
|
|
402,071
|
|
|
|
876,589
|
|
|
|
1,278,660
|
|
|
|
139,858
|
|
|
|
541,929
|
|
|
|
|
The new owner will continue litigation as it is expected to be decided in management favor
|
USD ¹
|
|
$
|
105,808
|
|
|
$
|
230,681
|
|
|
$
|
336,489
|
|
|
$
|
36,805
|
|
|
$
|
142,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total R$
|
|
|
7,363,022
|
|
|
|
13,503,131
|
|
|
|
20,866,154
|
|
|
|
2,372,666
|
|
|
|
1,351,676
|
|
|
8,384,012
|
|
|
Total USD
|
|
$
|
1,937,637
|
|
|
$
|
3,553,456
|
|
|
$
|
5,491,093
|
|
|
$
|
624,386
|
|
|
$
|
355,704
|
|
|
2,206,319
|
|
|
Legal Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,703
|
|
|
Total Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,286,022
|
|
|
¹ USD amounts based on exchange rate
of as of settlement on December 18, 2015 at 3.80. Values updated as of December 1, 2015, according to the Brazil internal finance
department. Numbers may not add due to rounding.
|
13.
|
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.
In May 2014, the Financial
Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606):,
to clarify the principles used to recognize revenue for all entities. This guidance is effective for annual and interim reporting
periods beginning after December 15, 2017, with early adoption permitted for annual periods after December 31, 2016. This guidance
permits the use of one of two retrospective transition methods. The Company has neither selected a transition method, nor determined
the effects that the adoption of the pronouncement may have on its consolidated financial statements.
In November 2015, the FASB
issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes
are classified on organizations’ balance sheets. The ASU eliminates the current requirement for organizations to present
deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required
to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified
balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. The Company
does not expect this update will
have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB
issued ASU No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU
2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments
in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early
application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at,
or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company
is currently evaluating the impact of this new standard on its consolidated financial statements.
In March 2016, the FASB Issued
ASU No. 2016-09, Compensation–Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The
guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early
adoption is permitted for an entity in any interim or annual period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects
early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact this guidance
will have on the consolidated Financial Statements and related disclosures.
In April 2016, FASB issued
ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments
clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation
guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements
for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the
amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e.,
January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods
beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently
evaluating the impact of this new standard on its consolidated financial statements.
In May 2016, the FASB issued
ASU No. 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815); Rescission of SEC Guidance Because of
Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which is rescinding
certain SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities—Oil
and Gas, effective upon adoption of Topic 606. The Company does not expect the adoption of the ASU to have any impact on
its consolidated financial statements.
In May 2016, FASB issued ASU
No. 2016-12—Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients, which
is intended to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic
606 by reducing the potential for diversity in practice at initial application and by reducing the cost and complexity of applying
Topic 606 both at transition and on an ongoing basis. The Company is assessing the impact of the adoption of the ASU on
its consolidated financial statements.
In August 2016, the FASB issued
ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends ASC 230, Statement of Cash Flows. This
ASU provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists.
The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The
Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's consolidated financial statements.
The Company is involved in
various litigation proceedings arising during the normal course of business which, in the opinion of the management of the Company,
will not have a material effect on the Company’s financial position and results of operations or cash flows; however, there
can be no assurance as to the ultimate outcome of these matters.
On March 9, 2015, Lakeland
Brazil changed its legal form to a Limitada and changed its name to Lake Brasil Industria E Comercio de Roupas E Equipamentos
de Protecao Individual LTDA.
Settlement Agreement –
Arbitration Debt
On June 18, 2015, Lakeland
and its then wholly-owned subsidiary Lakeland Brazil (together with Lakeland, the “Brazil Co”), entered into an Amendment
(the “Amendment”) to a Settlement Agreement, dated as of September 11, 2012 (the “Settlement Agreement”),
with two former officers (the “former officers”) of Lakeland Brazil. As part of the original Settlement Agreement,
the parties resolved all alleged outstanding claims against the Brazil Co arising from an arbitration proceeding in Brazil involving
Brazil Co and the former officers of Brazil Co for an aggregate amount of approximately US $8.5 million payable by Brazil Co to
the former officers over a period of six (6) years. As of the June 18, 2015 settlement date, there was a balance of US $3.75 million
(the “Outstanding Amount”) owed under the Settlement Agreement, which Outstanding Amount was to be paid by the Company
in quarterly installments of US $250,000 through December 31, 2018.
Pursuant to the Amendment,
the former officers agreed to fully and finally settle the Outstanding Amount owed by the Company for an aggregate lump sum payment
of US $3.41 million, resulting in a gain of US $224,000 after allowing for imputed interest on the original Settlement Agreement.
Within five days of receipt of such payment, the former officers provided to Lakeland Brazil the documents needed to have their
lien securing payment of the Outstanding Amount removed on certain real estate owned by Lakeland Brazil and such lien was removed.
The Amendment also contains a general release of claims by the former officers in favor of the Company and its past or present
officers, directors, and other affiliates. The Company’s senior lender, Alostar Bank of Commerce, has consented to the transactions
contemplated by the Amendment.
Shares Transfer Agreement
On July 31, 2015 (the “Closing
Date”), Lakeland and Lakeland Brazil, completed a conditional closing of a Shares Transfer Agreement (the “Shares
Transfer Agreement”) with Zap Comércio de Brindes Corporativos Ltda (“Transferee”), a company owned by
an existing Lakeland Brazil manager, entered into on June 19, 2015. Pursuant to the Shares Transfer Agreement, the Transferee
has acquired all of the shares of Lakeland Brazil owned by the Company. Pursuant to the Shares Transfer Agreement, Transferee
paid R$1.00 to the Company and assumed all liabilities and obligations of Lakeland Brazil, whether arising prior to, on or after
the Closing Date, including, without limitation (i) liabilities, such as severance obligations, in respect of the current and
former employees of Lakeland Brazil, (ii) liabilities arising from any labor claims already existing or which may thereafter be
filed against Lakeland Brazil and its current or former affiliates, officers and shareholders, (iii) liabilities with respect
to taxes imposed on the Brazilian business, including Value Added Tax (“VAT”) tax liabilities, (iv) liabilities arising
under leases, contracts, licenses or governmental permits pursuant to which Lakeland Brazil is a party or otherwise bound, (v)
product warranty liabilities, product and return obligations pursuant to any stock balancing program and rebates pursuant to any
marketing program, to the extent such liabilities arose from sales of products made in the course of the Brazilian business, (vi)
accounts payable of Lakeland Brazil, whether or not invoiced, and (vii) all other obligations and liabilities with respect to
the Brazilian business of Lakeland Brazil (collectively, the “Brazilian Liabilities”). In order to help enable Lakeland
Brazil to have sufficient funds to continue to operate for a period of at least two years following the Closing Date, the Company
provided funding to Lakeland Brazil in the aggregate amount of US $1,130,000, in cash, in the form of a capital raise, on or prior
to the Closing Date, and agreed to provide an additional R$582,000 (approximately US $188,000) (the “Additional Amount”),
in the form of a capital raise, to be utilized by Lakeland Brazil to pay off the Brazilian Liabilities and other potential contingent
liabilities. Pursuant to the Shares Transfer Agreement, the Company paid R$992,000 (approximately US $320,000) in cash, on July
1, 2015 and issued a non-interest bearing promissory note for the payment to be due for the Additional Amount (R$582,000) (approximately
US $188,000) on the Closing Date which was paid to Lakeland Brazil in two (2) installments of (i) R$288,300 (approximately US
$82,000) which was paid on August 1, 2015, and (ii) R$294,500 (approximately US $84,000) on September 1, 2015.
In addition, we may continue
to be exposed to certain liabilities arising in connection with the prior operations of Lakeland Brazil, including, without limitation,
from lawsuits pending in the labor courts in Brazil in which plaintiffs were seeking, as at July 31, 2015, a total of nearly US
$8,000,000 in damages from our then Brazilian subsidiary. We believe many of these labor court claims are without merit and the
amount of damages being sought is significantly higher than any damages which may have been incurred. Pursuant to the Shares Transfer
Agreement, we are required to fully fund amounts owed by Lakeland Brazil in connection with the then existing labor claims by
Lana dos Santos and to pay amounts potentially owed for future labor claims up to an aggregate amount of $375,000 plus 60% of
the excess of such amount until the earlier of (i) the date all labor claims against Lakeland Brazil deriving from events prior
to the sale are settled, (ii) by our mutual agreement with Lakeland Brazil or (iii) on the two (2) year anniversary of closing
of the sale. As of July 31, 2016, the Lana dos Santos claim was settled for $272,000 and $79,000 was paid in respect of other
labor claims. With respect to continuing claims, $278,000 is being sought, of which management estimates the aggregate liability
will be less than that amount.
The Company believes that these
amounts contributed to its now former subsidiary Lakeland Brazil will be more than offset by a benefit for USA taxes of approximately
US $9.5 million generated by a worthless stock deduction for Brazil that the Company claimed on its corporate tax returns. Although
the Company’s tax advisors believe that the worthless stock deduction is valid, there can be no assurance that the IRS will
not challenge it and, if challenged, that the Company will prevail.
The closing of this agreement
was subject to Brazilian government approval of the shares transfer, which was received in October 2015 (The “Final Closing
Date”). Even after the Final Closing Date for transactions contemplated by the Shares Transfer Agreement, the Company may
be exposed to certain liabilities arising in connection with the prior operations of Lakeland Brazil, including, without limitation,
from lawsuits pending in the labor courts in Brazil and VAT taxes, as more fully described in Note 12. The Company understands
that under the laws of Brazil, a concept of fraudulent bankruptcy exists, which may hold a parent company liable for the liabilities
of its Brazilian subsidiary in the event some level of fraud or misconduct is shown during the period that the parent company
owned the subsidiary. While the Company believes that there has been no such fraud or misconduct relating to the proposed transfer
of stock of Lakeland Brazil and the transactions contemplated by the Shares Transfer Agreement, as evidenced by the Company’s
funding support for continuing operations of Lakeland Brazil, there can be no assurance that the courts of Brazil will not make
such a finding nonetheless. The risk of exposure to the Company continues to diminish as the Transferee continues to operate Lakeland
Brazil, as the risk of a finding of fraudulent bankruptcy lessens and pre-sale liabilities are paid off. Should the Transferee
operate Lakeland Brazil for a period of two years, the Company believes the risk of a finding of fraudulent bankruptcy is eliminated.
The Company believes that the loan transaction with its former Brazilian subsidiary resulting in a substantial reduction of the
VAT tax liability, as described in Note 12, significantly reduced such potential liability. In addition, as discussed above in
this Note, the potential labor claims liability has substantially diminished. The Shares Transfer Agreement, which is governed
by United States law, contains customary representations, warranties and covenants of the parties for a transaction of this type.
The Company and Transferee have agreed to indemnify each other from and against certain liabilities, subject to certain exceptions.
Under the Shares Transfer Agreement, the Company will be subject to certain non-solicitation provisions for a period of two years
following the Closing Date.
The Company estimated that
the transactions involved with the completion of its exit from Brazil result in a loss of approximately $1.2 million (net of tax
benefit of $0.7 million) reflected on its statement of operations and a decrease of approximately $0.5 million to stockholders’
equity as a result of recording the exit transactions. This included a reclassification of approximately $1.3 million from Accumulated
Other Comprehensive Loss to the Statement of Operations and Retained Earnings which did not impact net stockholders’ equity.
Further losses on the sale were reflected in Q4 FY16 as a result of the reserves against the loans related to the VAT taxes as
described elsewhere in Note 12. Since this is a resolution of contingencies that arise from and that are directly related to the
operations of the Brazil component prior to its disposal, it has been accounted for as discontinued operations.
The following tables summarize
the results of the Brazil business included in the statements of operations for the years ended July 31, 2016 and July 31, 2015.
|
|
Statement of Operations
(000’s)
|
|
|
|
Three Months Ended
July 31,
|
|
|
Six Months Ended
July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net sales from discontinuing operations
|
|
|
—
|
|
|
$
|
425
|
|
|
|
—
|
|
|
$
|
869
|
|
Gross profit from discontinuing operations
|
|
|
—
|
|
|
|
132
|
|
|
|
—
|
|
|
|
164
|
|
Operating expenses from discontinuing operations
|
|
|
—
|
|
|
|
279
|
|
|
|
—
|
|
|
|
763
|
|
Operating loss from discontinuing operations
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
(599
|
)
|
Interest expense from discontinuing operations
|
|
|
—
|
|
|
|
75
|
|
|
|
—
|
|
|
|
256
|
|
Other expense from discontinuing operations
|
|
|
—
|
|
|
|
100
|
|
|
|
—
|
|
|
|
398
|
|
Loss from operation of discontinuing operations before income tax
|
|
|
—
|
|
|
|
(322
|
)
|
|
|
—
|
|
|
|
(1,253
|
)
|
Non-cash reclassification of Other Comprehensive Income to Statement of Operations (no impact
on stockholders’ equity)
|
|
|
—
|
|
|
|
(1,286
|
)
|
|
|
—
|
|
|
|
(1,286
|
)
|
Loss from disposal of discontinued operations
|
|
|
—
|
|
|
|
(515
|
)
|
|
|
—
|
|
|
|
(515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes for discontinued operations
|
|
|
—
|
|
|
|
(2,123
|
)
|
|
|
—
|
|
|
|
(3,054
|
)
|
Income tax benefit from discontinued operations
|
|
|
—
|
|
|
|
(569
|
)
|
|
|
—
|
|
|
|
(569
|
)
|
Net loss from discontinued operations
|
|
|
—
|
|
|
$
|
(1,554
|
)
|
|
|
—
|
|
|
$
|
(2,485
|
)
|