Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark
one)
☒
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended January 31,
2020
OR
☐
TRANSITION REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from _____________ to ______________
Commission
File Number: 0-15535
LAKELAND INDUSTRIES, INC.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
13-3115216
|
|
(State
or Other Jurisdiction of Incorporation or
Organization)
|
(I.R.S.
Employer Identification No.)
|
|
202
Pride Lane SW, Decatur, AL
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35603
|
|
(Address of Principal Executive Offices)
|
(Zip Code)
|
(Registrant's telephone number, including area code) (256)
350-3873
Securities registered pursuant to Section 12(b) of the
Act:
|
Title
of each class
|
Trading
Symbol(s)
|
Name of
each exchange on which registered
|
|
Common
Stock
|
LAKE
|
NASDAQ
|
Securities registered pursuant to Section 12(g) of the
Act:
Not Applicable
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes☐ No
☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ☒
No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§229.405 of this Chapter) is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ☒
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a nonaccelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company”, and
“emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
|
Large
accelerated filer
|
Accelerated
filer ☒
|
|
Nonaccelerated
filer
|
Smaller
reporting company ☒
|
|
Emerging
growth company
|
|
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act) Yes☐ No
☒
As of
July 31, 2019, the aggregate market value of the registrant’s
common stock held by nonaffiliates of the registrant was
$80,224,689 based on the closing price of the common stock as
reported on the National Association of Securities Dealers
Automated Quotation System National Market System.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable date.
|
Class
|
|
Outstanding at April 10, 2020
|
|
Common Stock, $0.01 par value per share
|
|
7,972,423 Shares
|
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement to be filed
pursuant to Regulation 14A of the Security Exchange Act of 1934 are
incorporated by reference into Part III (Items 10, 11, 12, 13 and
14) of this Form 10-K.
LAKELAND INDUSTRIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
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PART
I
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1
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13
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20
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21
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23
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23
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PART
II:
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24
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25
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26
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35
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35
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68
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68
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70
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PART
III:
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70
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PART
IV:
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71
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This Annual Report on Form 10-K contains forward-looking statements
that are made pursuant to the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements involve risks, uncertainties and assumptions as
described from time to time in registration statements, annual
reports and other periodic reports and filings of the Company filed
with the Securities and Exchange Commission. All statements, other
than statements of historical facts, which address the
Company’s expectations of sources of capital or which express
the Company’s expectation for the future with respect to
financial performance or operating strategies, can be identified as
forward-looking statements. As a result, there can be no assurance
that the Company’s future results will not be materially
different from those described herein as “believed,”
“anticipated,” “estimated” or
“expected,” “may,” “will” or
“should” or other similar words which reflect the
current views of the Company with respect to future events. We
caution readers that these forward-looking statements speak only as
of the date hereof. The Company hereby expressly disclaims any
obligation or undertaking to release publicly any updates or
revisions to any such statements to reflect any change in the
Company’s expectations or any change in events, conditions or
circumstances on which such statement is based.
PART I
Lakeland
Industries, Inc. (the “Company” or
“Lakeland,” “we,” “our,” or
“us”) was incorporated in the State of Delaware in
1986. Our executive office is located at 202 Pride Lane SW,
Decatur, AL 35603, and our telephone number is (256) 350-3873. Our
website is located at www.lakeland.com. Information contained on
our website is not part of this report.
ITEM 1. BUSINESS
Overview
We manufacture and sell a
comprehensive line of industrial protective clothing and
accessories for the industrial and public protective clothing
market. All Lakeland products either protect the wearer from
something in their environment, or protect a product or process
from the wearer. Our products must meet minimum performance
requirements defined by industry best practice, and/or
international or local standards.
Our
products are sold globally by our in-house sales teams, our
customer service group, and authorized independent sales
representatives to a global network of over 1,600 safety and
industrial supply distributors. Our authorized distributors supply
end users, such as integrated oil, chemical/petrochemical,
automobile, steel, glass, construction, smelting, heavy and light
industry, cleanroom, janitorial, pharmaceutical, and high
technology electronics manufacturers, as well as scientific,
medical laboratories and the utilities industries (electrical,
natural gas, and water). 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 US Food and Drug
Administration. Internationally, we sell to a mixture of end users
directly, and to industrial distributors depending on the
particular country and market. Sales are made in more than 50
foreign 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, FY20 refers to the
fiscal year ended January 31, 2020. In FY20 we had net sales of
$107.8 million and $99.0 million in FY19.
Lakeland
regards owning and operating its own manufacturing facilities as a
sustainable strategic advantage. We believe that ownership of
manufacturing is the cornerstone to building resilient
manufacturing. Having 6 manufacturing locations in 6 countries,
coupled with sourcing core raw materials from multiple suppliers in
various countries, affords Lakeland with capabilities and
manufacturing resilience that cannot be matched by our competitors
who use contractors. Owning our manufacturing provides us with the
ability to rapidly scale up production to meet emergency demand;
shift production between locations to take advantage of new trade
agreements or avoid complications that may arise from trade
disputes; and to maintain the highest levels of product quality.
This belief was validated during this year’s U.S./ China
trade dispute and subsequent COVID-19 pandemic. Through both of
these events, Lakeland was able to rebalance manufacturing in its
facilities and make use of its diversified supplier network to
supply its customers without major interruption.
By
comparison, our competitors who utilize contrators to sew their
garments, lack the ability to respond as quickly to emergency
situations because contractor agreements typically require forecast
lead-times in excess of 30 days. They typically deal with only one
or two contractors in order to maximize their purchasing power,
simplify their purchasing, and reduce freight out costs. While this
works well during normal business conditions, they are at a
disadvantage in the event of any changes in tariffs or export
resitrictions that may result from international trade disputes, or
any supply disruptions due to public health emergencies, social
unrest, or supply shortages.
1
Should these issues continue for an extended period of time, an
increasing number of our customers may seek sources of supply that
are not captive to single-site manufacturing.
Our
corporate strategy is to continue diversification of our
manufacturing capability and product lines, and leverage it with
real-time business intelligence allowing our sales team to focus on
products and markets that provide improved margins as well as
economic and seasonal insensitivity. In this manner we will be able
to develop products and services that will differentiate Lakeland
well into the future.
For the
first half of the year (FY20), economic growth and investment
globally was relatively strong as the global economy continued its
recovery from the second half of FY 2019. In the second half
of FY20 we encountered revenue headwinds due to changes, and
threatened changes to U.S. trade policies relative to several key
markets in which we manufacture and sell, specifically China,
Mexico, and India. In Europe, uncertainty around Brexit saw
customers less confident in economic growth. This was reflected in
the purchases and business investment of many of our EEC end users.
This in turn limited growth opportunities in these markets while
leading to more aggressive pricing from our competitors, which we
were forced to meet, resulting in downward pressure on gross
margins. Fortunately, even as global talks between the US
administration and China, the U.K and European Union became more
contentious and less certain, underlying economic strength in the
Americas (Latin America, Mexico and Canada) outweighed second half
headwinds resulting in 9.0% revenue growth year over year (FY19 to
FY20).
FY20
also saw significant progress in Lakeland’s continued
installation of its ERP system that began Q3 FY19. In Q1 FY20 we
began to see benefits from the ERP system installation in the our
U.S. operations (greater than 50% of our business), in terms of
business intelligence (BI) that enabled us to improve planning,
reduce lead-times, and increase manufacturing efficiencies as we
progressed through the year. Due to the progress in the last three
quarters of FY20, we are on schedule to continue the rollout of the
ERP system to our subsidiaries in Mexico and Canada, in the second
half of FY21.
The
Company is utilizing the BI capability of its new ERP system to
reorganize its global sales teams. We are now organizing our sales
personnel into four market-based, vertical teams. The previous
organization, in which sales teams were assigned geographically,
selling all Lakeland products, did not allow our sales personnel to
properly focus on our sales strategies. Simply stated, the time
allotted for end user meetings, in most cases, was not sufficient
for our sales personnel to cover our wide range of products, or to
develop the application expertise that many of our customers
require. This reorganization will limit the number of products each
sales person focuses on to the specific vertical they work in and
allow them to develop expertise in the use of Lakeland products
within their specific market. This will allow the Company to better
focus marketing and sales efforts to drive growth in specific
markets that are strategic for the company.
FY20
also saw the completion of the first phase of Lakeland’s
capital project to diversify and expand its manufacturing footprint
into Vietnam and India. Both our India plant and our Vietnam
facilitiy are fully equipped, staffed and making regular delivery
of product. Future capital expenditures, to add additional product
manufacturing capabilities and to expand the capacity of these
operations, is planned and will be implemented as our growth
dictates.
Additionally,
a major strategic companywide objective to accelerate growth
throughout the Company is to push additional products and sales
tools that are successful in the key US and China markets to the
other international operations, which have traditionally carried
smaller lines. To facilitate this, the Company is evaluating
and redeploying sales and marketing assets into regions that offer
the greatest potential for sales and margin
growth.
Industry Overview
While
our market, industrial protective clothing, is a subset of the
broader industrial work clothing market, our segment is
distinquished by its intended application; to protect people from
hazards in their environment or to protect products from the people
wearing our products. Our market segment is characterized by
minimum performance requirements for the garments. As a result our
products are more highly specified and technical than regular work
clothing or uniforms, qualifying them as personal protective
equipment or PPE. The industrial protective clothing market
includes our limited use/disposable protective or safety clothing,
high-end chemical protective suits, high visibility clothing/vests,
firefighting and heat protective apparel, gloves, Flame Resistant
(FR) garments, and arc flash protective garments. The industrial
protective clothing market in the United States has evolved over
the past 50 years as a result of governmental regulations and
requirements and commercial product development. In 1970, Congress
enacted the Occupational Safety and Health Act, or OSHA, which
requires employers to supply protective clothing in certain work
environments. Certain states have also enacted worker safety
laws and/or their own OSHA programs that further supplement OSHA
standards and requirements.
2
The
advent of OSHA coincided with the development of light disposable
fabrics, such as SMS (a three-layered nonwoven) and spunbonded
polypropylene which, for the first time, allowed for the economical
production of lightweight, disposable protective clothing. The
attraction of disposable garments grew in the late 1970s as a
result of increases in labor and material costs of producing cloth
garments and the promulgation of federal, state and local safety
and hazardous materials regulations. Internationally, in order to
comply with World Trade Organization (“WTO”) entry
requirements, foreign countries are required to adopt worker safety
regualtions similar to OSHA, and accept products that are certified
to international standards like, American National Standards
Institute (“ANSI”), Committee European de Normalization
(“CE”), and the International Organization for
Standardization (“ISO”) standards. As workers in these
countries become more highly skilled, and process and equipment
become more complex and hazardous, these developing international
markets continue to grow more rapidly than the US and EU
markets.
International and Domestic Standards
Globally,
standards development continues to challenge Industrial protective
clothing manufacturers. The pace of change and adoption of new
standards continues to increase as standards for more hazards are
added and deficiencies in existing standards are corrected.
Complex and changing international standards play to
Lakeland’s strengths when compared to most multinationals or
smaller manufacturers. Lakeland currently sits on committees
and/or works closely with groups involved in writing many
international standards such as the American Society for Testing
and Materials International (“ASTM”), the National Fire
Protection Association (“NFPA”), International Safety
Equipment Association (“ISEA”), the European Committee
for Standardization (“CEN”), ISO, the China National
Standards Board (“GB”) in China, and the Standards
Australia and Standards New Zealand
(“ASNZ”).
Globally,
not only are the standards continuing to change, but the focus of
standards activity is shifting. In response to increasing use
of certification processes as a technical barrier to trade,
standards writing bodies in the US and Europe have both concluded
efforts to update and define conformity assessment (ANSI/ISEA 125
and the PPE Regulation respectively) within their own spheres of
influence, unfortunately, these are not “international
standards” and can be easily ignored by other countries who
wish to impose their own conformity assessment systems on
importers. The result is an increasingly dynamic standards
environment where not only are the standards changing, but the
minimum requirements for conformity with the certification process
itself are changing.
A
number of developing nations are now becoming active in their own
standards development based on existing international
standards. However, we believe that the primary goal of their
standards writing activity is not focused on worker protection
(that is provided for by the use of international standards),
rather they are attempting to establish their own certification
criteria that will protect their domestic markets or favor specific
regional suppliers. This presents a new challenge in that not only
are we faced with multiple test methods and standards, but we have
the potential for multiple certification processes. While this adds
to product development and sales expenses, the additional cost is
only incremental. The real challenge is in navigating the
certification process itself. This is a significant impediment to
entry for companies seeking to expand sales distribution globally.
In many cases products preferred in one market are not acceptable
in another and multiple conformity assessments are required for the
same standard certification. This is both technically challenging
and costly. Lakeland, by virtue of its international manufacturing
and sales operations, is in a unique position to capitalize on this
complex dynamic.
3
Business Strategy
Key
elements of our strategy include:
●
Continued Development of Manufacturing
Capability: It is critical that we increase our
manufacturing capacity to meet our sales growth targets. We
currently operate six (6) manufacturing facilities in six (6)
countries, affording us a unique capability to take advantage of
various trade agreements and to adjust our manufacturing as those
agreements change. Diverse manufacturing also allows us to move
price sensitive products into lower cost more efficient operations
as labor costs increase in other countries. Lakeland is also
committed to manufacturing R&D and invests in new equipment to
improve efficiencies, quality, and maximize manufacturing
flexibility.
●
Improve Sales & Marketing in Existing
Markets: We believe that we have significant opportunity to
increase market penetration and improve margins in existing markets
by focusing our sales and marketing teams on vertical markets. The
four 4 vertical markets that we are focusing on are our core
industrial (e.g. oil & petrochmicals, manufacturing, and auto)
markets, the fire services market, the utilities (e.g. electrical,
gas, and water) market, and critical environments (clean rooms)
markets. Focusing on verticals will allow our sales and marketing
groups to better provide the expertise in specific applications
relative to our products that our customers are seeking. The result
will be an improved ability to focus on specific products and sell
multiple product lines to the same accounts affording us the
opportunity to bundle products to secure business.
●
Continued Emphasis on Customer Service.
We continue to offer a high level of customer service to
distinguish our products and to create customer loyalty. The
installation of our new enterprise resource planning (ERP) system
into the United States and its continued rollout to additional
Lakeland markets will provide us with the necessary business
intelligence to better anticipate customer demand and improve our
planning and customer service. We offer well-trained and
experienced sales and support personnel, on-time delivery and
accommodation of custom and rush orders. We also seek to advertise
our Lakeland branded tradenames and trademarks.
●
Introduce New Products: We continued
our history of product development and innovation by introducing
new proprietary products across all our product lines. In 2018 we
introduced our CleanMax line of clean and sterile manufactured
garments for use in critical and aseptic work environments. We also
continued the development and introduction of our Performance Wear
line targeting electrical and gas distribution with a complete
layering system designed to improve worker comfort and be worn away
from as well as to work. We are continuing to ramp up manufacturing
and add products to both of these lines.
We own
20 patents on fabrics and production machinery, with one
application in process, and continue to work on developing fabrics
that could potentially lead us into new markets and channels.
In North America, our growth strategy
is to focus on key target sectors where we have advantages, and to
increase our involvement at the end user level by adding sales
personnel and enhancing our marketing and product training tools to
make it easier for the sales teams of our distributors to be
successful promoting our products.
We have
integrated the US, Canadian, and Mexican sales teams into one
coordinated unit, a strategic recognition that the three countries
are increasingly part of a great North American market with
inter-related industries and companies throughout, and our sales
teams are sharing opportunities with each other. We have
experienced situations in which we could not break through with a
company in one country, but the team in another country was able to
make a conversion to our products. Then, after successful use of
our products in one country, the doors open to us in the other. We
have recently begun installation of SalesForce CRM software to
facilitiate this strategy globally.
We
continue to pursue conversion of end users to our core disposable
and chemical products, based on our overall performance and prices,
however we are working hard to provide our sales teams with the
tools needed to increase sales of higher value product lines,
specifically fire service, critical environment, and performance
wear (utilities). Our marketing is being significantly upgraded in
terms of resources, better sales collateral materials, and
increasingly effective use of social media. The Company plans
to continue its efforts to align its global markets in terms of
sales collateral, sales software, and e-commerce in the coming year
and into the future.
4
●
Decrease Manufacturing Expenses by Opening New
Manufacturing Facilites: We have successfully opened new
manufacturing facilities in Vietnam and India in an effort to hedge
against ever increasing manufacturing costs in China. Our China
operation will continue for the foreseeable future to service
products that are more complex and higher margin and for the
manufacture of products for sale into China. Beginning in 1995, we
successfully moved the labor-intensive sewing operations for our
limited use/disposable protective clothing lines to facilities in
Mexico and China. Manufacturing expansion is not only necessary to
control rising costs, it is also necessary for Lakeland to achieve
its growth objectives.
●
We continue to
diversify our raw material and component suppliers, qualifying
multiple suppliers whenever possible to enable us to press for
price reductions and better payment terms, as well as providing for
continuity of supply.
●
We are sourcing raw
materials and components from most of the countries in which we
have operations in order to reduce freight costs and inventory
levels.
●
We are
re-engineering many products to reduce the amount of raw materials
used and reduce the direct labor required as well as harmonizing
designs to meet the requirements of multiple global markets,
thereby eliminating a number SKUs based on local certifications or
preferences. The result is improved manufacturing throughput and
reduced inventory levels.
Our Competitive Strengths
Our
competitive strengths include:
●
Industry Reputation. We devote
significant resources to creating customer and brand loyalty and
brand by accommodating custom and rush orders, focusing on on-time
delivery, building a resilient manufacturing and supply chain, and
focusing on our core customers even during times of emergency
demand. Additionally, our ISO 9001 and 9002 certified facilities
manufacture high-quality products. As a result of these factors, we
believe that we have an excellent reputation in the
industry.
●
Technical Expertise: The breadth of the
Company’s product lines, the raw materials used, the markets
serviced and standards compliance globally, all contribute to a
level of expertise and cross-functional knowledge that is unique in
the industrial protective clothing market. Manufacturing our own
products around the world for various global markets results in a
body of knowledge that is not easily replicated. Lakeland’s
knowledge of product design, technical fabrics and films, combined
with market specific knowledge of standards, and the ability to
navigate manufacturing in a number of different countries around
the world provides synergies that few competitors can
match.
●
International Manufacturing
Capabilities. We have operated our own manufacturing
facilities in Mexico since 1995 and in China since 1996. In 2018,
we commenced manufacturing operations in Vietnam and India. Our
facilities in China in FY20 totaled 177,316 sq. ft. of
manufacturing, warehousing and administrative space, in Mexico
totaled 74,000 sq. ft. of manufacturing, warehousing and
administrative space, in Vietnam totaled 141,588 sq. ft of
manufacturing, warehousing and administrative space and in India
totaled 32,905 sq ft of manufacturing, warehousing and
administrative space. Our facilities and capabilities in China,
India, Mexico and Vietnam allow access to a less expensive labor
pool than is available in the US and permits us to purchase certain
raw materials at a lower cost than are available
domestically.
●
International Sales Offices. We have
sales offices around the world to service various major markets,
including offices in Toronto, Canada; Hull, UK; Beijing, Weifang,
Chongqing and Shanghai, China; Melbourne, Australia; Southeast
Asia: Noida, India; Santiago, Chile; Buenos Aires, Argentina;
Jerez, Mexico; Moscow, Russia; and Ust-Kamenogorsk, Kazakhstan.
Lakeland sales personnel are located in 21 countries around the
world.
●
Comprehensive Inventory. We have a
large product offering with numerous variants, such as size, hood
design, elastic wrists and ankles, and pockets, and maintain a
large inventory of each in order to satisfy customer orders in a
timely manner. Many of our customers traditionally make purchases
of industrial protective gear with expectation of immediate
delivery. We believe our ability to provide timely service for
these customers enhances our reputation in the industry and
positions us strongly for repeat business, particularly in our
limited use/disposable protective clothing lines.
●
Manufacturing Flexibility. By locating
labor-intensive manufacturing processes, such as sewing, in Mexico,
China, Vietnam, and India, and by utilizing sewing subcontractors,
we have the ability to increase production without substantial
additional capital expenditures. Our manufacturing systems allow us
flexibility for unexpected production surges and alternative
capacity in the event any of our independent contractors become
unavailable.
5
Products
The
following table summarizes our principal product lines, the raw
materials used to manufacture them, their applications and end
markets:
|
Product
Line
|
Raw
Material
|
Protection
Against
|
End
Users
|
|
● Limited
use/disposable protective clothing
|
● Nonwoven
polyethylene, Spunlaced blends, SMS, and spundbonded polypropylene
fabrics and laminates are use in our Micromax®, Micromax NS,
Micromax and VP, ChemMax® 1,
ChemMax® 2,
Pyrolon®,CleanMAX®
and numerous other products
|
● Contaminants,
irritants, metals, chemicals, fertilizers, pesticides, acids,
asbestos, PCBs, lead, dioxin and many other hazardous
chemicals
● Viruses and
bacteria (AIDS, streptococcus, SARS, Bird flu, hepatitis, and
COVID-19)
|
● Integrated
oil
● Chemical
industries
● Pharmaceuticals
● Cleanrooms
● Public
utilities
● Automotive and
pharmaceutical industries
● Government
(terrorist response)
● Laboratories
● Janitorial
|
|
● High-end chemical
protective suits
|
● Patented and
proprietary multilayer film laminates
● ChemMax® 3 and
4
● Interceptor®
● Pyrolon®
CRFR
|
● Chemical
spills
● Toxic chemicals
used in many varied manufacturing processes
● Terrorist attacks,
biological and chemical warfare (sarin, anthrax and
ricin)
|
● Integrated oil,
chemical and nuclear industries
● Hazardous material
teams
● Fire departments
(hazmat)
● Government (first
responders & law enforcement)
|
|
● Firefighting and
heat protective apparel
|
● Para and meta
aramid fabrics and blends, multilayer liners and moisture
barriers
|
● Fire, burns and
excessive heat
|
● Municipal,
corporate and volunteer fire departments
● Wildland fire
fighting
● Hot equipment
maintenance personnel and industrial fire departments
● Oil well
fires
● Airport crash
rescue
|
|
● Durable woven
garments
|
● polyester
taffeta with conductinve thread
● Cotton/polyester
blends
● Cotton
● Polyester
● FR cotton
fabrics
● Para and metaAramid
fabrics and blend
● Nylon
|
● Protects
manufactured products from human contamination or static electrical
charge
● Bacteria, viruses
and blood borne pathogens
● Protection from
Flash fires
● Electric Arc
Flash
|
● General industrial
applications
● Household
uses
● Clean room
environments
● Emergency medical
ambulance services
● Oil and gas
industry
● Petrochemcials
● Refineries
● Medical and
laboratory facilities
● Electric and Gas
Utilities
|
6
|
Products
(con’t)
|
|||
|
Product
Line
|
Raw
Material
|
Protection
Against
|
End
Users
|
|
● High Visibility
Clothing
|
● Polyester
mesh
● Solid
polyester
● FR polyester
mesh
● FR solid
polyester
● Modacrylic
● Modacrylic
antistatic
● FR
cotton
● Nomex
● FR
trim
|
● Lack of
visibility
● Heat, flame,
sparks
● Arc
flash
● Static buildup,
explosive atmospheres
● Fire, heat
explosions
|
● Highway
● Construction
● Maintenance
● Transportation
● Airports
● Police
● Fire,
EMS
● Electric, coal and
gas utilities
● Extrication
● Confined space
rescue
|
|
● Gloves and
Sleeves
|
● Para aramid
yarns
● Para aramid wrapped
steel core yarns
● High Performance
Polyethylene yarns (“HPPE”)
● Composite
engineered yarns
● Nitrile, latex,
natural rubber, neoprene, polyurethane compounds and mixtures
thereof
|
● Cuts, lacerations,
heat, hazardous chemicals and dermatological irritants
|
● Integrated
oil
● Automotive, glass
and metal fabrication industries
● Chemical
plants
● Food
processing
● Electronic
industries
|
|
|
MARKET
VERTICAL
|
|||
|
PRODUCT
DIVISION
|
INDUSTRIAL
|
FIRE
|
CRITICAL
ENVIRONMENT
|
UTILITIES
|
|
Disposables
|
✓
|
|
✓
|
|
|
Chemical
|
✓
|
✓
|
✓
|
✓
|
|
Fire/Industrial
Heat
|
✓
|
✓
|
|
|
|
Wovens
|
|
✓
|
✓
|
✓
|
|
Performance
Wear
|
|
|
|
✓
|
|
High
Visibility
|
✓
|
✓
|
|
✓
|
|
Hand
& Arm
|
✓
|
|
|
|
Limited Use/Disposable Protective Clothing
We
manufacture a complete line of limited use/disposable protective
garments, including coveralls, laboratory coats, shirts, pants,
hoods, aprons, sleeves, arm guards, caps and smocks. Limited use
garments can also be coated or laminated to increase splash
protection against harmful inorganic acids, bases and other
hazardous liquid and dry chemicals. Limited use garments are made
from several different nonwoven fabrics. We use spunbonded
polypropylene (SBPP), spundonded meltblow spunbond (SMS),
hydroentangled woodpulp/polyester, and needlepunched fabrics. These
fabrics can be used alone or in combination with films of varying
composition, and/or topical chemical treatments to make our own
trademarked fabrics, like Pyrolon® Plus 2, XT, CRFR, CBFR
MicroMax®, MicroMax NS,
CleanMax, Safegard®,
Zonegard®, and
ChemMax® 1, 2, 3, and 4,
as well as our patented Interceptor fabric. We incorporate many
sewing, heat sealing and taping techniques depending on the level
of protection needed in the end use application.
7
Typical
users of these garments include integrated oil/petrochemical
refineries, chemical plants, automotive manufacturers,
pharmaceutical companies, construction companies, coal, gas and oil
power generation utilities and telephone utility companies,
laboratories, mortuaries and governmental entities. Numerous
smaller industries use these garments for specific safety
applications unique to their businesses. Additional applications
include protection from viruses and bacteria, such as Ebola, AIDS,
streptococcus, SARS, hepatitis, and COVID-19 at medical facilities,
laboratories, and emergency rescue sites. Clean manufactured and
sterilized versions of our MicroMAX NS product, trademarked
CleanMax, is used in aseptic laboratories to protect both the
wearer and the product from cross contamination.
High-End Chemical Protective Suits
We
manufacture and sell heavy duty chemical protective suits and
protective apparel from our proprietary CRFR, ChemMax® 3, 4, Interceptor and other
fabrics. These suits are worn by individuals on hazardous material
teams and within general industry to provide protection from
powerful, highly concentrated, toxic and/or potentially lethal
chemicals and biological toxins. These suits are useful against
toxic wastes at Superfund sites, toxic chemical spills or
biological discharges, chemical or biological warfare weapons (such
as sarin, anthrax or ricin and mustard gas) and chemicals and
petro-chemicals present during the cleaning of refineries and
nuclear facilities, and volatile organic compounds (VOCs) in
industrial applications, and protection from infectious diseases
such as Avian Flu and Ebola. Our line of chemical protective
clothing ranges in price from about $22 to $1,340 per
garment.
We
believe that we offer the most complete and cost-effective line of
chemical protective garments available on the market today.
Garments are certified to both NFPA, CE, ISO, as well as other
international standards allowing us to offer products composed of
these fabrics all over the world.
Our
ChemMAX 3, 4 and Interceptor fabrics are supported by
PermaSure®, an app based chemical database and permeastion
modeler that allows our customers to quickly determine the safe use
time for supported Lakeland garments, under specific environmental
conditions for over 4,000 chemicals. This powerful tool allows
Lakeland customers to safely minimize the chemical protective
clothing cost by not having to default to the most protective
garments available because chemical data is not available, or
because there is not time to consult with the manufacturer.
PermaSure can be used to model response scenarios so that
contingency plans for response can be put in place. PermaSure is an
excellent example of the kind of value-added expertise that
Lakeland provides to its customers.
Firefighting and Heat Protective Apparel
We
manufacture an extensive line of UL certified, NFPA compliant,
structural firefighter protective apparel (turnout gear) for
domestic and foreign fire departments. Our turnout gear is
available both in standard stock patterns and custom
configurations.
We
offer basic firefighter turnout gear in the Attack (A10) and
Battalion (B1) styles. Introduced in 2013 are the Battalion
(“B2”) style with advanced ergonomic features and the
Stealth style, with innovative features new to the fire
industry.
We also
manufacture each of the above styles in our UL certified, NFPA
compliant, Proximity line for Aircraft Rescue Fire Fighting
(“ARFF”) with aluminized shells.
We
manufacture full lines of Fire service extrication suits in FR
cotton, UL certified, NFPA compliant Wildland firefighting apparel
in multiple fabrics and Aluminized Kiln entry/Approach suits to
protect industrial workers from extreme heat encountered in
foundrys, boiler rooms, and direct fired ovens.
We
manufacture fire suits (turnout gear) at our facilities in China,
Mexico and Alabama. Our turnout gear range in price from about $800
for standard fire department turnout gear to $2,000 for custom
gear. Our Lakeland Fire®
brand of firefighting apparel continues to benefit from ongoing
research and development investment, as we seek to address the
ergonomic needs of stressful occupations.
8
Durable Woven Garments
We
manufacture and market a line of durable, launderable woven
garments that complement our firefighting and heat protective
offerings and provide alternatives to our limited use/disposable
protective clothing lines. These products provide us access to the
much larger woven industrial and health care-related markets. Woven
garments are favored by customers for certain applications because
of familiarity with and acceptance of these fabrics. These products
allow us to supply and satisfy a wider range of our end
users’ safety needs.
Our
product lines include the following:
●
Electrostatic
dissipative apparel used in electronics clean rooms.
●
Flame resistant
(FR) meta aramid, para aramid and FR Cotton coveralls/pants/jackets
used in petrochemical, refining operations, and electrical
utilities.
●
Cotton and
Polycotton coveralls, lab coats, pants and shirts.
●
FR fabrics
containing blends of cotton, Modacrylic, meta aramid, para aramid,
and viscose
Our
reusable woven garments range in price from $30 to $200 per
garment. We manufacture woven garments at our facilities in China,
Mexico, Argentina and Alabama. We are continuing to relocate our
woven protective coveralls and flame-retardant coveralls to our
facilities in China, Mexico, Vietnam and India where lower fabric
and labor costs allow increased profit margins.
High Visibility Clothing
Lakeland’s
High-Visibility Division manufactures and markets a comprehensive
line of reflective apparel meeting the American National Standards
Institute (ANSI) requirements as well as multiple national
standards around the world. The line includes vests, T-shirts,
sweatshirts, jackets, coats, raingear, jumpsuits, hats and
gloves.
Fabrics
available include solid and mesh fluorescent, polyester, both
inherently FR and FR treated fabrics, and
Modacrylic materials, which meet the arc flash protective
requirements for use by electrical utilities. The mesh
modacrylic fabric, with its inherent FR capability, has a
strong appeal to utility workers in warmer climates during spring
and summer months (heat prostration).
Our
High Vis FR/ARC rated rainwear is light-weight, soft, flexible and
breathable, providing for a cooler garment. This product is
intended for the Gas and Electrical Utility markets. The Lakeland
ARC-X FR/PU garment exceeds all of the required ASTM arc flash and
flash fire ratings for the Electric and Gas Utility
market.
Our
vest production occurs in our facilities in Alabama, Mexico and
China. Much of this manufacturing is for custom products. Many
corporations and agencies, such as State Departments of
Transportation and large electric utilities, develop custom
specifications which they feel are more efficient in meeting their
specific needs than off-the-shelf product. We can also import
significant quantities of product from China and Mexico to meet the
demand for items in high volume commodity markets.
In
addition to ANSI Reflective items, Lakeland Hi-Visibility
manufactures Nomex and FR cotton garments which have reflective
trim attached as a part of their design criteria. These garments
typically are used in rescue or extrication operations, such as
those encountered as a result of vehicular accidents. Garments in
this group are not as price sensitive as those in other reflective
categories.
Gloves and Sleeves
We
manufacture and sell specially designed glove and sleeve products
made from Kevlar®, a cut
and heat resistant fiber produced by DuPont, Spectra®, a cut resistant fiber made by
Honeywell, and our own patented engineered yarns. These gloves offer a better overall
level of protection, lower worker injury rate, and are more cost
effective than traditional leather, canvas or coated work gloves.
These gloves allow workers to safely handle sharp or jagged
unfinished sheet metal, are used primarily in the automotive, glass
and metal fabrication industries.
We have
patents for our Despro®
and Despro® Plus products
that provide greater cut and abrasion protection to the areas of a
glove where injury is most likely to occur. For example, the areas
of the thumb, thumb crotch and index fingers are made of heavier
yarn than the balance of the glove, providing increased wear
protection and longer glove life, reducing overall glove costs.
This proprietary manufacturing process allows us to produce our
gloves more economically and provide a greater value to the end
user.
9
Quality
All of
our manufacturing facilities are ISO 9001 or 9002 certified. ISO
standards are internationally recognized manufacturing standards
established by the International Organization for Standardization
based in Geneva, Switzerland. To obtain ISO registration, our
factories were independently audited to test our compliance with
the applicable standards and norms. In order to maintain
registration, our factories receive regular inspections by an
independent certification organization. While ISO certification is
advantageous in retaining CE certification of products, we believe
that the ISO 9001 and ISO 9002 certifications help make us more
competitive in the marketplace, as customers increasingly recognize
the standard as an indication of conformity with industry best
practices in manufacturing.
As we
source more and more of our fabrics internationally and manufacture
more products certified to various satandards we have installed
laboratories in our China and U.S. facilities. These laboratories
are critical for ensuring that our incoming raw materials meet our
quality requirements, for research and development of new products
or qualification of new fabrics, and evalution of new products
against international standards. We continue to add new
capabilities to these facilities to meet the requirements of new
products and new standards.
Marketing and Sales
Domestically,
we employ a field sales force, organized in four vertical sales
groups, industrial sales, fire service, critical environment, and
utilites, to better support customers and enhance marketing. We
further leverage our in-house sales team with 52 independent sales
representatives to a global network of approximately 1,600 safety
and industrial supply distributors buy our products for resale and
typically maintain inventory at the local level in order to assure
quick response times and the ability to serve their customers
properly.
Internationally,
Lakeland has sales representatives in 21 countries outside of the
US and selling products into more than 50 countries. Our
sustainable market advantages continue to be our knowledge of
global standards, the diversity of our product offering and the
fact that we manufacture our own products. We provide our customers
with an exceptionally broad product selection, high quality, and
excellent customer service. We had no customers who accounted for
10% of sales or more in FY20 or FY19.
We seek
to maximize the efficiency of our established distribution network
through direct promotion of our products at the end user level. To
this end, we have organized our sales teams into the previously
mentioned vertical market teams to increase our ability to focus on
sales of specific products and into specific markets. Additionally,
we are motivating our distributors to engage in promotional
activities aligned with our sales strategies via coop incentives.
We advertise primarily through trade publications, and our
promotional activities include sales brochures, emails and our
website. We exhibit at both regional and national trade shows, such
as the National Safety Congress, the American Industrial Hygiene
Association (“AIHA”), the American Society of Safety
Engineers “(ASSE”), the CIOSH, the COS+H and the A+A
show in Dusseldorf, Germany.We believe
that future international growth is sustainable in excess of the
estimated industry organic growth rate of 7.0% to 7.5% (per Allied
Market Research, “Global Disposable Protective Clothing
Market 2019-2026”) in the coming year, but there can be no
assurance in that regard, particularly in view of the descriptions
due to the COVID-19 outbreak. This belief is based on our current
estimates of market penetration, the introduction of higher value
products and improved business intelligence and better planning
afforded to us by our new ERP system .
Our Amazon sales continue to expand and with the added capabilities
of our domestic ERP system, allowing us to use a third-party
logistics warehouse (“3PL”). Use of a 3PL warehouse
will remove a significant number of small shipments from our
current distribution center in Decatur, Alabama, allowing for
reduced delivery lead-times and better control of Amazon related
shipping costs by placing these responsibilities with a contract
warehouse that specializes in these smaller shipments and Amazon
related communications. Once we have completed the rollout of our
ERP system, we will concentrate our efforts on bringing Amazon
shipping back “in house”.
Suppliers and
Materials
It is
our policy, whenever possible, to qualify multiple vendors for our
fabrics and findings. We frequently distribute our purchases among
the the top two or three suppliers, based on pricing and delivery
schedules, in order to keep multiple suppliers qualified and
proficient in the manufacture of the raw materials that we require.
Materials, such as polypropylene, polyethylene, polyvinyl chloride,
spunlaced polyester, melt blown polypropylene and their derivatives
and laminates, are available from 30 or more major mills. FR
fabrics are also available from a number of both domestic and
international mills. The accessories used in the production of our
disposable garments, such as thread, boxes, snaps and elastics, are
obtained from unaffiliated suppliers. We have not experienced
difficulty in obtaining our requirements for these commodity
component items.
10
Due to
the high cost of freight for our nonwoven fabrics, we also seek to
find multiple sources that are local to our manufacturing to
emergency demand and shift manufacturing between our locations with
greater ease.
Competition
We
compete on the basis of our product quality, pricing, product
availability, responsiveness to customers and manufacturing
capability. Our business is highly competitive due to a few
competitors who have monopolistic positions in the fabrics that are
standards in the industry for disposable and high-end chemical
suits. We believe that the barriers to entry in the disposable and
reusable garments and gloves industries are relatively low as
evidenced the by the increasing availability of distributor private
label product in the marketplace. We face competition in some of
our other product markets from large established companies that
have greater financial, research and development, sales and
technical resources. Where larger competitors, such as DuPont,
Kimberly Clark, Ansell and Honeywell, offer products that are
directly competitive with our products, particularly as part of an
established line of products, there can be no assurance that we can
successfully compete for sales and customers. Larger competitors
outside of our Disposable and Chemical Suit Lines also may be able
to benefit from economies of scale and technological innovation and
may introduce new products that compete with our
products.
We are
continually seeking sources for our raw mateials in or near the
various countries where we have manufacturing operations. Not only
does this reduce freight costs, but it makes for a more robust
supply chain that allows us to respond quickly.
The
recent trade war with China, followed closely by the coronavirus
(COVID-19) pandemic, may place a premium on our ability to
manufacture in multiple countries to not only avoid increased
duties, but also to ensure supply through emergency situations that
may limit the ability of some suppliers to meet delivery
requirements. In the near-term, this may reduce some of the pricing
pressure on disposables and low end chemical garments that have
become commodity products in many cases. It remains too early to
know with certainty.
Seasonality
Our
operations have historically been moderately seasonal, with higher
sales generally occurring in March, April and May when scheduled
maintenance on nuclear, coal, oil and gas fired utilities,
chemical, petrochemical and smelting facilities, and other heavy
industrial manufacturing plants occurs, primarily due to moderate
spring temperatures and low Energy demands. Sales decline during
the warmer summer vacation months and gradually increase from Labor
Day through February with slight declines during holidays, such as
Christmas. As a result of this seasonality in our sales, we have
historically experienced a corresponding seasonality in our working
capital, specifically inventories, with peak inventories occurring
between December and May, coinciding with lead times required to
accommodate the spring maintenance schedules. We believe that by
sustaining higher levels of inventory, we gain a competitive
advantage in the marketplace. Certain of our large customers seek
sole sourcing to avoid sourcing their requirements from multiple
vendors whose prices, delivery times and quality standards
differ.
In
recent years, due to increased demand by first responders for our
chemical suits and fire gear, our growing sales into the southern
hemisphere, and our development of non-seasonal products like
CleanMAX, our historical seasonal pattern has shifted. In fact FY20
saw substaintially flat revenues for the last three quarters of the
year (adjusting the fourth quarter for an increase in sales in the
last two weeks related to the coronavirus outbreak). While we doubt
that we will ever fully eliminate seasonality in our business, we
continue our efforts to diminish its impact on revenues,
operational results, working capital and cash flow, by focusing on
sales into non-seasonal markets like clean rooms, electric
utilities and the fire service markets.
Patents and Trademarks
We own
20 patents and have one patent in the application and approval
process with the US Patent and Trademark Office. We own 56
trademarks and have six trademarks in the application and approval
process. Intellectual property rights that apply to our various
products include patents, trade secrets, trademarks and, to a
lesser extent, copyrights. We maintain an active program to protect
our technology, filing for patent and trademark protection in
multiple countries where out product may be “knocked
off” or where there exist significant sales of our
products.
11
Employees
As of
January 31, 2020, we had 1,829 full-time employees, 1,718, or 94%,
were employed in our international facilities, and 111, or 6%, were
employed in our domestic facilities. Approximately 1,500 of
international employees are members of unions in their respective
countries. We are not currently a party to any collective
bargaining agreements or any other contracts with these unions. We
believe our employee relations to be excellent.
Environmental Matters
We are
subject to various foreign, federal, state and local environmental
protection, chemical control, and health and safety laws and
regulations, and we incur costs to comply with those laws. We own
and lease real property, and certain environmental laws hold
current or previous owners or operators of businesses and real
property responsible for contamination on or originating from
property, even if they did not know of, or were not responsible for
the contamination. The presence of hazardous substances on any of
our properties or the failure to meet environmental regulatory
requirements could affect our ability to use or to sell the
property, or to use the property as collateral for borrowing, and
could result in substantial remediation or compliance
costs.
Although
we have not in the past had any material costs or damages
associated with environmental claims or compliance, and we do not
currently anticipate any such costs or damages, we cannot guarantee
that we will not incur material costs or damages in the future as a
result of the discovery of new facts or conditions, acquisition of
new properties, the release of hazardous substances, a change in
interpretation of existing environmental laws or the adoption of
new environmental laws.
Executive Officers of the Registrant
The
following is a list of the names and ages of all of our executive
officers indicating all positions and offices they hold with us as
of April 15, 2020.
|
Name
|
|
Age
|
|
Position
|
|
Christopher
J. Ryan
|
|
68
|
|
Executive
Chairman
|
|
Charles
D. Roberson
|
|
57
|
|
Chief
Executive Officer, President and Secretary
|
|
Allen
E. Dillard
|
|
60
|
|
Chief
Financial Officer
|
|
Daniel
L. Edwards
|
|
52
|
|
Senior
Vice President Sales for North America
|
Christopher J. Ryan
has served as our Executive Chairman of the Board since February 1,
2020. Mr. Ryan was our Chief Executive Officer and President from
November 2003 to January 31, 2020, Secretary from April 1991, and a
director since May 1986. Mr. Ryan was our Executive Vice
President-Finance from May 1986 until becoming our President in
November 2003. Mr. Ryan also worked as a Corporate Finance Partner
at Furman Selz Mager Dietz & Birney, Senior Vice
President-Corporate Finance at Laidlaw Adams & Peck, Inc.,
Managing-Corporate Finance Director of Brean Murray Foster
Securities, Inc. and Senior Vice President-Corporate Finance of
Rodman & Renshaw, respectively, between 1983 to 1991. Mr. Ryan
served as a Director of Lessing, Inc., a privately held restaurant
chain based in New York, from 1995 to 2008. Mr. Ryan received his
BA from Stanford University, his MBA from Columbia Business School
and his J.D. from Vanderbilt Law School. Mr. Ryan’s
qualifications to serve on our board include his business and legal
education as well as his lengthy experience as a director at our
Company and at other companies.
Charles D. Roberson
has served as our Chief Executive Officer, President and Secretary
since February 2020. Previously he served a Chief Operations
Officer from July 2018. From 2009 to July 2018, he was our Senior
Vice President, International Sales. Mr. Roberson joined our
Company in 2004 as Technical Marketing Manager; was instrumental in
development of our ChemMAX and Interceptor fabrics and represented
Lakeland to various standards writing bodies, and later served as
International Sales Manager. Prior to joining the Company, Mr.
Roberson was employed by Precision Fabrics Group, Inc. as a Market
Manager from 1995-2001 and as a Nonwovens Manufacturing Manager
from 1991-1995. He began his career as a manufacturing manager for
Burlington Industries, Inc. in its Menswear Division from
1985-1991.
Allen E. Dillard has
served as our Chief Financial Officer since August 2019. Mr.
Dillard was Chief Financial Officer of Digium, Inc., a provider of
telecommunications solutions from September 2015 to August
2019. Mr. Dillard served as Chief Executive Officer of
Mobular Technologies, Inc., a technology solutions provider from
September 2003 to September 2015. Mr. Dillard has also served
as CFO/Treasurer for Nichols Research Corporation and Wolverine
Tube, Inc. and was a senior manager at EY.
12
Daniel L. Edwards
has been our Senior Vice President Sales for North America since
March 2017 after most recently serving as our Vice President of USA
Sales since March 2013. Mr. Edwards has been employed by us in
various capacities since joining Lakeland in 2005, including as our
National Accounts Manager and Eastern Regional Sales
Manager. Prior to joining the Company, Mr. Edwards was a
Senior Market Manager at Precision Fabrics Group, Inc., where he
began his career in 1990 and held various roles at that company
including manufacturing, technical and quality management and sales
manager.
Item 1A. Risk Factors
RISK FACTORS
You should carefully consider the following risks before investing
in our common stock. These are not the only risks that we may face.
If any of the events referred to below actually occur, our
business, financial condition, liquidity and results of operations
could suffer. In that case, the trading price of our common stock
could decline, and you may lose all or part of your investment. You
should also refer to the other information in this Form 10-K and in
the documents we incorporate by reference into this Form 10-K,
including our consolidated financial statements and the related
notes.
Risks Related to Our Business and Industry and Other
Matters
We are subject to risk as a result of our international
manufacturing operations.
Because
most of our products are manufactured at our facilities located in
China, Vietnam, Mexico, Argentina and India, our operations are
subject to risk inherent in doing business internationally. Such
risks include the adverse effects on operations from corruption,
war, international terrorism, civil disturbances, political
instability, government activities such as border taxes and
renegotiation of treaties, deprivation of contract and property
rights and currency valuation changes.
Since
1978, the Chinese government has been reforming its economic and
political systems, and we expect this to continue. Although we
believe that these reforms have had a positive effect on the
economic development of China and have improved our ability to
successfully operate our facilities in China, we cannot assure you
that these reforms will continue or that the Chinese government
will not take actions that impair our operations or assets in
China. In addition, periods of international unrest may impede our
ability to manufacture goods in other countries and could have a
material adverse effect on our business and results of
operations.
A terrorism attack, other geopolitical crisis, or widespread
outbreak of an illness or other health issue, such as the COVID-19
Coronavirus outbreak, could negatively impact our domestic and/or
international operations.
Our
global operations are susceptible to global events, including acts
or threats of war or terrorism, international conflicts, political
instability, and natural disasters. The occurrence of any of these
events could have an adverse effect on our business results and
financial condition.
We are
also susceptible to a widespread outbreak of an illness or other
health issue, such as the recent COVID-19 coronavirus outbreak
first reported in Wuhan, Hubei Province, China in December 2019
("COVID-19 virus"), resulting in tens of thousands of confirmed
cases identified around the world and in countries in which we
conduct business. The outbreak has caused governments to implement
quarantines, implement significant restrictions on travel, closed
schools and work places, and implement work restrictions, all of
which can impair normal business operations. Globally air travel
has been significantly interrupted as has air freight, ocean
freight, and even truck deliveries.
As a
result of pandemic outbreaks, businesses can be shut down, supply
chains can be interrupted, slowed, or rendered inoperable, and
individuals can become ill, quarantined, or otherwise unable to
work and/or travel due to health reasons or governmental
restrictions. Governmental mandates may require forced shutdowns of
our facilities for extended or indefinite periods. In addition,
these widespread outbreaks of illness could adversely affect our
workforce resulting in serious health issues and absenteeism.
Pandemic outbreaks could also interfere with general commercial
activity related to our supply chain and customer base, which could
have an adverse effect on our financial condition and operational
results. If our operations are curtailed, we may have to shift
manufacturing, if available, to another Lakeland facility which may
be more expensive and limit our manufacturing capacity. Our Raw
materials sources may not be available or may be delayed in
shipments to us, impacting our ability to deliver to our customers,
negatively impacting our operational results and financial
condition . Further, if our customers’ businesses are
similarly affected, they might delay or reduce purchases from us,
which could adversely affect our results of
operations.
13
The COVID-19 Pandemic Poses Threat to Manufacturing Capacity and
Temporary Disruption of Operations.
While
we have seen increased sales and order activity since the outbreak
of COVID-19, we believe that some customers, distributors and end
users alike, are stockpiling product and placing orders to assure a
continued supply of garments through the duration of this
event. The ability of our industry to ramp up production to
meet demand, and how long the pandemic lasts, will have a direct
impact on the amount of inventory remaining in distribution
channels once the pandemic subsides. This factor, coupled
with the possibility of economic recession, could have a
deleterious impact on sales of disposable and chemical products for
a significant period that could negatively impact our revenues,
manufacturing efficiencies and subsequently our profitability.
In order to mitigate this risk, we are attempting to increase
market penetration in our existing disposable and chemical
businesses and increase sales of non-COVID-19 impacted product
lines (fire service, flame and arc flash garments, and high
visibility) in order to secure new long term customers. Our
ability to increase market penetration and grow non-COVID-19
product lines is predicated upon our continued ability to
manufacturer at maximum capacity, however there can be no
guarantees that our manufacturing will not be negatively impacted
by the pandemic or government responses to it.
There
is a risk that government responses to thwart the spread of the
virus, in the form of local or regional quarantine or
shelter-in-place orders, could require temporary curtailment of our
manufacturing operations, or prevent the export of our products
from the country of origin. In such cases, Lakeland’s
inability to deliver product would negatively impact sales and our
contingency plans for post-COVID-19 recession with realization of
the aforementioned negative impact on financial performance.
The geographic dispersion of our manufacturing facilities, China,
Vietnam, India, and Mexico reduces the likelihood that all
facilities would be impacted simultaneously by such government
response . The fact that personal protective equipment (PPE)
(face masks, garments, gloves, and face protection) are in high
demand globally for medical care and institutional cleaning will
allow Lakeland to claim “essential industry” status, in
the event of government imposed general industrial shutdown or
quarantine. While such a claim may allow us to continue
manufacturing, it may also result in a government restriction on
export of our products, as government may seek local benefit from
our continued operation. In such a case, our sales may
suffer, depending on selling prices, and our ability to service
other markets would likely be impeded as would our ability to
increase market penetration and shift sales to other product
lines.
Consistent
with our belief that we qualify as an “essential
industry” in the countries where we manufacture and
distribute products, we have taken actions to protect our work
force and workplaces from the virus. We have restricted
travel domestically and internationally, set up for our sales force
to work remotely and have virtual customer meetings, implemented
continuous disinfecting of our workplaces, and set up employees
whose jobs allow it to work remotely. We have advised all of
our employees in proper care and hygiene to prevent the spread of
the virus. While these measures serve to reduce the
possibility of transmission of the virus within our workplaces,
they do not assure that our employees will not contract the virus
or bring it into the workplace. Were such an event to be
widespread enough, our manufacturing and/or distribution could be
disrupted to varying degrees up to and including a shutdown, with
the aforementioned deleterious impact on our financials and
contingency planning for recession.
Our results of operations could be negatively affected by potential
fluctuations in foreign currency exchange rates.
Most of
our assembly arrangements with our foreign-based subsidiaries or
third-party suppliers require payment to be made in US dollars or
the Chinese RenminBi (“RMB”). Any decrease in the value
of the US dollar or RMB in relation to foreign currencies could
increase the cost of the services provided to us upon contract
expirations or supply renegotiations. There can be no assurance
that we will be able to increase product prices to offset any such
cost increases, and any failure to do so could have a material
adverse effect on our business, financial condition and results of
operations.
We are also exposed to foreign currency exchange rate risks as a
result of our sales to customers in foreign countries in the amount
of $51.9 million in FY20. Our sales in these countries are
usually denominated in the local currency. If the value of the US
dollar increases relative to these local currencies, and we are
unable to raise our prices proportionally, then our profit margins
could decrease because of the exchange rate change.
We are
exposed to changes in foreign currency exchange rates as a result
of our purchases and sales in other countries. To manage the
volatility relating to foreign currency exchange rates, we seek to
limit, to the extent possible, our non-US dollar denominated
purchases and sales.
14
In
connection with our operations in China, we purchase a significant
amount of products from outside of the United States. However, our
purchases in China are primarily made in the RMB, the value of
which has floated for the last 4 years, therefore we have been
exposed to additional foreign exchange rate risk on our Chinese raw
material and component purchases.
Our
primary risk from foreign currency exchange rate changes is
presently related to non-US dollar denominated sales in China,
Canada and Europe and, to a smaller extent, in South American
countries and in Russia. Our sales to customers in Canada are
denominated in Canadian dollars, in Europe in Euros and British
pounds, and in China in RMB and US dollars. If the value of the US
dollar increases relative to the Canadian dollar, the Pound, the
Euro, or the RMB then our net sales could decrease as our products
would be more expensive to these international customers because of
changes in rate of exchange. We manage the foreign currency risk
when appropriate through the use of rolling 90-day forward
contracts against the Canadian dollar and Euro and through cash
flow hedges in the US against the RMB and the Euro. We do not hedge
other currencies at this time. In the event that non-US dollar
denominated international purchases and sales grow, exposure to
volatility in exchange rates could have a material adverse impact
on our financial results.
We may be exposed to continuing and other liabilities arising from
our former Brazilian operations.
Although
we 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. We understand 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 we 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. For this reason we have worked with
Brazilian legal counsel to settle all open labor claims against the
former subsidiary in order to mitigate this risk.
The implementation of our ERP system had, and may continue to have,
an adverse effect on operating results.
We
suffered a net loss of $1.9 million in the fourth quarter of fiscal
2019, and the implementation on August 1, 2019 of our ERP system
was a factor. Such software application enables us to better
manage and interpret important parts of our
business. Implementation is a complex task, often initially
causing difficulties and adversely effecting operations of
implementing companies. While we have completed three consecutive
quarters of what we consider normal operational results, we have
only implemented the ERP system in 50% of the Company, and there is
risk with each implementation that is directly proportional to the
percent of manufacturing conducted by, or the percent of revenue
generated by the applicable foreign operation. Rollout to our
foreign subsidiaries is scheduled to take place beginning in Q3
FY21 and continue through FY22.
InFY20 we have identified a material weakness in our internal
controls over financial reporting. If we continue to fail
maintaining proper and effective internal controls or are unable to
remediate a material weakness in our internal controls, our ability
to produce accurate and timely financial statements could be
impaired, and investors’ views of us could be
harmed.
Ensuring that we have adequate internal financial and accounting
controls and procedures in place so that we can produce accurate
financial statements on a timely basis involves substantial effort
that needs to be re-evaluated frequently. Our internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with generally
accepted accounting principles. Management has assessed the
effectiveness of the Company’s internal control over
financial reporting as of January 31, 2020. In making this
assessment, management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013 (COSO). As a
result of this assessment, management identified a material
weakness in our internal controls over financial reporting related
to inventory valuation. A description of this material weakness can
be found in Item 9A of this report. A material weakness is a
deficiency or combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility
that a material misstatement of a company’s financial
statements will not be prevented or detected on a timely basis.
Upon our discovery of this material weakness, extensive procedures
were performed to validate completeness and accuracy of underlying
data and we determined and began implementation of a remediation
plan.
These additional substantive procedures have allowed us to conclude
that, notwithstanding the material weakness in our internal control
over financial reporting, the consolidated financial statements
included in this Report fairly present, in all material respects,
the Company’s financial position, results of operations, and
cash flows for the periods presented in conformity with generally
accepted accounting principles.
15
We may be adversely effected by the withdrawal of the United
Kingdom from the European Union
Our
performance depends in part on general economic conditions
affecting all countries in which we do business. In March 2017, the
United Kingdom announced its decision to exit the European Union
(“Brexit”). The U.K.'s withdrawal was completed
effective January 31, 2020. Our business in the U.K. and/or the
E.U. may be adversely affected by the uncertainty surrounding the
future relationship between the U.K. and the E.U. Brexit and
any uncertainty with respect thereto could adversely impact
consumer demand and create significant currency fluctuations. In
addition, we could be adversely impacted by changes in trade
policies, labor, tax or other laws and regulations, intellectual
property rights and supply chain logistics. We may incur additional
costs as it addresses any such changes. All or any one of these
factors could adversely affect our business, revenue, financial
condition and results of operations.
Our results of operations may vary widely from quarter to
quarter.
Our
quarterly results of operations have varied and are expected to
continue to vary in the future. These fluctuations may be caused by
many factors, including:
●
Currency
volatility
●
Global crisis, such
as the Ebola outbreak, oil spills, or COVID 19;
●
Our expansion of
international operations;
●
Competitive pricing
pressures;
●
Seasonal buying
patterns resulting from the cyclical nature of the business of some
of our customers;
●
Changes in the mix
of products and services sold;
●
The timing of
introductions and enhancements of products by us or our
competitors;
●
Market acceptance
of new products;
●
Technological
changes in fabrics or production equipment used to make our
products;
●
Availability of raw
materials due to unanticipated demand or lack of precursors (oil
and gas);
●
Changes in the mix
of domestic and international sales;
●
Personnel changes;
and
These
variations could negatively impact our stock price.
Some of our sales are to foreign buyers, which exposes us to
additional risks.
We
derived approximately 48% of our net sales from customers located
in foreign countries in FY20. We intend to seek to increase the
amount of foreign sales we make in the future. The additional risks
of foreign sales include:
●
Potential adverse
fluctuations in foreign currency exchange rates;
●
Higher credit
risks;
●
Restrictive trade
policies of the US foreign governments;
●
Currency
hyperinflation and weak banking institutions;
●
Changing economic
conditions in local markets;
●
Political and
economic instability in foreign markets;
●
Changes in
leadership of foreign governments;
●
Export restrictions
due to local states of emergency for disease or illness;
and
16
Some or
all of these risks may negatively impact our results of operations
and financial condition.
We deal in countries where corruption is an obstacle.
We must
comply with American laws such as the Foreign Corrupt Practices Act
(FCPA) and Sarbanes-Oxley and also with anticorruption legislation
in the U.K. Some of our competitors and customers in foreign
jurisdictions may not adhere to such legislation. As a result, we
believe that we lose sales orders due to our strict adherence to
such regulations.
We are exposed to tax expense risks.
On
December 22, 2017, 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) reduced the
federal corporate income tax rate to 21% from 35% effective January
1, 2018. 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, 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.
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. The
regulations were finalized as of June 14, 2019. Re-measurement and
reassessment of the GILTI tax as it is currently written resulted
in a charge to tax expense of $1.0 million for FY20 and $0.6
million for 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 FY20 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
Company claimed a worthless stock deduction in connection with our
exit from Brazil which generated a tax benefit of approximately US
$9.5 million in its fiscal year ended January 31, 2016. While,
along with our tax advisors, we 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.
Covenants in our credit facilities may restrict our financial and
operating flexibility.
As a
result of the Loan Agreement the Company entered into on May 10,
2017 we currently have a $20 million revolving credit facility,
expiring May 10, 2020. Our credit facility requires, and any future
credit facilities may also require, among others that we comply
with specified financial covenants relating to fixed charge
coverage and maximum capital expenditures. Our ability to satisfy
these financial covenants can be affected by events beyond our
control, and we cannot guarantee that we will meet the requirements
of these covenants. These restrictive covenants could affect our
financial and operational flexibility or impede our ability to
operate or expand our business, including a limitation on annual
investments and advances we can make to foreign subsidiaries.
Default under our credit facilities would allow the lenders to
declare all amounts outstanding to be immediately due and payable.
Our lenders have a security interest in substantially all of our
assets to secure the debt under our current credit facilities, and
it is likely that our future lenders will have security interests
in our assets. If our lenders declare amounts outstanding under any
credit facility to be due, the lenders could proceed against our
assets. Any event of default, therefore, could have a material
adverse effect on our business. The Company is currently
negotiating with a prospective lender to replace the current Loan
Agreement. We cannot be certain that those negotiations will be
successful or that the terms of any arrangement will be any more
favorable than those under the current Loan Agreement.
Because we do not have long-term commitments from many of our
customers, we must estimate customer demand, and errors in our
estimates could negatively impact our inventory levels and net
sales.
Our
sales are generally made on the basis of individual purchase
orders, which may later be modified or canceled by the customer,
rather than on long-term commitments. We have historically been
required to place firm orders for fabrics and components with our
suppliers prior to receiving an order for our products, based on
our forecasts of customer demands. Our sales process requires us to
make multiple demand forecast assumptions, each of which may
introduce error into our estimates, causing excess inventory to
accrue or a lack of manufacturing capacity when needed. If we
overestimate customer demand, we may allocate resources to
manufacturing products that we may not be able to sell when we
expect to or not at all. As a result, we would have excess
inventory, which would negatively impact our financial results.
Conversely, if we underestimate customer demand or if insufficient
manufacturing capacity is available, we would lose sales
opportunities, lose market share and damage our customer
relationships. On occasion, we have been unable to adequately
respond to delivery dates required by our customers because of the
lead time needed for us to obtain required materials or to send
fabrics to our assembly facilities in China, Vietnam, India, and
Mexico. We must recruit and retain skilled employees, including our
senior management, to succeed in our business.
17
We face competition from other companies, a number of which have
substantially greater resources than we do.
Four of
our competitors, DuPont, Honeywell, Ansell and Kimberly Clark, have
substantially greater financial, marketing and sales resources than
we do. In addition, we believe that the barriers to entry in the
disposable and reusable garments and gloves markets are relatively
low. We cannot assure you that our present competitors or
competitors that choose to enter the marketplace in the future will
not exert significant competitive pressures. Such competition could
have a material adverse effect on our net sales and results of
operations.
Our operations are substantially dependent upon key
personnel.
Our
performance is substantially dependent on the continued services
and performance of our senior management and certain other key
personnel, including Charles D. Roberson, our Chief Executive
Officer, President and Secretary, Allen E. Dillard, our Chief
Financial Officer, Daniel L. Edwards, our Senior Vice President
Sales for North America and Christopher J. Ryan, our Executive
Chairman. The loss of services of any of our executive officers or
other key employees could have a material adverse effect on our
business, financial condition and results of operations. In
addition, any future expansion of our business will depend on our
ability to identify, attract, hire, train, retain and motivate
other highly skilled managerial, marketing, customer service and
manufacturing personnel, and our inability to do so could have a
material adverse effect on our business, financial condition and
results of operations.
Technological change could negatively affect sales of our products
and our performance.
The
rapid development of fabric technology continually affects our
apparel applications and may directly impact the performance of our
products. We cannot assure you that we will successfully maintain
or improve the effectiveness of our existing products, nor can we
assure you that we will successfully identify new opportunities or
continue to have the needed financial resources to develop new
fabric or apparel manufacturing techniques in a timely or
cost-effective manner. In addition, products manufactured by others
may render our products obsolete or noncompetitive. If any of these
events occur, our business, prospects, financial condition and
operating results will be materially and adversely
affected.
Cybersecurity incidents could disrupt business operations, result
in the loss of critical and confidential information and adversely
impact our reputation and results of operations.
Global
cybersecurity threats can range from uncoordinated individual
attempts to gain unauthorized access to our information technology
(“IT”) systems to sophisticated and targeted measures
known as advanced persistent threats. While we employ comprehensive
measures to prevent, detect, address and mitigate these threats
(including access controls, data encryption, vulnerability
assessments, management training, continuous monitoring of our IT
networks and systems and maintenance of backup and protective
systems), cybersecurity incidents, depending on their nature and
scope, could potentially result in the misappropriation,
destruction, corruption or unavailability of critical data and
confidential or proprietary information (our own or that of third
parties) and the disruption of business operations. While no
cybersecurity attack to date has had a material impact on our
financial condition, results of operations or liquidity, the threat
remains and the potential consequences of a material cybersecurity
incident include reputational damage, litigation with third
parties, diminution in the value of our investment in research,
development and engineering, and increased cybersecurity protection
and remediation costs, which in turn could adversely affect our
competitiveness and results of operations.
We may be subject to product liability claims, and insurance
coverage could be inadequate or unavailable to cover these
claims.
We
manufacture products used for protection from hazardous or
potentially lethal substances, such as chemical and biological
toxins, fire, viruses and bacteria. The products that we
manufacture are typically used in applications and situations that
involve high levels of risk of personal injury. Failure to use our
products for their intended purposes, failure to use our products
properly or the malfunction of our products could result in serious
bodily injury or death of the user. In such cases, we may be
subject to product liability claims arising from the design,
manufacture or sale of our products. If these claims are decided
against us, and we are found to be liable, we may be required to
pay substantial damages, and our insurance costs may increase
significantly as a result. We cannot assure you that our insurance
coverage would be sufficient to cover the payment of any potential
claim. In addition, we cannot assure you that this or any other
insurance coverage will continue to be available or, if available,
that we will be able to obtain it at a reasonable cost. Any
material uninsured loss could have a material adverse effect on our
financial condition, results of operations and cash
flows.
18
Environmental laws and regulations may subject us to significant
liabilities.
Our US
operations, including our manufacturing facilities, are subject to
federal, state and local environmental laws and regulations
relating to the discharge, storage, treatment, handling, disposal
and remediation of certain materials, substances and wastes. Any
violation of any of those laws and regulations could cause us to
incur substantial liability to the Environmental Protection Agency,
the state environmental agencies in any affected state or to any
individuals affected by any such violation. If hazardous substances
are released from or located on any of our properties, we could
incur substantial costs and damages. Any such liability could have
a material adverse effect on our financial condition and results of
operations.
Our directors and executive officers have the ability to exert
significant influence on our Company and on matters subject to a
vote of our stockholders.
As of
January 31, 2020, our directors and executive officers beneficially
owned or could vote approximately 6.7% of the outstanding shares of
our common stock. As a result of their ownership of common stock
and their positions in our Company, our directors and executive
officers are able to exert significant influence on our Company and
on matters submitted to a vote by our stockholders. In particular,
as of January 31, 2020, Christopher J. Ryan, our Executive
Chairman, beneficially owned or votes approximately 5.4% of our
common stock. The ownership interests of our directors and
executive officers, including Mr. Ryan, could have the effect of
delaying or preventing a change of control of our Company that may
be favored by our stockholders generally.
Provisions in our restated certificate of incorporation and by-laws
and Delaware law could make a merger, tender offer or proxy contest
difficult.
Our
restated certificate of incorporation contains classified board
provisions, authorized preferred stock that could be utilized to
implement various “poison pill” defenses and a
stockholder authorized, but as yet unused, Employee Stock Ownership
Plan (“ESOP”), all of which may have the effect of
discouraging a takeover of Lakeland, which is not approved by our
board of directors. Further, we are subject to the antitakeover
provisions of Section 203 of the Delaware General Corporation Law,
which prohibit us from engaging in a “business
combination” with an “interested stockholder” for
a period of three years after the date of the transaction in which
the person became an interested stockholder, unless the business
combination is approved in the prescribed manner.
Acquisitions could be unsuccessful.
In the
future, subject to capital constraints, we may seek to acquire
selected safety products lines or safety-related businesses which
will complement our existing products. Our ability to acquire these
businesses is dependent upon many factors, including our
management’s relationship with the owners of these
businesses, many of which are small and closely held by individual
stockholders. In addition, we will be competing for acquisition and
expansion opportunities with other companies, many of which have
greater name recognition, marketing support and financial resources
than us, which may result in fewer acquisition opportunities for
us, as well as higher acquisition prices. There can be no assurance
that we will be able to identify, pursue or acquire any targeted
business and, if acquired, there can be no assurance that we will
be able to profitably manage additional businesses or successfully
integrate acquired business into our Company without substantial
costs, delays and other operational or financial
problems.
If we
proceed with additional acquisitions for cash, we may use a
substantial portion of our available line of credit (if available)
in order to consummate any such acquisition. We may also seek to
finance any such acquisition through debt or equity financings, and
there can be no assurance that such financings will be available on
acceptable terms or at all. If consideration for an acquisition
consists of equity securities, the stock held by our investors
could be diluted. If we borrow funds in order to finance an
acquisition, we may not be able to obtain such funds on terms that
are favorable to us. In addition, such indebtedness may limit our
ability to operate our business as we currently intend because of
restrictions placed on us under the terms of the indebtedness and
because we may be required to dedicate a substantial portion of our
cash flow to payments on the debt instead of to our operations,
which may place us at a competitive disadvantage.
Acquisitions
involve a number of special risks in addition to those mentioned
above, including the diversion of management’s attention to
the assimilation of the operations and personnel of the acquired
companies, the potential loss of key employees of acquired
companies, potential exposure to unknown liabilities, adverse
effects on our reported operating results and the amortization or
write-down of acquired intangible assets. We cannot assure you that
any acquisition by us will or will not occur, that if an
acquisition does occur that it will not materially and adversely
affect our results of operations or that any such acquisition will
be successful in enhancing our business. To the extent that we are
unable to manage growth efficiently and effectively or are unable
to attract and retain additional qualified management personnel,
our business, financial condition and results of operations could
be materially and adversely affected.
19
We may need additional funds, and if we are unable to obtain these
funds, we may not be able to expand or operate our business as
planned.
Our
operations require significant amounts of cash, and we may be
required to seek additional capital, whether from sales of equity
or by borrowing money, to fund acquisitions for the future growth
and development of our business or to fund our operations and
inventory, particularly in the event of a market
downturn.
A
number of factors could affect our ability to access future debt or
equity financing, including:
●
Our
financial condition, strength and credit rating;
●
The
financial markets’ confidence in our management team and
financial reporting;
●
General
economic conditions and the conditions in the homeland security and
Energy sectors; and
●
Capital
markets conditions.
Even if
available, additional financing may be more costly than our current
facility and may have adverse consequences. If additional funds are
raised through the incurrence of debt, we will incur increased debt
servicing costs and may become subject to additional restrictive
financial and other covenants. We can give no assurance as to the
terms or availability of additional capital. Although management
believes it currently has sufficient capital, if we do need
additional capital in the future and are unsuccessful, it could
reduce our net sales and materially adversely impact our earning
capability and financial position.
Risks Relating to Our Common Stock
The market price of our common stock may fluctuate
widely.
The
market price of our common stock could be subject to significant
fluctuations in response to quarter-to-quarter variations in our
operating results, announcements of new products or services by us
or our competitors and other events or factors. For example, a
shortfall in net sales or net income, or an increase in losses,
from levels expected by securities analysts or investors, could
have an immediate and significant adverse effect on the market
price of our common stock. Volume fluctuations that have
particularly affected the market prices of many micro and small
capitalization companies have often been unrelated or
disproportionate to the operating performance of these companies.
These fluctuations, as well as general economic and market
conditions, may adversely affect the market price for our common
stock.
Our common stock is an equity interest and therefore subordinated
to our indebtedness.
Payments
of the principal and interest under the notes issued under the loan
agreements entered into in connection with our senior financing are
secured by liens on, and security interests in, substantially all
of our and our subsidiaries’ present and after-acquired
assets. In the event of our liquidation, dissolution or winding up,
our common stock would rank below all debt and creditor claims
against us. As a result, holders of our common stock will not be
entitled to receive any payment or other distribution of assets
upon our liquidation, dissolution or winding up until after all of
our obligations to our debt holders and creditors have been
satisfied.
We are precluded from paying and do not anticipate paying any
dividends to our common stockholders in the near
future.
We are
prohibited from declaring or paying any dividends to our common
stockholders without the prior consent of our lenders. Further, we
have not paid dividends on our common stock since August 2006 and
we do not anticipate, if permitted, paying any dividends in the
foreseeable future. Instead, we plan to retain any earnings to
maintain and expand our existing operations.
ITEM 1B: UNRESOLVED STAFF
COMMENTS
None.
20
ITEM 2. PROPERTIES
We
believe that our owned and leased facilities are suitable for the
operations we conduct in each of them. Each manufacturing facility
is well maintained and capable of supporting higher levels of
production. The table below sets forth certain information about
our principal facilities.
|
Address
|
Annual Rent
|
Lease Expiration
|
Principal Activity
|
|
|
|
|
|
|
Lakeland Industries, Inc.
● 202
Pride Lane SW; and
● 3420
Valley Avenue; and
● 201
Pride Lane SW
Decatur, AL 35603
|
Owned
|
N/A
|
Administration
Manufacturing Warehouse
Sales
|
|
|
|
|
|
|
Lakeland Protective Wear Inc.
59 Bury Court
Brantford, ON N3S 0A9 - Canada
|
Owned
|
N/A
|
Sales
Warehouse
|
|
|
|
|
|
|
Weifang Lakeland Safety Products Co., Ltd. Plant #1
No. 61 South Huaan Road,
AnQui City, Shandong Province, PRC 262100
|
Owned(1)
|
N/A
|
Administration
Manufacturing Warehouse
Sales
|
|
|
|
|
|
|
Industrias Lakeland S.A. de C.V.
Carretera a Santa Rita, Calle Tomas Urbina #1
Jerez de Garcia, Salinas, Zacatecas, Mexico
|
Owned
|
N/A
|
Administration
Manufacturing Warehouse
Sales
|
|
|
|
|
|
|
Industrias Lakeland S.A. de C.V.
Carretera a Santa Rita, Calle Tomas Urbina #1
Jerez de Garcia, Salinas, Zacatecas, Mexico
|
Owned
|
N/A
|
Land Only
|
|
|
|
|
|
|
Porto Rico Street, Lots 16/17/18
Granjas Rurais, Salvador
|
Owned
|
N/A
|
Land and building held for sale
|
|
|
|
|
|
|
Lakeland Industries, Inc.
1701 4th
Avenue SE
Decatur, AL 35603
|
$24,000
|
Month to month
|
Warehouse
|
|
|
|
|
|
|
Total
Warehouse, Inc.
3030
North Lamb Blvd, Ste 103
Las
Vegas, NV 89115
|
By case
|
Annual –
auto renew
|
Warehouse
|
|
|
|
|
|
|
Safety
Pro, LLC
7101
North Loop East
Houston,
TX 77028
|
$63,120
|
Annual –
auto renew
|
Warehouse
|
21
|
Address
|
Annual Rent
|
Lease Expiration
|
Principal Activity
|
|
|
|
|
|
|
Lakeland
Argentina, SRL
Cuba
4870 San Martin
Provincia
de
Buenos
Aires, Argentina
|
$93,000
|
11/30/2020
|
Administration
Manufacturing* Warehouse
Sales
|
|
|
|
|
|
|
Lakeland
Industries Chile Limitado
Roman
Spech 3283, Comunica
Quinta
Normal, Santago, Chile
|
$59,000
|
1/31/2021
|
Administration
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland (Beijing) Safety Products Co., Ltd.
Unit 503, Building B, Sinolight Plaza
No. 4 Wangjing Qiyang Road, Chaoyang District
Beijing 100102 PRC
|
$42,000
|
5/31/2021
|
Sales
|
|
|
|
|
|
|
Lakeland (Beijing) Safety Products Co., Ltd.
Unit 502, Building B, Sinolight Plaza
No. 4 Wangjing Qiyang Road, Chaoyang District
Beijing 100102 PRC
|
$18,000
|
5/31/2021
|
Sales
|
|
|
|
|
|
|
Lakeland (Beijing) Safety Products Co., Ltd.
Xiaodian
Logistic Park, Xiaodian Village
Beichen
District, Tianjin, PRC
|
$60,000
|
10/09/2021
|
Warehouse
|
|
|
|
|
|
|
Lakeland (Beijing) Safety Products Co., Ltd.
Unit 602, Building A, Number 169 Shengxia Road
Zhangjian Hi-tech Park, Pudong, Shanghai, PRC
|
$36,000
|
07/31/2022
|
Sales Office
|
|
|
|
|
|
|
Lakeland Glove and Safety Apparel Private, Ltd.
Plots 50, Noida Special Economic Zone
Noida, India
|
$1,500 (2)
|
11/13/2028
|
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland Glove and Safety Apparel Private, Ltd.
Plots 81, Noida Special Economic Zone
Noida, India
|
$1,300 (2)
|
03/29/2024
|
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland Glove and Safety Apparel Private, Ltd.
A-67, Sector 83
Noida, District-Gautam Budh Nagar, India
|
$12,000
|
8/31/2020
|
Manufacturing
Sales
|
|
|
|
|
|
|
Lakeland Glove and Safety Apparel Private, Ltd.
A-67, Sector 83 – 1st
Floor
Noida, District-Gautam Budh Nagar, India
|
$12,240
|
8/31/2020
|
Sales
|
|
|
|
|
|
|
Lakeland India Private Ltd.
A-67, Sector 83 – 2nd
Floor
Noida, District-Gautam Budh Nagar, India
|
$1,704
|
8/31/2020
|
Manufacturing
|
|
|
|
|
|
22
|
Address
|
Annual Rent
|
Lease Expiration
|
Principal Activity
|
|
Art Prom, LLC
Varashilova Street 5/1,
Ust-Kamnogorsk, Kazakhstan, 070002
|
$1,100
|
12/31/2020
|
Manufacturing* Warehouse
Sales
|
|
|
|
|
|
|
RussIndProtection, Ltd.
201, vlad. 4B, str.1, 38km, MKAD
Moscow, Russia 117574
|
$5,600
|
10/31/2020
|
Warehouse
Sales
|
|
|
|
|
|
|
SpecProtect LLC
192012, St. Petersburg, Obukhov Defense Ave.,
d. 271, lit, A
|
$7,309
|
12/31/2020
|
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland Industries Europe Ltd.
Unit 9/10 Park 2, Main Road
New Port, East Yorkshire HU15 2RP
United Kingdom
|
Approximately $66,000 (varies with exchange rates)
|
March 2023 (with 8-year review period from 4/2011
|
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland (Vietnam) Industries Co., Ltd.
Hemlet No.8, Xuan Trung Commune, Xuan Truong District, Nam Dinh
Province, Vietnam
|
$360,000
|
1/20/2022
|
Administration
Manufacturing
Warehouse
Sales
|
|
|
|
|
|
|
Lakeland Industries Pty Ltd
Unit 12, Susan J Smith & Co, 1140 Nepean Highway
Mornington, Australia 3931
|
$22,000
|
07/31/2021
|
Business
Address – Accounting
|
|
|
|
|
|
(1) We own the buildings in which we
conduct the majority of our manufacturing operations in China and
lease the land underlying the buildings from the Chinese
government. We have 27 years remaining under the leases with
respect to the AnQui City facilities.
(2) We
lease the underlying land from the SEZ, but we own the buildings on
Plots 50 & 51.
* A small amount of manufacturing is done locally, but most sales
are made in other Lakeland facilities.
Our
manufacturing facilities in Alabama, Mexico, China, Vietnam, India,
and Argentina contain equipment used for the design, development,
manufacture and sale of our products. Our other operations in
Canada, United Kingdom, Poland, Chile, Uruguay, Hong Kong, China,
Russia, Kazakhstan, and Australia are primarily sales and
warehousing operations receiving goods for resale from our
manufacturing facilities around the world. We had $3.32 million and
$3.87 million of net property and equipment located in the US;
$3.19 million and $3.17 million in Asia; $2.17 million and $2.14
million in Mexico as of January 31, 2020 and 2019,
respectively.
ITEM 3. LEGAL PROCEEDINGS
From
time to time, we are a party to litigation arising in the ordinary
course of our business. We are not currently a party to any
litigation or other legal proceedings that we believe could
reasonably be expected to have a material adverse effect on our
results of operations, financial condition or cash flows. See Note
12 to the consolidated financial statements related to legal
matters in respect of our former subsidiary in Brazil and its
relation to the Company.
ITEM 4. MINE SAFETY DISCLOSURES
N/A
23
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our
common stock is currently traded on the Nasdaq Market under the
symbol “LAKE.” The following table sets forth for the
periods indicated the high and low closing sales prices for our
common stock as reported by the Nasdaq Market.
|
|
Price Range of Common Stock
|
|
|
|
High
|
Low
|
|
Fiscal
2020
|
|
|
|
First
Quarter
|
$12.69
|
$11.01
|
|
Second
Quarter
|
12.91
|
9.98
|
|
Third
Quarter
|
12.12
|
10.32
|
|
Fourth
Quarter
|
16.10
|
10.03
|
|
Fiscal
2019
|
|
|
|
|
|
|
|
First
Quarter
|
$13.90
|
$12.70
|
|
Second
Quarter
|
15.95
|
13.25
|
|
Third
Quarter
|
13.90
|
12.60
|
|
Fourth
Quarter
|
14.33
|
10.13
|
Holders
Holders
of our Common Stock, approximately 28 of record, are entitled to
one (1) vote for each share held on all matters submitted to a vote
of the stockholders. No cumulative voting with respect to the
election of directors is permitted by our Articles of
Incorporation. The Common Stock is not entitled to preemptive
rights and is not subject to conversion or redemption. Upon our
liquidation, dissolution or winding-up, the assets legally
available for distribution to stockholders are distributable
ratably among the holders of the Common Stock after payment of
liquidation preferences, if any, on any outstanding stock that may
be issued in the future having prior rights on such distributions
and payment of other claims of creditors. Each share of Common
Stock outstanding as of the date of this Annual Report is validly
issued, fully paid and nonassessable.
Dividend Policy
In the
past, we have declared dividends in stock to our stockholders. We
may pay stock dividends in future years at the discretion of our
board of directors and consent of our lenders.
We have
never paid any cash dividends on our common stock, and we currently
intend to retain any future earnings for use in our business. The
payment and rate of future cash or stock dividends, if any, or
stock repurchase programs are subject to the discretion of our
board of directors and will depend upon our earnings, financial
condition, capital or contractual restrictions under our credit
facilities and other factors. In addition, the payment of cash
dividends is restricted by the terms of our current senior loan
agreement.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Information
regarding securities authorized for issuance under the
Company’s equity compensation plans is contained in Part III,
Item 12 of this Report.
24
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. During the year ended
January 31, 2020, the Company repurchased 47,153 shares of stock,
for approximately $506,000, inclusive of commissons. The Company
has repurchased 152,801 shares of stock under this program as of
the date of this filing for $1,671,188, inclusive, of
commissions.
During
the fourth quarter of FY20, stock repurchases were as
follows:
|
|
(a)Total number of shares (or
units) purchased
|
(b)Average price paid per share (or
unit)($)
|
(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($)
|
|
12/01/19-12/31/19
|
23,845
|
10.81
|
23,845
|
900,000
|
|
01/01/20-01/31/20
|
14,108
|
10.76
|
14,108
|
800,000
|
|
Total
|
37,953
|
10.79
|
37,953
|
800,000
|
|
|
|
|
|
|
Registration
Statement
On
March 24, 2017, the Company filed a shelf registration statement on
Form S-3 which was declared effective by the SEC on April 11, 2017.
The shelf registration statement permits the Company to sell, from
time to time, up to an aggregate of $30 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, should the value of our common
stock held by non-affiliates be less than $75.0 million, one-third
of the Company’s public float in any 12-month period. The
public offering of common stock effectuated by the
Company in FY18, the gross proceeds of which were $10.1
million, was pursuant to this Registration Statement.
ITEM 6. SELECTED FINANCIAL DATA
N/A
25
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s Discussion and Analysis of
Financial
Condition and Results of Operations
You should read the following summary together with the more
detailed business information and consolidated financial statements
and related notes that appear elsewhere in this Form 10-K and in
the documents that we incorporate by reference into this Form 10-K.
This document may contain certain “forward-looking”
information within the meaning of the Private Securities Litigation
Reform Act of 1995. This information involves risks and
uncertainties. Our actual results may differ materially from the
results discussed in the forward-looking statements. In this Form
1-K, (a) “FY” means fiscal year; thus for example, FY20
refers to the fiscal year ended January 31, 2020 and (b)
“Q” refers to a quarter; thus, for example, Q4 FY20
refers to the fourth quarter of the fiscal year ended January 31,
2020.
Overview; Response to COVID-19 Outbreak
FY20
revenue growth was led by the Americas (US, Canada, Latin America,
and Mexico). Other markets experienced essentially flat revenue
results. Growth in the Americas can be attributed to general
economic conditions, high finished goods inventory levels allowing
for lead-time reduction, and an increase in direct container sales
to customers in the US and Canada. The second half of FY20 saw
headwinds due to contentious trade negotiations between the US and
China, which resulted in decreased sales in China and necessitated
a shift in the manufacture of US products from China to Vietnam in
order provide uninterrupted supply to our US customers. The revenue
short fall in China was somewhat ameliorated by increased late
January sales of limited use/disposable protective clothing of
approximately $0.99 million in China in response to orders related
to the COVID-19 virus outbreak. The US also saw a late Q4 sales
increase of for COVID-19 related products. Overall, coronavirus
related sales during the last weeks of January totaled $1.2 million
to $1.5 million and accounted for the Q4 revenue growth over Q3
FY20. European sales were flat year over year largely because of
second half uncertainty over whether or not Brexit would be
successfully negotiated or not and increased pricing pressure on
our disposable and chemical sales within Europe. Gross margins
improved continually throughout the year, returning to normal
levels of 37.7% in Q4 and 35.2% for the year as our ERP system
allowed us to gain control of our freight in costs, and direct
container shipments increased into North America. Operating
expenses as a percentage of sales decreased from 30.6% in FY19 to
29.7% in FY20.
The
last two weeks of FY20 were dominated by response to the COVID-19
outbreak. The virus’ progression into a global pandemic will
likely impact our business throughout the entirety of FY21. In the
near term, increased demand for our disposable product lines and to
some extent our lower end chemical lines, combined with our high
inventory levels will produce sales revenues beyond our sustainable
manufacturing capacity on an annualized basis. We anticipate strong
sales through Q1 and Q2 of FY21, and the possibility of a
recession, and consumer stockpiled inventories, that may temper
demand within our regular markets in the second half of the year.
We believe that once the pandemic subsides, there will likely be an
eventual secondary government-based pandemic demand as governments
around the world seek to replenish and perhaps increase their PPE
stockpiles in an effort to correct the deficiencies exposed by
COVID-19. This stockpiling will be filled in part by inventory that
is in the distribution channels as the pandemic ends, When
governments will issue RFQs for additional product is unknown, but
could take as long as a year in some cases. For these reasons we
are maximizing our manufacturing capacity in the near-term and
preparing for a slower second half to last quarter of the
year.
Lakeland’s
strategy for response to these “black swan” events is
to remain focused on our long term growth strategies and tailor our
response to these events so as to accelerate our strategic plans.
We believe that focusing on our long-term growth strategy is also a
solid strategy for minimizing the impact of any post-pandemic
recession. In this particular case, our long-term strategy for
revenue and margin improvement is to increase market penetration
into markets that use higher value, higher margin products, that
are recession resistant. Our manufacturing flexibility allows the
company to maximize the manufacture of disposable and chemical
garments without degrading its ability to supply higher end, flame
resistant and arc flash resistant garments. In order to maximize
our response to pandemic demand, we are running our disposables and
chemical manufacturing 12 hours per day, 7 days per week and we
have significantly reduced the number of SKUs in these product
lines in order to maximize efficiencies. This will have the effect
of increasing throughput and reducing manufacturing costs to
mitigate any raw materials prices increases. Additionally, by
focusing on a few core styles, we believe we can minimize the
impact on inventory of any production over run when the pandemic
subsides. In short, Lakeland is responding to COVID-19 as it did to
Ebola and Avian Flu in 2015. We are not deviating from our growth
strategy, rather we are looking to utilize the short-term,
increased demand as a catylast to accelerate attainment of growth
objectives.
26
On
December 22, 2017, 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) reduced the
federal corporate income tax rate to 21% from 35% effective January
1, 2018. 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, 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.
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. The
regulations were finalized as of June 14, 2019. Re-measurement and
reassessment of the GILTI tax as it is currently written resulted
in a charge to tax expense of $1.0 million for FY20 and $0.6
million for 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 FY20 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
personal protective equipment market continues to grow worldwide at
an estimated rate of 7.0% to 7.5%, prior to the COVID-19 pandemic,
as developing countries increasingly adopt protection standards
similar to those of North America and Europe, and standards in more
mature markets become more stringent, cover more workers, and more
hazards. This growth rate will likely be impacted by the COVID-19
pandemic and resultant post-pandemic economic conditions, however
these fundamental growth drivers will remain in place. Management
believes Lakeland is uniquely positioned to take advantage of these
trends with its presence in many major and high growth potential
markets worldwide. However, management also understands that
significant investment in these markets in terms of sales
personnel, sales collateral and improved distribution (local
warehousing) is required for the Company to realize its goals for
growth in revenue and income as many of these markets become more
competitive.
In
order to promote future improvements in operating income, cash
availability, and business outlook, the Company made multiple
investments in operations and organizational expansion. Additional
personnel in sales and marketing have been hired worldwide in order
to increase penetration in existing markets and pursue new sales
channels. On February 1, 2020, we relocated our corporate offices
from New York to our Decatur, AL facility where we have hired
additional personnel to improve centralized planning, finance, and
IT support throughout the organization. New equipment has been
purchased to increase manufacturing capacity and efficiency as well
as to replace older equipment. New manufacturing facilities in
Vietnam and India commenced production in FY19 and continued to add
capacity until the latter half of FY20 when inventory levels
necessitated curtailment. Curtailment of these operations was ended
at all facilities in early February as C0VID-19 sales begain to
escalate. New accounting and operations software is being installed
to improve processes, planning, and access to sales, financial, and
manufacturing data. Additionally we continue to explore new fabrics
and new technologies that may improve our product offerings and/or
profitability. Management believes the Company’s ability to
compete for the global opportunities in its industry are being
enhanced.
We
manufacture and sell a comprehensive line of industrial protective
clothing and accessories for the industrial and public protective
clothing market. All Lakeland products either protect the wearer
from something in their environment, or protect a product or
process from the wearer. Our products must meet minimum performance
requirements defined by industry best practice, and/or
international or local standards.
Our
products are sold globally by our in-house sales teams, our
customer service group, and authorized independent sales
representatives to a global network of approximately 1,600
safety and industrial supply distributors. Our authorized
distributors supply end users, such as integrated oil,
chemical/petrochemical, automobile, steel, glass, construction,
smelting, heavy and light industry, cleanroom, janitorial,
pharmaceutical, and high technology electronics manufacturers, as
well as scientific, medical laboratories and the utilities
industries (electrical, natural gas, and water). 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 US Food and Drug Administration. Internationally,
we sell to a mixture of end users directly, and to industrial
distributors depending on the particular country and market. Sales
are made in more than 50 foreign 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. In FY19 we had
net sales of $99.0 million and $107.8 million in FY20.
27
We have
operated facilities in Mexico since 1995 and in China since 1996.
Beginning in 1995, we moved the labor intensive sewing operation
for our limited use/disposable protective clothing lines to these
facilities. In FY19, we opened manufacturing facilities in Vietnam
and India. Our facilities and capabilities in China, Mexico,
Vietnam and India allow access to a less expensive labor pool than
is available in the United States of America and permit us to
purchase certain raw materials at a lower cost than they are
available domestically. As we have increasingly moved production of
our products to our facilities in Mexico, China, India and Vietnam,
we have seen improvements in the profit margins for these products.
Our net sales attributable to customers outside the United States
of America were $51.9 million and $49.1 million for the years ended
January 31, 2020 and 2019, respectively.
We
anticipate our R&D expenses to remain essentially the same in
FY21 as in FY20 at approximately $0.7 million as we continue to
develop vertical product lines for new markets and expand
production of existing product lines to our new manufacturing
facilities in Vietnam and India. R&D expense will include
material testing as we seek new raw material sources nearer to our
new manufacturing facilities.
Critical Accounting Policies and Estimates
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 FY20 and FY19 aggregated
approximately $3.3 million and $2.7 million, respectively. Taxes
collected from customers relating to product sales and remitted to
governmental authorities are excluded from revenue.
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:
28
|
|
Year Ended
January 31,
(in millions of dollars)
|
|
|
|
2020
|
2019
|
|
External
Sales by region:
|
|
|
|
USA
|
$55.89
|
$49.88
|
|
Other
foreign
|
3.66
|
3.02
|
|
Europe
(UK)
|
9.35
|
9.42
|
|
Mexico
|
2.82
|
3.51
|
|
Asia
|
18.15
|
18.00
|
|
Canada
|
9.64
|
8.56
|
|
Latin
America
|
8.30
|
6.62
|
|
Consolidated
external sales
|
$107.81
|
$99.01
|
|
|
Year Ended
January 31,
(in millions of dollars)
|
|
|
|
2020
|
2019
|
|
External
Sales by product lines:
|
|
|
|
Disposables
|
$53.42
|
$53.18
|
|
Chemical
|
22.96
|
18.03
|
|
Fire
|
8.63
|
5.98
|
|
Gloves
|
3.12
|
3.22
|
|
Hi-Vis
|
7.75
|
6.99
|
|
Wovens
|
11.93
|
11.61
|
|
Consolidated
external sales
|
$107.81
|
$99.01
|
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.
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.
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.
29
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. At 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 believed there was no
recoverable value for the asset held for sale previously on the
Company’s consolidated balance sheet.
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 the People’s
Republic of China, Mexico, Vietnam, India, and Argentina and can
access independent contractors in China, Vietnam, Argentina, and
Mexico. It also maintains sales and distribution entities located
in China, Canada, the U.K., Chile, Argentina, Russia, Kazakhstan,
India, Mexico, Uruguay, Australia, and Vietnam. 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; and 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.
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.
30
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.
Net Income Per Share
Basic
net income per share is based on the weighted average number of
common shares outstanding without consideration of common stock
equivalents. Diluted net income per share is based on the weighted
average number of common shares and common stock equivalents. The
diluted net income per share calculation takes into account
unvested restricted shares and the shares that may be issued upon
exercise of stock options and warrants, reduced by shares that may
be repurchased with the funds received from the exercise, based on
the average price during the fiscal year.
Significant
Balance Sheet Fluctuation January 31, 2020, as Compared to January
31, 2019
Balance
Sheet Accounts. Cash increased by $1.8 million, primarily as a
result of increased profitability, improved accounts receivable
collection efficiency, an increase in inventory turns, and a net
increase in current liabilities. Accounts receivable was increased
due to an increase in sales. Inventory was increased $1.9 million
due to the increase in sales, albeit at a slower rate as inventory
turns were increased. Accounts payable, accrued compensation, and
other accrued expenses increased $0.8 million due to an increase in
accounts payable for raw material purchases offset by a reduction
in accrued legal expenses. Treasury stock increased $0.5 million
due to repurchases under the stock buyback program approved in
October 2016.
Results
of Operations
The
following table sets forth our historical results
of continuing operations for the years and three-months ended
January 31, 2020 and 2019 as a percentage of our net sales from
operations.
|
|
For the Three Months Ended
January 31,
(Unaudited)
|
For the Year Ended
January 31,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Net
sales
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
|
Cost
of goods sold
|
62.3%
|
72.3%
|
64.8%
|
65.8%
|
|
Gross
profit
|
37.7%
|
27.7%
|
35.2%
|
34.2%
|
|
Operating
expenses
|
31.6%
|
33.7%
|
29.7%
|
30.6%
|
|
Operating
profit (loss)
|
6.1%
|
(6.0)%
|
5.5%
|
3.6%
|
|
Other
income, net
|
0.1%
|
0.1%
|
0.0%
|
0.0%
|
|
Interest
expense
|
(0.1)%
|
(0.1)%
|
(0.1)%
|
(0.1)%
|
|
Income
(loss) before tax
|
6.1%
|
(6.0)%
|
5.3%
|
3.5%
|
|
Income
tax expense (benefit)
|
1.9%
|
1.6%
|
2.3%
|
2.0%
|
|
Net
income (loss)
|
4.3%
|
(7.6)%
|
3.0%
|
1.5%
|
Net Sales. Net sales
increased to $107.8 million for the year ended January 31, 2020
compared to $99.0 million for the year ended January 31, 2019, an
increase of 8.9%. Sales in the US increased $6.0 million or 12%
primarily due to a reduction in lead times as we began to realize
benefits from our ERP implementation, an increase in the number of
direct container shipments in the US and Canada, and sales driven
by COVID 19 demand, primarily in the US and China. Canada sales
increased modestly by $1.1 million or 12.6% due to direct container
shipments. Latin America sales increased $1.7 million or 25.4% as
the Company continued to expand its selling efforts into the
Chilean market and also expanded to Uruguay. Sales in all other
markets in FY20 were essentially the same as in FY19.
31
Gross Profit. Gross
profit increased $4.0 million, or 11.8%, to $37.9 million for the
year ended January 31, 2020, from $33.9 million for the year ended
January 31, 2019. Gross profit as a percentage of net sales
increased from 34.2% for the year ended January 31, 2019 to 35.2%
for the year ended January 31, 2020. Major factors driving gross
margins were:
●
Increased volumes
and pricing overall, primarily in Q4.
●
Increased sales of
higher margin product lines, primarily diposables, chemical, and
fire.
●
Reduction in
freight costs due to improved controls over logistics.
●
Improved
manufacturing efficiency in Vietnam even after curtailments in
Q3.
Operating Expense.
Operating expenses increased 5.5% from $30.3 million for the year
ended January 31, 2019 to $32.0 million for the year ended January
31, 2020. Operating expenses as a percentage of net sales was 29.7%
for the year ended January 31, 2020, down from 30.6 % for the year
ended January 31, 2019. Selling expenses increased $1.2 million,
including sales compensation, freight out, advertising and
marketing. General and administrative expenses were increased due
to increases in salaries and compensation (including bonuses and
cash director fees), banking and insurance expenses, depreciation,
and bad debt expense. These increases were offset by decreases in
professional fees due primarily to reduced legal fees; equity-based
compensation as the Company reduced its estimate of future vested
amounts, and currency fluctuation impacts. In connection with the
2017 and 2018 restricted stock grants, stock-based compensation
expense was reversed in an amount of $835,000 in FY20 as a result
of a change in estimate in the numbers of shares expected to be
earned under the performance plan.
Operating Profit. Operating profit increased to $5.9 million
for the year ended January 31, 2020, from $3.6 million for the year
ended January 31, 2019, due to the impacts detailed above.
Operating margin increased to 5.5% for the year ended January 31,
2020, compared to 3.6% for the year ended January 31,
2019.
Interest Expense. Interest expenses was $0.1 million for the
year ended January 31, 2020 compared to $0.1 million for the year
ended January 31, 2019.
Income Tax Expense. Income tax expense consists of federal,
state and foreign income taxes. Income tax expense was $2.5 million
for the year ended January 31, 2020 and included $1.0 million
associated with the GILTI component of the Tax Act of 2017, as
compared to an income tax expense of $2.0 million for the year
ended January 31, 2019. All international subsidiaries are impacted
GILTI calculation.
Net Income. Net income increased to $3.3 million for
the year ended January 31, 2020 from $1.5 million for the year
ended January 31, 2019.
Fourth
Quarter Results
Net
sales and net income (loss) were $28.2 million and $1.2 million,
respectively, for Q4 FY20, as compared to $25.0 million and $(1.9)
million, respectively, for Q4 FY19.
Factors
affecting Q4 FY20 results of operations included:
●
Increased sales
volumes as issues associated with order fulfillment and shipment
from the ERP implementation in Q4 FY19 were resolved.
●
Increased sales due
to COVID 19 demand in the US and China.
●
Margins were
increased due to improved manufacturing efficiency, primarily in
our Vietnam facility.
●
Operating expenses
were increased $0.5 million overall. Significant changes include
increases in compensation (selling and administrative), advertising
and marketing, and debt expense. These increases were offset by a
significant decrease in legal fees.
32
Liquidity and Capital Resources
At
January 31, 2020, cash and cash equivalents were approximately
$14.6 million and working capital was approximately $66.9 million.
Cash and cash equivalents increased $1.8 million and working
capital increased $1.7 million from January 31, 2019 as the Company
focused on working capital efficiencies.
Of the
Company’s total cash and cash equivalents of $14.6 million as
of January 31, 2020, cash held in Latin America of $1.1 million,
cash held in Russia and Kazakhstan of $0.5 million, cash held in
the UK of $0.2 million, cash held in India of $0.2 million and cash
held in Canada of $0.8 million would not be subject to additional
US tax due to the change in the US tax law as a result of the
December 22, 2017 enactment of the 2017 Tax Cuts and Jobs Act (the
“Tax Act”). In the event the Company repatriated cash
from China, of the $6.0 million balance at January 31, 2020 there
would be an additional 10% withholding tax incurred in that
country. The Company has strategically employed a dividend plan
subject to declaration and certain approvals in which its Canadian
subsidiary sends dividends to the US in the amount of 100% of the
previous year’s earnings, the UK subsidiary sends dividends
to the US in the amount of 50% of the previous year’s
earnings, and the Weifang China subsidiary sends dividends to the
US in declared amounts of the previous year’s earnings. No
dividends were proposed by management or declared by our Board of
Directors for our China subsidiary in FY20.
Net
cash provided by operating activities of $3.6 million for the year
ended January 31, 2020 was primarily due to net income of $3.3
million, non-cash expenses of $2.6 million for deferred taxes,
depreciation and amortization and stock compensation, and an
increase in accounts payable of $1.1 million, offset in part by a
$1.4 million increase to accounts receivable due to a higher
concentration of sales in the latter part of the fourth quarter and
an increase in inventories of approximately $2.2 million. Net cash
used in investing activities of $1.0 million for the year ended
January 31, 2020 reflects purchases in property and equipment as
the Company optimized capital expenditures in the year for the ERP
project, the set-up of manufacturing facilities in Vietnam and
India, the enhancement of IT infrastructure, and equipment
purchases in Mexico and China. Net cash used in financing
activities was $0.7 million for the year ended January 31, 2020,
was primarily due to a $0.5 million increase in treasury stock for
shares purchased under the previously approved stock repurchase
program.
Net
cash provided by operating activities of $1.8 million for the year
ended January 31, 2019 was primarily due to net income of $1.5
million, non-cash expenses of $1.7 million for depreciation and
amortization and stock compensation, and an increase in accrued
expenses and other liabilities of $0.9 million, offset in part by a
$2.5 million increase to accounts receivable due to a higher
concentration of sales in the latter part of the fourth quarter.
Net cash used in investing activities of $3.1 million for the year
ended January 31, 2019 reflects purchases in property and equipment
of $3.1 million as the Company optimized capital expenditures in
the year for the ERP project, the set-up of manufacturing
facilities in Vietnam and India, the enhancement of IT
infrastructure, and equipment purchases in Mexico and China. Net
cash used in financing activities was $1.6 million for the year
ended January 31, 2019, was primarily due to a $1.2 million
increase in treasury stock for shares purchased under the
previously approved stock repurchase program.
We
currently have a $20 million revolving credit facility which
commenced May 10, 2017, of which we had no borrowings outstanding
as of January 31, 2020, expiring on May 10, 2020, at a current per
annum rate of 3.3%. Maximum availability in excess of amount
outstanding at January 31, 2020 was approximately$14.0 million. Our
current credit facility requires, and any future credit facilities
may also require, that we comply with specified financial covenants
relating to fixed charge coverage ratio and limits on capital
expenditures and investments in foreign subsidiaries. Our ability
to satisfy these financial covenants can be affected by events
beyond our control, and we cannot guarantee that we will meet the
requirements of these covenants. These restrictive covenants could
affect our financial and operational flexibility or impede our
ability to operate or expand our business. Default under our credit
facilities would allow the lenders to declare all amounts
outstanding to be immediately due and payable. Our primary lender,
SunTrust Bank, has a security interest in substantially all of our
US assets and pledges of 65% of the equity of the Company’s
foreign subsidiaries. If our lender declares amounts outstanding
under the credit facility to be due, the lenders could proceed
against our assets. Any event of default, therefore, could have a
material adverse effect on our business. We are currently
negotiating with another prospective lender to provide a revolving
credit facility agreement which would replace the existing
agreement with SunTrust.
The
Company has experienced increased sales and order activity as a
result of the COVID-19 pandemic and may need to increase
inventories in order to continue to respond to this increased
demand. Additionally, the Company may accelerate investments in
capacity expansion which may require significant capital
expenditures.
33
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. During the year ended January 31,
2020, the Company repurchased 47,153 shares of stock, which
amounted to approximately $506,000, inclusive of commissons. The
Company has repurchased 152,801 shares of stock under this program
as of the date of this filing which amounted to $1,671,188,
inclusive of commissions.
Capital Expenditures. Our capital expenditures for FY20 of
$1.0 million principally relate to capital purchases for our
manufacturing facilities in Vietnam and India, the enhancement of
IT infrastructure, and equipment purchases in Mexico and the US. We
anticipate FY21 capital expenditures to be approximately $2.0
million as we continue to deploy our ERP solution globally, invest
in strategic capacity expansion, and replace existing equipment in
the normal course of operations.
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
February 2016, the Financial Accounting Standards Board
(“FASB”) established Topic 842, Leases, by issuing
Accounting Standards Update (“ASU”) No. 2016-02, which
requires lessees to recognize leases on their balance sheets and
disclose key information about leasing arrangements. Topic 842 was
subsequently amended by ASU No. 2018-01, Land Easement Practical
Expedient for Transition to Topic 842; ASU No. 2018-10,
Codification Improvements to Topic 842, Leases; and ASU No.
2018-11, Targeted Improvements. The new standard establishes a
right-of-use model (“ROU”) that requires a lessee to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases will be
classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income
statement. The new standard was effective 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. The Company adopted the new standard on
February 1, 2019 and used the effective date as the 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. The Company elects the ‘package of practical
expedients’, which permits the Company not to reassess under
the new standard prior conclusions about lease identification,
lease classification and initial direct costs. On adoption, the
Company recognized additional operating lease liabilities of
approximately $2.8 million with corresponding ROU assets of the
same amount based on the present value of the remaining minimum
rental payments under the prior leasing standard for existing
operating leases.
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 has adopted this guidance, which had no material impact
on its consolidated financial statements and related
disclosures.
New Accounting Pronouncements Not Yet Adopted
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill
and Other (Topic 350), which includes provisions, intended to
simplify the test for goodwill impairment. The standard is
effective for annual periods beginning after December 15, 2019,
with early adoption permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
The Company does not expect the adoption of this standard to have a
significant impact on its financial position and results of
operations.
34
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic
740), Simplying the Accounting for Income Taxes. The ASU removes
certain exceptions for performing intra-period allocation and
calculating income taxes in interim periods. It also simplifies the
accounting for income taxes by requiring recognition of franchise
tax partially based on income as an income-based tax, requiring
reflection of enacted chages in tax laws in the interim period and
making improvements for income taxes related to employee stock
owernship plans. ASU 2019-12 is effective for fiscal years and
interim periods within those years, beginning after December 15,
2020. Early adoption is permitted, including adoption in any
interim period for which financial statements have not been issued.
The Company is currently evaluating the impact the standard will
have on its consolidated financial statements.
In
March 2020, the FASB issued ASU No. 2020-03, Codification
Improvements to Financial Instruments, which makes improvements to
financial instruments guidance. The standard is effective
immediately for certain amendments and for fiscal years beginning
after December 15, 2019. The implementation of this pronouncement
will not have a material impact on the Company’s consolidated
financial statements.
No
other recently issued accounting pronouncements had or are expected
to have a material impact on the Company’s consolidated
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
A
smaller reporting company is not required to provide the
information required by this Item and therefore, no disclosure is
required under Item 7A for the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Index to Consolidated Financial Statements
|
|
Page No.
|
|
36-37
|
|
|
38
|
|
|
39
|
|
|
40
|
|
|
41
|
|
|
42
|
|
|
43-67
|
35
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and Stockholders of
Lakeland
Industries, Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Lakeland
Industries, Inc. and Subsidiaries (collectively, the
“Company”) as of January 31, 2020 and 2019, and
the related consolidated statements of operations, comprehensive
income, stockholders’ equity, and cash flows for each of the
years in the two-year period ended January 31, 2020, and the
related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of January 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the years in the two-year
period ended January 31, 2020, in conformity with accounting
principles generally accepted in the United States of
America.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over
financial reporting as of January 31, 2020, based on criteria
established in Internal
Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated April 15, 2020,
expressed an adverse opinion.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Friedman LLP
We have
served as the Company's auditor since 2016.
New
York, New York
April
15, 2020
36
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of
Lakeland
Industries, Inc.
Adverse Opinion on Internal Control over Financial
Reporting
We have
audited Lakeland Industries Inc. and subsidiaries’ (the
“Company’s”) internal control over financial
reporting as of January 31, 2020, based on criteria established in
Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). In
our opinion, because of the effect of the material weakness
described in the following paragraph on the achievement of the
objectives of the control criteria, the Company has not maintained
effective internal control over financial reporting as of January
31, 2020, based on criteria established in Internal Control—Integrated Framework
(2013) issued by COSO.
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 following
material weakness has been identified and included in
management’s assessment:
(i)
The Company did not
design, implement, and consistently operate effective process-level
controls over the product costing and valuation process to ensure
the appropriate valuation of the inventory on hand at
year-end.
This material
weakness was considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2020 consolidated
financial statements, and this report does not affect our report
dated April 15, 2020, on those
consolidated financial statements.
We do
not express an opinion or any other form of assurance on
management’s statements referring to any corrective actions
taken by the Company after the date of management’s
assessment.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets and the
related consolidated statements of operations, comprehensive
income, stockholders’ equity, and cash flows of the Company,
and our report dated April 15, 2020, expressed an unqualified
opinion.
Basis for Opinion
The
Company’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting,
included in the accompanying “Item 9A - Management’s
Report on Internal Control over Financial Reporting”. Our
responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We
are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition
and Limitations of Internal Control over Financial
Reporting
A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with
authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
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.
/s/ Friedman LLP
New
York, New York
April
15, 2020
37
Lakeland Industries, Inc.
and
Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended January 31,
2020 and 2019
($000’s)
except share information
|
|
2020
|
2019
|
|
Net
sales
|
$107,809
|
$99,011
|
|
Cost of goods
sold
|
69,912
|
65,105
|
|
Gross
profit
|
37,897
|
33,906
|
|
Operating
expenses
|
32,021
|
30,341
|
|
Operating
profit
|
5,876
|
3,565
|
|
Other income
(expense), net
|
(7)
|
41
|
|
Interest
expense
|
(116)
|
(125)
|
|
Income before
taxes
|
5,753
|
3,481
|
|
Income tax
expense
|
2,472
|
2,022
|
|
Net
income
|
$3,281
|
$1,459
|
|
Net income per
common share:
|
|
|
|
Basic
|
$0.41
|
$0.18
|
|
Diluted
|
$0.41
|
$0.18
|
|
Weighted average
common shares outstanding:
|
|
|
|
Basic
|
8,005,927
|
8,111,458
|
|
Diluted
|
8,037,019
|
8,170,401
|
The accompanying notes are an integral part of these consolidated
financial statements.
38
Lakeland Industries, Inc.
and
Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended January 31, 2020 and 2019
($000)’s
|
|
2020
|
2019
|
|
Net
income
|
$3,281
|
$1,459
|
|
Other comprehensive
loss:
|
|
|
|
Foreign currency
translation adjustments
|
(510)
|
(601)
|
|
Comprehensive
income
|
$2,771
|
$858
|
The accompanying notes are an integral part of these consolidated
financial statements.
39
Lakeland Industries, Inc.
and
Subsidiaries
CONSOLIDATED BALANCE SHEETS
January 31, 2020 and 2019
($000’s)
except share information
|
ASSETS
|
2020
|
2019
|
|
Current
assets
|
|
|
|
Cash and cash
equivalents
|
$14,606
|
$12,831
|
|
Accounts
receivable, net of allowance for doubtful accounts of $497 and $434
at January 31, 2020 and 2019, respectively
|
17,702
|
16,477
|
|
Inventories
|
44,238
|
42,365
|
|
Prepaid VAT and
other taxes
|
1,228
|
1,478
|
|
Other current
assets
|
2,033
|
2,319
|
|
Total current
assets
|
79,807
|
75,470
|
|
Property and
equipment, net
|
10,113
|
10,781
|
|
Operating leases
right-of-use assets
|
2,244
|
-----
|
|
Deferred tax
assets
|
5,939
|
7,267
|
|
Prepaid VAT and
other taxes
|
333
|
176
|
|
Other
assets
|
98
|
158
|
|
Goodwill
|
871
|
871
|
|
Total
assets
|
$99,405
|
$94,723
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
$7,204
|
$6,214
|
|
Accrued
compensation and benefits
|
1,300
|
1,137
|
|
Other accrued
expenses
|
2,445
|
2,825
|
|
Current maturity of
long-term debt
|
1,155
|
158
|
|
Current portion of
operating lease liability
|
835
|
-----
|
|
Total current
liabilities
|
12,939
|
10,334
|
|
Long-term portion
of debt
|
-----
|
1,161
|
|
Long-term portion
of operating lease liability
|
1,414
|
-----
|
|
Total
liabilities
|
14,353
|
11,495
|
|
Commitments and
contingencies
|
|
|
|
Stockholders’
equity
|
|
|
|
Preferred stock,
$0.01 par; authorized 1,500,000 shares (none issued)
|
-----
|
-----
|
|
Common stock, $0.01
par; authorized 20,000,000 shares,
Issued 8,481,665
and 8,475,929; outstanding 7,972,423 and 8,013,840 at January 31,
2020 and 2019, respectively
|
85
|
85
|
|
Treasury stock, at
cost; 509,242 and 462,089 shares at January 31, 2020 and 2019,
respectively
|
(5,023)
|
(4,517)
|
|
Additional paid-in
capital
|
75,171
|
75,612
|
|
Retained
earnings
|
17,581
|
14,300
|
|
Accumulated other
comprehensive loss
|
(2,762)
|
(2,252)
|
|
Total stockholders'
equity
|
85,052
|
83,228
|
|
Total liabilities
and stockholders’ equity
|
$99,405
|
$94,723
|
The accompanying notes are an integral part of these consolidated
financial statements.
40
Lakeland Industries, Inc. and
Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended January 31, 2020 and 2019
|
|
|
|
|
|
|
|
Accummulated
|
|
|
|
|
|
|
|
Additional
|
|
Other
|
|
|
|
Common
Stock
|
Treasury
Stock
|
Paid-in
|
Retained
|
Comprehensive
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Caital
|
Earnings
|
Loss
|
Total
|
|
|
|
($000’s)
|
|
($000’s)
|
($000’s)
|
($000’s)
|
($000’s)
|
($000’s)
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January
31, 2018
|
8,472,640
|
$85
|
(356,441)
|
$(3,352)
|
$74,917
|
$12,841
|
$(1,651)
|
$82,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
-----
|
-----
|
-----
|
-----
|
-----
|
1,459
|
-----
|
1,459
|
|
Other comprehensive
loss
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
(601)
|
(601)
|
|
Stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
Restricted stock
issued
|
3,239
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
|
Restricted Stock
Plan
|
-----
|
-----
|
-----
|
-----
|
721
|
-----
|
-----
|
721
|
|
Return of shares in
lieu of payroll tax withholding
|
-----
|
-----
|
-----
|
-----
|
(26)
|
-----
|
-----
|
(26)
|
|
Treasuary stock
purchased, inclusive of commissions
|
-----
|
-----
|
(105,648)
|
(1,165)
|
-----
|
-----
|
-----
|
(1,165)
|
|
Balance, January
31, 2019
|
8,475,929
|
$85
|
(462,089)
|
$(4,517)
|
$75,612
|
$14,300
|
$(2,252)
|
$83,228
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
-----
|
-----
|
-----
|
-----
|
-----
|
3,281
|
-----
|
3,281
|
|
Other comprehensive
loss
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
(510)
|
(510)
|
|
Stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
Restricted stock
issued
|
5,736
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
-----
|
|
Restricted stock
plan
|
-----
|
-----
|
-----
|
-----
|
(417)
|
-----
|
-----
|
(417)
|
|
Return of shares in
lieu of payroll tax withholding
|
-----
|
-----
|
-----
|
-----
|
(24)
|
-----
|
-----
|
(24)
|
|
Treasuary stock
purchased,
inclusive of
commissions
|
-----
|
-----
|
(47,153)
|
(506)
|
-----
|
-----
|
-----
|
(506)
|
|
Balance, January
31, 2020
|
8,481,665
|
$85
|
(509,242)
|
$(5,023)
|
$75,171
|
$17,581
|
$(2,762)
|
$85,052
|
41
Lakeland Industries, Inc. and
Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended January 31, 2020 and 2019
($000’s)
|
|
2020
|
2019
|
|
Cash flows from
operating activities:
|
|
|
|
Net
income
|
$3,281
|
$1,459
|
|
Adjustments to
reconcile net income to net cash provided by operating
activities
|
|
|
|
Provision for
(recovery of) doubtful accounts
|
63
|
(45)
|
|
Deferred income
taxes
|
1,328
|
290
|
|
Depreciation and
amortization
|
1,645
|
965
|
|
Stock based and
restricted stock compensation
|
(403)
|
744
|
|
Loss on disposal of
property and equipment
|
19
|
18
|
|
Impairment
write-down on assets held for sale
|
-----
|
150
|
|
Non-cash
operating lease expense
|
957
|
-----
|
|
(Increase) decrease
in operating assets:
|
|
|
|
Accounts
receivable
|
(1,414)
|
(2,549)
|
|
Inventories
|
(2,156)
|
152
|
|
Prepaid VAT and
other taxes
|
250
|
641
|
|
Other current
assets
|
102
|
(560)
|
|
Increase (decrease)
in operating liabilities:
|
|
|
|
Accounts
payable
|
1,090
|
(372)
|
|
Accrued expenses
and other liabilities
|
(220)
|
892
|
|
Operating lease
liabilities
|
(952)
|
-----
|
|
Net cash provided
by operating activities
|
3,590
|
1,785
|
|
Cash flows from
investing activities:
|
|
|
|
Purchases
of property and equipment
|
(1,033)
|
(3,103)
|
|
Net cash used in
investing activities
|
(1,033)
|
(3,103)
|
|
Cash flows from
financing activities
|
|
|
|
Loan repayments,
short-term
|
(158)
|
(206)
|
|
Loan
borrowings, short-term
|
-----
|
175
|
|
Loan repayments,
long-term
|
-----
|
(151)
|
|
UK (repayments)
under line of credit facility and invoice financing facilities,
net
|
-----
|
(178)
|
|
Purchase of
Treasury Stock under stock repurchase program
|
(506)
|
(1,165)
|
|
Shares returned to
pay employee taxes under restricted stock program
|
(24)
|
(26)
|
|
Net
cash used in financing activities:
|
(688)
|
(1,551)
|
|
Effect of exchange
rate changes on cash and cash equivalents
|
(94)
|
(88)
|
|
Net increase
(decrease) in cash and cash equivalents
|
1,775
|
(2,957)
|
|
Cash and cash
equivalents at beginning of year
|
12,831
|
15,788
|
|
Cash and cash
equivalents at end of year
|
$14,606
|
$12,831
|
|
|
|
|
|
Cash paid for
interest
|
$116
|
$125
|
|
Cash paid for
taxes
|
$1,700
|
$1,667
|
|
|
|
|
|
Noncash investing
and financing activities
|
|
|
|
Leased assets
obtained in exchange for operating lease liabilities
|
$3,180
|
$-----
|
The accompanying notes are an integral part of these consolidated
financial statements.
42
Lakeland Industries, Inc. and
Subsidiaries
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, FY20 refers to the fiscal year ended
January 31, 2020.
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.
43
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
realizable value.
Property and Equipment
Property and
equipment is stated at cost, net of accumulated depreciation and
amortization. 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.
Capitalized Software Costs
In
accordance with ASC 350-40, Internal-Use Software, The Company
capitalizes eligible costs to acquire or develop internal-use
software. 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.
During FY19, 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 believed there was no receovable 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 FY20 and
FY19 aggregated approximately $3.3 million and $2.7 million,
respectively. Taxes collected from customers relating to product
sales and remitted to governmental authorities are excluded from
revenue.
44
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 and
product line 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)
|
|
|
|
2020
|
2019
|
|
External Sales by
region:
|
|
|
|
USA
|
$55.89
|
$49.88
|
|
Other
foreign
|
3.66
|
3.02
|
|
Europe
(UK)
|
9.35
|
9.42
|
|
Mexico
|
2.82
|
3.51
|
|
Asia
|
18.15
|
18.00
|
|
Canada
|
9.64
|
8.56
|
|
Latin
America
|
8.30
|
6.62
|
|
Consolidated
external sales
|
$107.81
|
$99.01
|
|
|
Years
Ended
|
|
|
|
January
31,
|
|
|
|
(in millions of
dollars)
|
|
|
|
2020
|
2019
|
|
External Sales by
product lines:
|
|
|
|
Disposables
|
$53.42
|
$53.18
|
|
Chemical
|
22.96
|
18.03
|
|
Fire
|
8.36
|
5.98
|
|
Gloves
|
3.12
|
3.22
|
|
Hi-Vis
|
7.75
|
6.99
|
|
Wovens
|
11.93
|
11.61
|
|
Consolidated
external sales
|
$107.81
|
$99.01
|
45
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 $1.0 million and $0.8 million in FY20 and FY19,
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
$0.2 million in FY20 and FY19, 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, Australia 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 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 included in
net income for the years ended January 31, 2020 and 2019, were
approximately $0.4 million and $0.5 million,
respectively.
46
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.
There
were no foreign currency forward or hedge contracts at January 31,
2020 or January 31, 2019.
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.
Net Income Per Share
Net
income per share are based on the weighted average number of common
shares outstanding without consideration of common stock
equivalents. Diluted net income per share are based on the weighted
average number of common shares and common stock equivalents. The
diluted net income 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.
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
February 2016, the Financial Accounting Standards Board
(“FASB”) established Topic 842, Leases, by issuing
Accounting Standards Update (“ASU”) No. 2016-02, which
requires lessees to recognize leases on their balance sheets and
disclose key information about leasing arrangements. Topic 842 was
subsequently amended by ASU No. 2018-01, Land Easement Practical
Expedient for Transition to Topic 842; ASU No. 2018-10,
Codification Improvements to Topic 842, Leases; and ASU No.
2018-11, Targeted Improvements. The new standard establishes a
right-of-use model (“ROU”) that requires a lessee to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases will be
classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income
statement. The new standard was effective 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. The Company adopted the new standard on
February 1, 2019 and used the effective date as the 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. The Company elects the ‘package of practical
expedients’, which permits the Company not to reassess under
the new standard prior conclusions about lease identification,
lease classification and initial direct costs. On adoption, the
Company recognized additional operating lease liabilities of
approximately $2.9 million with corresponding ROU assets of the
same amount based on the present value of the remaining minimum
rental payments under the prior leasing standard for existing
operating leases.
47
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 has adopted this guidance, which had no material impact
on its consolidated financial statements and related
disclosures.
New Accounting Pronouncements Not Yet Adopted
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill
and Other (Topic 350), which includes provisions, intended to
simplify the test for goodwill impairment. The standard is
effective for annual periods beginning after December 15, 2019,
with early adoption permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017.
The Company does not expect the adoption of this standard to have a
significant impact on its financial position and results of
operations.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic
740), Simplying the Accounting for Income Taxes. The ASU removes
certain exceptions for performing intra-period allocation and
calculating income taxes in interim periods. It also simplifies the
accounting for income taxes by requiring recognition of franchise
tax partially based on income as an income-based tax, requiring
reflection of enacted chages in tax laws in the interim period and
making improvements for income taxes related to employee stock
owernship plans. ASU 2019-12 is effective for fiscal years and
interim periods within those years, beginning after December 15,
2020. Early adoption is permitted, including adoption in any
interim period for which financial statements have not been issued.
The Company is currently evaluating the impact the standard will
have on its consolidated financial statements.
In
March 2020, the FASB issued ASU No. 2020-03, Codification
Improvements to Financial Instruments, which makes improvements to
financial instruments guidance. The standard is effective
immediately for certain amendments and for fiscal years beginning
after December 15, 2019. The implementation of this pronouncement
will not have a material impact on the Company’s consolidated
financial statements.
No
other recently issued accounting pronouncements had or are expected
to have a material impact on the Company’s consolidated
financial statements.
2.
INVENTORIES
Inventories consist
of the following (in $000s):
|
|
January
31,
|
|
|
|
2020
|
2019
|
|
Raw
materials
|
$16,709
|
$14,986
|
|
Work-in-process
|
670
|
987
|
|
Finished
goods
|
26,859
|
26,392
|
|
|
$44,238
|
$42,365
|
48
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT, NET
Property and
equipment consists of the following:
|
|
|
January
31,
|
|
|
|
Useful Life in
Years
|
2020
|
2019
|
|
|
(000’s)
|
(000’s)
|
|
|
Machinery and
equipment
|
3-10
|
$4,559
|
$5,070
|
|
Furniture and
fixtures
|
3-10
|
906
|
316
|
|
Leasehold
improvements
|
|
1,598
|
1,496
|
|
Computer
equipment
|
3
|
2,766
|
2,669
|
|
Software
costs
|
3
|
1,187
|
1,187
|
|
Land and
building
|
20-30
|
9,182
|
9,177
|
|
|
|
20,198
|
19,915
|
|
Less accumulated
depreciation and amortization
|
|
(10,176)
|
(9,134)
|
|
Construction-in-progress
|
|
91
|
-----
|
|
|
|
$10,113
|
$10,781
|
Depreciation and
amortization expense for FY20 and FY19 amounted to $1,645,477 and
$965,451, respectively.
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, 2020 and 2019. This goodwill is included in the
US segment for reporting purposes.
5.
LONG-TERM DEBT
Revolving Credit Facility
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).
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 nine 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 nine 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
was 2.745% per annum and the initial rate of interest for the term
loan was 2.995% per annum. At January 31, 2020, the rate of
interest on the revolver was 3.8% per annum and the rate of
interest on the term loan was 3.3% 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.
49
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
October 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.
On June
7, 2019 the Company received a waiver for certain compliance
provisions in the Loan Agreement. Pursuant to the Waiver,
compliance with the “fixed charge coverage ratio” was
waived for the fiscal quarters ending April 30, 2019, July 31, 2019
and October 31, 2019 and testing of the “fixed charge
coverage ratio” commenced again for the fiscal quarter ending
January 31, 2020. Pursuant to the Waiver, the Company agreed to
maintain “Availability” (as defined in the Loan
Agreement) of at least $10,000,000 for the period from May 31, 2019
through December 31, 2019. At January 31, 2020 the Company was in
compliance with all provisions in the Loan Agreement.
As of
January 31, 2020, the Company had no borrowings outstanding on the
letter of credit sub-facility, no borrowings outstanding under the
revolving credit facility, and $1.2 million outstanding on the term
loan. As of January 31, 2019 the Company had no borrowings
outstanding on the letter of credit sub-facility, no borrowings
outstanding under the revolving credit facility, and $1.3 million
outstanding on the term loan. On April 10, 2020, the Company
prepaid the outstanding balance on the term loan. The Company is
currently negotiating with another prospective lender to provide a
revolving credit facility agreement which would replace the
existing agreement with SunTrust.
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 December 4, 2017 the facility was extended to March
31, 2018 for the next review period. On March 9, 2019 the facility
was extended to March 31, 2020 and on March 6, 2020 further
extended to March 31, 2021 with no additional changes to the terms.
There were no borrowings outstanding under this facility at Janaury
31, 2020 and January 31, 2019. The amounts due from HSBC of USD
$0.1 million and USD $0.4 million as of January 31, 2020, and
January 31, 2019, respectively, is included in other current assets
on the accompanying consolidated balance sheets.
Below
is a table to summarize the debt amounts above (in
000’s):
|
|
Short-Term
|
Long-term
|
Current Maturity of Long-term
|
|||
|
|
1/31/2020
|
1/31/2019
|
1/31/2020
|
1/31/2019
|
1/31/2020
|
1/31/2019
|
|
USA
|
$-----
|
$-----
|
$-----
|
$1,161
|
$1,155
|
$158
|
|
Totals
|
$-----
|
$-----
|
$-----
|
$1,161
|
$1,155
|
$158
|
50
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Five-year Debt Payout Schedule
This
schedule reflects the liabilities as of January 31, 2020, and does
not reflect any subsequent event (in 000’s):
|
|
Total
|
1 Year or
less
|
2
Years
|
3
Years
|
4
Years
|
5
Years
|
After 5
Years
|
|
|
|
|
|
|
|
||
|
Borrowings in
US
|
$1,155
|
$1,155
|
$-----
|
$-----
|
$-----
|
$-----
|
$-----
|
|
Total
|
$1,155
|
$1,155
|
$-----
|
$-----
|
$-----
|
$-----
|
$-----
|
6.
CONCENTRATION
OF RISK
Credit Risk
Financial
instruments, which potentially subject the Company to concentration
of credit risk, consist principally of cash and cash equivalents,
and trade receivables. Concentration of credit risk with respect to
trade receivables is generally diversified due to the large number
of entities comprising the Company’s customer base and their
dispersion across geographic areas principally within the United
States. The Company routinely addresses the financial strength of
its customers and, as a consequence, believes that its receivable
credit risk exposure is limited. The Company does not require
customers to post collateral.
The
Company’s foreign financial depositories are Bank of America;
China Construction Bank; Bank of China; China Industrial and
Commercial Bank; HSBC (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 $4.3
million total included in the U.S. bank accounts and approximately
$10.3 million total in foreign bank accounts as of January 31,
2020, of which $13.9 million was uninsured.
Major Customer
No
customer accounted for more than 10% of net sales during FY20 and
FY19.
Major Supplier
No
vendor accounted for more than 10% of purchases during FY20 and
FY19.
7. STOCKHOLDERS’ EQUITY
The 2017 Plan
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”).
51
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 tables summarize the unvested
shares granted on June 7, 2018 and December 4, 2019 which have been
made under the 2017 Plan.
Granted
June 7, 2018
|
|
Number of shares awarded total
|
|||
|
|
Minimum
|
Target
|
Maximum
|
Cap
|
|
Employees
|
17,834
|
26,753
|
35,670
|
42,805
|
|
Non-Employee
Directors
|
7,168
|
10,752
|
14,336
|
17,204
|
|
Total
|
25,002
|
37,505
|
50,006
|
60,009
|
|
|
Value
at grant date (numbers below are rounded to the nearest
100)
|
|||
|
|
Minimum
|
Target
|
Maximum
|
Cap
|
|
Employees
|
$248,800
|
$373,200
|
$497,600
|
$597,120
|
|
Non-Employee
Directors
|
100,000
|
150,000
|
200,000
|
240,000
|
|
Total
|
$348,800
|
$523,200
|
$697,600
|
$837,120
|
Granted
December 4, 2019
|
|
Number of shares
awarded total
|
|
||
|
|
Minimum
|
Target
|
Maximum
|
|
|
Employees
|
48,186
|
74,133
|
88,960
|
|
|
Non-Employee
Directors
|
16,360
|
25,168
|
30,204
|
|
|
Total
|
64,546
|
99,301
|
119,164
|
|
|
|
|
|||
|
|
Value at grant date
(numbers below are rounded to the nearest $100)
|
|
||
|
|
Minimum
|
Target
|
Maximum
|
|
|
Employees
|
$497,800
|
$765,800
|
$918,960 -
|
|
|
Non-Employee
Directors
|
169,000
|
260,000
|
312,000
|
|
|
Total
|
$666,800
|
$1,025,800
|
$1,230,960
|
|
52
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company recognized total stock-based compensation costs, which are
reflected in operating expenses:
|
|
Year Ended
January 31,
|
|
|
|
2020
|
2019
|
|
2017
Plan:
|
|
|
|
Restricted
Stock Program
|
$(443,441)
|
$721,111
|
|
Stock
Options
|
27,577
|
-----
|
|
Cash-based
Bonus
|
38,677
|
-----
|
|
|
$(377,187)
|
$721,111
|
|
|
|
|
|
Stock appreciation
rights
|
$(25,559)
|
$22,646
|
|
Total stock-based
compensation
|
$(402,746)
|
$743,757
|
|
Total income tax
benefit (expense) recognized for stock-based compensation
arrangements
|
$(85,577)
|
$267,752
|
53
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Units
Under
the 2017 Plan, as described above, the Company awarded
performance-based and service based restricted stock units to
eligible employees and directors. The following table summarizes
the activity under the 2017 Plan for the year ended January 31,
2020. This table reflects the amount of awards granted at the
maximum number of shares that would be issued if the Company were
to achieve the maximum performance level under the December 2019
grants.
|
|
Performance-Based
|
Service-Based
|
Total
|
Weighted Average
Grant Date Fair Value
|
|
Outstanding at
January 31, 2019
|
-
|
-
|
-
|
-
|
|
Awarded
|
109,234
|
9,930
|
119,164
|
$10.33
|
|
Vested
|
-
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding at
January 31, 2020
|
109,234
|
9,930
|
119,164
|
$10.33
|
The
actual number of shares of common stock of the Company, if any, to
be earned by the award recipients is determined over a three year
performance measurement period based on measures that include
Earnings Before Interest Taxes Depreciation and Amoritzation
(“EBITDA”) with respect to the June 7, 2018 grant and
revenue growth, EBITDA margin, and cash flow for the December 4,
2019 grant. The performance targets have been set for each of the
Minimum, Target, and Maximum levels.The actual performance amount
achieved is determined by the Board and may be adjusted for items
determined to be unusual in nature or infrequent in occurrence, at
the discretion of the Board.
The
compensation cost is based on the fair value at the grant date, is
recognized over the requisite performance/service period using the
straight-line method, and is periodically adjusted for the probable
number of shares to be awarded. The Company is recognizing expense
related to the December 2019 grants under the 2017 Plan at Target,
and these expenses were approximately $153,000 for the year ended
January 31, 2020 As of January 31, 2020, unrecognized stock-based
compensation expense totaled $912,000 pursuant to the 2017 Plan
based on outstanding awards under the Plan. This expense is
expected to be recognized over approximately two
years.
The
following table reflects the amount of awards granted at the
maximum number of shares that would be issued if the Company were
to achieve the maximum performance level in relation to the
September 2017 and June 2018 grants
|
Shares issued under
2017
|
Outstanding
Unvested Grants at Maximum at Beginning of FY20
|
Granted
during
FY20
|
Becoming Vested
during
FY20
|
Forfeited
during
FY20
|
Outstanding
Unvested Grants at Maximum at End of
January
31,
FY20
|
|
Restricted stock
grants – employees
|
84,126
|
-----
|
-----
|
48,456
|
35,670
|
|
Restricted stock
grants – non-employee directors
|
28,829
|
-----
|
-----
|
14,493
|
14,336
|
|
Retainer in stock
– non-employee directors
|
25,044
|
7,292
|
7,568
|
----
|
24,768
|
|
Total
restricted stock
|
137,999
|
7,292
|
7,568
|
62,949
|
74,774
|
|
Weighted average
grant date fair value
|
13.77
|
10.44
|
14.72
|
13.82
|
11.53
|
54
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During
the year ended January 31, 2020, the Company revised its estimate
of grants that will be earned for certain performance periods
ending on or before January 31, 2021. Based on actual
performance achieved by the Company to date, grants issued on
September 12, 2017 expired on January 31, 2020. Also, based on
actual performance to date, it was deemed improbable that the
Company would meet even the performance level required for the June
7, 2018 grants to vest. As a result, stock-based compensation
expense was adjusted to account for this change in estimate.
The total amount of previously recognized stock-based compensation
attributable to those grants that has been reversed is
approximately $835,000.
Stock Options
During
the year ended January 31, 2020 a stock option was granted pursuant
to the Company’s 2017 Equity Incentive Plan in the amount of
24,900 shares at an exercise price of $11.17 per share. Such shares
will vest at 8,300 shares on each of August 12, 2020, August 12,
2021 and August 12, 2022.
The
following table represents stock options granted, exercised and
forfeited during the year ended January 31, 2020.
|
Stock
Options
|
Number of
Shares
|
Weighted Average
Exercise Price per Share
|
Weighted Average
Remaining Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
|
Outstanding at
January 31, 2019
|
-----
|
$-----
|
-----
|
$-----
|
|
Granted
|
24,900
|
$11.17
|
-----
|
-----
|
|
Outstanding at
January 31, 2020
|
24,900
|
$11.17
|
9.53
|
-----
|
|
Exercisable at
January 31, 2020
|
-----
|
$-----
|
-----
|
$-----
|
The
Company recognized approximately $26,000 of stock-based
compensation expense during the year ended January 31, 2020
associated with the grant of the stock option. As of January 31,
2020 there is approximately $149,000 of unrecognized stock-based
compensation expense.
The
Company estimates the fair value of each stock option award on the
grant date using the Black-Scholes option-pricing model. The
assumptions used to calculate the fair value of the options granted
during the year ended January 31, 2020 are as follows:
|
|
FY20
|
|
|
|
|
Expected
volatility
|
53%
|
|
Expected life in
years
|
10
|
|
Expected dividend
yield
|
0.00%
|
|
Risk-free interest
rate
|
1.65%
|
Other Compensation Plans/Programs
Pursuant to the
Company’s restricted 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, 2020, unrecognized stock-based compensation expense related to
these restricted stock awards totaled $30,087 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, 2020, the Company issued 7,568 shares and granted awards for up
to an aggregate of 24,768 shares under the 2017 Plan.
55
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. During the year ended
January 31, 2020, the Company repurchased 47,153 shares of stock,
for approximately $506,000, inclusive of commissons. The Company
has repurchased 152,801 shares of stock under this program as of
January 31, 2020 for $1,671,188, inclusive, of
commissions.
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. During FY20, such warrant expired.
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, should the value
of our common stock held by non-affiliates be less than $75.0
million, one-third of the Company's public float in any 12-month
period.
8. INCOME TAXES
The
provision for income taxes is based on the following pretax income
(loss):
|
|
Years Ended January 31,
|
|
|
Domestic
and Foreign Pretax Income (Loss)
|
2020
|
2019
|
|
Domestic
|
$466
|
$(1,116)
|
|
Foreign
|
5,287
|
4,597
|
|
Total
|
$5,753
|
$3,481
|
|
|
Years Ended January 31,
|
|
|
|
2020
|
2019
|
|
Income
Tax Expense
|
|
|
|
Current:
|
|
|
|
Federal
|
$16
|
$45
|
|
State
and other taxes
|
38
|
20
|
|
Foreign
|
1,090
|
1,667
|
|
Total Current
Tax Expense
|
$1,144
|
$1,732
|
|
Deferred:
|
|
|
|
Domestic
|
$1,328
|
$290
|
|
Total
Income Taxes
|
$2,472
|
$2,022
|
56
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:
|
|
Years Ended January
31,
|
|
|
|
2020
|
2019
|
|
Statutory
rate
|
21.00%
|
21.00%
|
|
State Income Taxes,
Net of Federal Tax Benefit
|
4.47
|
6.89
|
|
Adjustment to
Deferred
|
0.70
|
(0.92)
|
|
Argentina Flow
Through Loss
|
(0.24)
|
1.37
|
|
GILTI
|
17.96
|
16.85
|
|
Permanent
Differences
|
2.47
|
0.63
|
|
Valuation
Allowance-Deferred Tax Asset
|
-----
|
(24.46)
|
|
Foreign Tax
Credit
|
-----
|
24.46
|
|
Foreign Rate
Differential
|
(3.51)
|
20.16
|
|
Rate
Change
|
0.20
|
(5.63)
|
|
Other
|
(0.08)
|
(2.25)
|
|
Effective
Rate
|
42.97%
|
58.09%
|
The tax
effects of temporary cumulative differences which give rise to
deferred tax assets at January 31, 2020 and 2019 are summarized as
follows:
|
|
Years Ended January
31,
|
|
|
|
2020
|
2019
|
|
Deferred tax
assets:
|
|
|
|
Inventories
|
$672
|
$849
|
|
US tax loss
carryforwards, including work opportunity credit*
|
3,524
|
4,290
|
|
Accounts receivable
and accrued rebates
|
247
|
233
|
|
Accrued
compensation and other
|
179
|
314
|
|
India reserves - US
deduction
|
45
|
46
|
|
Equity based
compensation
|
171
|
299
|
|
Foreign tax credit
carry-forward
|
1,348
|
1,348
|
|
State and local
carry-forwards
|
990
|
1,116
|
|
Argentina timing
difference
|
43
|
32
|
|
Depreciation and
other
|
55
|
59
|
|
Amortization
|
(206)
|
(193)
|
|
Brazil
write-down
|
220
|
222
|
|
Right-of-use
asset
|
549
|
-----
|
|
Operating Lease
Liability
|
(550)
|
-----
|
|
Deferred tax
asset
|
7,287
|
8,615
|
|
Less valuation
allowance
|
(1,348)
|
(1,348)
|
|
Net deferred tax
asset
|
$5,939
|
$7,267
|
*The federal net operating loss (“NOL”) generated from
the 01/31/2015 tax year that is left after FY20 of approximately
$16.0 million, will expire after 1/31/2035 and the NOL generated
after 01/31/2018 will be carried forward indefinitely. 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. At 1/31/2020, the Company had NOLs totaling
approximately $15.98 million.
The state NOLs with carry forward limitations will begin to expire
after 1/31/2025 and will continue to expire at various periods up
until 1/31/2039 when they will be fully expired. The states have a
larger spread because some only carryforward for 10 years and some
allow 20 years. The Georgia NOLs generated after 01/31/2018 can be
carried forward indefinitely. At 1/31/2020, the Company had state
NOLs totaling approximately $28.69 million.
,
57
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax Reform
On
December 22, 2017, 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) reduced the
federal corporate income tax rate to 21% from 35% effective January
1, 2018. 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, 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.
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. The
regulations were finalized as of June 14, 2019. Re-measurement and
reassessment of the GILTI tax as it is currently written resulted
in a charge to tax expense of $1.0 million and $0.6 million in FY20
and FY19, respectively. The Company intends to account for the
GILTI tax in the period in which it is incurred. Though this
non-cash expense (due to available NOL’s) had a materially
negative impact on FY20 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.
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 FY17 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 2018 with no significant
issues noted and we believe our tax positions are reasonably stated
as of January 31, 2020. 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. The 2019 tax review will be performed before May 30, 2020
in China.
Lakeland Protective
Wear, Inc., our Canadian subsidiary, is subject to Canadian federal
income tax, as well as income tax in the Province of Ontario. The
normal reassessment period is four years from the date of
reassessment. The January 31, 2017 tax return was assessed on
September 13, 2017, so it and subsequent returns are within the
normal reassessment period and open to examination by tax
authorities.
58
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020, 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 did not change for the year ended January 31, 2020 and
decreased $0.9 for the year ended January 31, 2019.
9.
NET INCOME PER SHARE
The
following table sets forth the computation of basic and diluted net
income per share for the years ended January 31, 2020 and 2019 as
follows:
|
|
Years Ended
January 31,
(000’s
except share information)
|
|
|
|
2020
|
2019
|
|
Numerator
|
|
|
|
Net
income
|
$3,281
|
$1,459
|
|
Denominator
|
|
|
|
Denominator for
basic net income per share (weighted-average shares which reflect
509,242 shares in the treasury at January 31, 2020 and 462,089
shares in the treasury at January 31, 2019)
|
8,005,927
|
8,111,458
|
|
|
|
|
|
Effect of dilutive
securities from restricted stock plan and from dilutive effect of
stock options
|
31,092
|
58,943
|
|
|
|
|
|
Denominator for
diluted net income per share (adjusted weighted average
shares)
|
8,037,019
|
8,170,401
|
|
|
|
|
|
Basic net income
per share
|
$0.41
|
$0.18
|
|
Diluted net income
per share
|
$0.41
|
$0.18
|
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
$227,000 and $209,100 in the years ended January 31, 2020 and 2019,
respectively.
59
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020 or 2019.
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.
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”).
60
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 during the
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.
61
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
There
are additional cases in Labor and Civil courts against Lakeland
Brazil in which Lakeland is not a party, and other outstanding
monetary allegations of Lakeland Brazil.
In
FY19, the Company recorded an accrual of $1.2 million for
professional fees and litigaton reseres associated with labor
claims in Brazil. In FY20 the Company recorded an additional
expense of $0.4 million and paid $1.4 million in professional fees
and labor claims. The accrual on the balance sheet at January 31,
2020 and 2019 is $0.2 million and $1.2 million,
respectively.
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, 2022, with two principal officers. Pursuant to
such contracts, the Company is committed to aggregate annual base
remuneration of $565,000 and $335,000 for FY21 and FY22,
respectively.
Officer severance payment
The
Company entered into a separation agreement with a former officer
effective July 22, 2019 and recorded a severance charge of $260,000
in connection with this arranagement. The severance amount will be
paid through June 5, 2020 pursuant to the terms of the separation
agreement.
Leases
We
lease real property, equipment and certain automobiles. The Company
made the accounting policy election to account for short-term
leases as described herein. Leases with an initial term of 12
months or less are not recorded on the balance sheet; we recognize
lease expense for these leases on a straight-line basis over the
lease term.
The
Company determines if a contract contains a lease at inception. US
GAAP requires that the Company’s leases be evaluated and
classified as operating or finance leases for financial reporting
purposes. The classification evaluation begins at the commencement
date and the lease term used in the evaluation includes the
non-cancellable period for which the Company has the right to use
the underlying asset, together with renewal option periods when the
exercise of the renewal option is reasonably certain and failure to
exercise such option would result in an economic penalty. All of
the Company’s real estate leases are classified as operating
leases.
Most of
our real estate leases include one or more options to renew, with
renewal terms that generally can extend the lease term for an
additional four to five years. The exercise of lease renewal
options is at the Company’s discretion. The Company evaluates
renewal options at lease inception and on an ongoing basis, and
includes renewal options that it is reasonably certain to exercise
in its expected lease terms when classifying leases and measuring
lease liabilities. Lease agreements generally do not require
material variable lease payments, residual value guarantees or
restrictive covenants.
62
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leases
recorded on the consolidated balance sheet consist of the following
(in 000's):
|
|
Classification
|
January
31,
2020
|
|
Assets
|
|
|
|
Operating lease
assets
|
Operating lease
right-of-use assets
|
$2,244
|
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
|
Current portion of
operating lease liabilities
|
$835
|
|
Noncurrent
|
|
|
|
Operating
|
Long-term portion
of operating lease liabilities
|
1,414
|
|
Total Lease
Obligations
|
|
$2,249
|
Lease cost
The
components of lease expense are included on the consolidated
statement of operations as follows (in 000’s):
|
|
Classification
|
Year
Ended
January
31,
2020
|
|
Operating lease
cost
|
Cost of goods
sold
|
$401
|
|
|
Operating
expenses
|
$691
|
|
Short-term lease
cost
|
|
$867
|
63
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturity of Lease Liabilities
Maturity of lease
liabilities as of January 31, 2020 was as follows (in
$000’s):
|
Year ending
January 31,
|
Operating Leases
(a)
|
|
2021
|
$938
|
|
2022
|
775
|
|
2023
|
653
|
|
2024
|
23
|
|
2025
|
5
|
|
Thereafter
|
75
|
|
Total lease
payments
|
2,469
|
|
Less:
Interest
|
220
|
|
Present value of
lease liability
|
$2,249
|
(a)
Operating leases
payments include $263,000 related to options to extend lease terms
that are reasonably certain of being exercised and new leases
entered into during the year.
Weighted-average lease terms and discount rates are as
follows:
|
|
January
31,
2020
|
|
Weighted-average
remaining lease term (years)
|
|
|
Operating
leases
|
3.14
|
|
|
|
|
Weighted-average
discount rate
|
|
|
Operating
leases
|
5.87%
|
64
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental cash
flow information related to leases for the year ended January 31,
2020 were as follows (in 000’s):
|
Cash
paid for amounts included in the measurement of lease
liabilities;
|
Year
Ended
January
31,
2020
|
|
Operating cash
flows from operating leases
|
$1,035
|
|
Leased assets
obtained in exchange for new operating lease
liabilities
|
$3,180
|
13.
SEGMENT REPORTING
Domestic and
international sales from continuing operations are as follows in
millions of dollars:
|
|
Years Ended
January 31,
|
|||
|
|
2020
|
2019
|
||
|
Domestic
|
$55.89
|
51.84%
|
$49.88
|
50.38%
|
|
International
|
51.92
|
48.16%
|
49.13
|
49.62%
|
|
Total
|
$107.81
|
100.00%
|
$99.01
|
100.00%
|
We
manage our operations by evaluating each of our geographic
locations. Our US operations include a facility in Alabama
(primarily the distribution to customers of the bulk of our
products and the light manufacturing of our chemical, wovens,
reflective, and fire products). The Company also maintains one
manufacturing company in China (primarily disposable and chemical
suit production), a manufacturing facility in Mexico (primarily
disposable, reflective, fire and chemical suit production), a
manufacturing facility in Vietnam (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:
|
|
Years Ended January
31,
|
|
|
|
2020
|
2019
|
|
|
(in millions of
dollars)
|
|
|
USA Operations
(including Coprorate)
|
$61.15
|
$55.47
|
|
Other
foreign
|
6.59
|
5.52
|
|
Europe
(UK)
|
9.35
|
9.42
|
|
Mexico
|
4.03
|
4.90
|
|
Asia
|
58.12
|
56.36
|
|
Canada
|
9.68
|
8.58
|
|
Latin
America
|
8.58
|
7.05
|
|
Less intersegment
sales
|
(49.69)
|
(48.29)
|
|
Consolidated
sales
|
$107.81
|
$99.01
|
|
External
Sales
|
|
|
|
USA Operations
(including Coprorate)
|
$55.89
|
$49.88
|
|
Other
foreign
|
3.66
|
3.02
|
|
Europe
(UK)
|
9.35
|
9.42
|
|
Mexico
|
2.82
|
3.51
|
|
Asia
|
18.15
|
18.00
|
|
Canada
|
9.64
|
8.56
|
|
Latin
America
|
8.30
|
6.62
|
|
Consolidated
external sales
|
$107.81
|
$99.01
|
|
Intersegment
Sales
|
|
|
|
USA Operations
(including Coprorate)
|
$5.25
|
$5.59
|
|
Other
foreign
|
2.95
|
2.52
|
|
Mexico
|
1.21
|
1.38
|
|
Asia
|
39.96
|
38.35
|
|
Canada
|
0.03
|
0.02
|
|
Latin
America
|
0.29
|
0.43
|
|
Consolidated
intersegment sales
|
$49.69
|
$48.29
|
65
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Years Ended January
31,
|
|
|
|
2020
|
2019
|
|
|
(in millions of
dollars)
|
|
|
Operating Profit
(Loss):
|
|
|
|
USA Operations
(including Coprorate)
|
$0.44
|
$(1.20)
|
|
Other
foreign
|
0.46
|
0.26
|
|
Europe
(UK)
|
-----
|
0.20
|
|
Mexico
|
(0.84)
|
0.07
|
|
Asia
|
4.35
|
2.63
|
|
Canada
|
0.98
|
1.01
|
|
Latin
America
|
0.36
|
0.70
|
|
Less intersegment
profit
|
0.13
|
(0.10)
|
|
Consolidated
operating profit (loss)
|
$5.88
|
$3.57
|
|
Depreciation and
Amortization Expense:
|
|
|
|
USA
Operations
|
$0.87
|
$0.44
|
|
Other
foreign
|
0.03
|
0.05
|
|
Europe
(UK)
|
-----
|
0.01
|
|
Mexico
|
0.15
|
0.13
|
|
Asia
|
0.55
|
0.27
|
|
Canada
|
0.10
|
0.06
|
|
Latin
America
|
0.04
|
0.04
|
|
Less
intersegment
|
(0.09)
|
(0.03)
|
|
Consolidated
depreciation and amortization expense
|
$1.65
|
$0.97
|
|
Interest
Expense:
|
|
|
|
USA Operations
(including Coprorate)
|
$0.06
|
$0.08
|
|
Europe
(UK)
|
0.01
|
0.01
|
|
Latin
America
|
0.05
|
0.04
|
|
Consolidated
interest expense
|
$0.12
|
$0.13
|
|
Income Tax Expense
(Benefit):
|
|
|
|
USA Operations
(including Corporate)
|
$1.38
|
$0.35
|
|
Europe
(UK)
|
-----
|
0.03
|
|
Mexico
|
(0.12)
|
0.12
|
|
Asia
|
0.94
|
1.04
|
|
Canada
|
0.35
|
0.23
|
|
Latin
America
|
(0.08)
|
0.26
|
|
Less
intersegment
|
0.01
|
(0.01)
|
|
Consolidated income
tax expense (benefit)
|
$2.48
|
$2.02
|
66
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Years Ended
January 31,
|
|
|
|
2020
|
2019
|
|
|
(in millions of
dollars)
|
(in millions of
dollars)
|
|
Total Assets:
*
|
|
|
|
USA
Operations
|
$88.08
|
$92.33
|
|
Other
foreign
|
1.69
|
1.54
|
|
Europe
(UK)
|
4.52
|
4.37
|
|
Mexico
|
5.00
|
5.00
|
|
Asia
|
44.22
|
39.52
|
|
Canada
|
6.09
|
7.47
|
|
Latin
America
|
5.77
|
7.42
|
|
Less
intersegment
|
(55.96)
|
(62.93)
|
|
Consolidated
assets
|
$99.41
|
$94.72
|
|
Total Assets Less
Intersegment:*
|
|
|
|
USA
Operations
|
$49.94
|
$49.50
|
|
Other
foreign
|
3.41
|
2.85
|
|
Europe
(UK)
|
4.52
|
4.36
|
|
Mexico
|
5.16
|
5.13
|
|
Asia
|
24.65
|
20.97
|
|
Canada
|
6.07
|
6.64
|
|
Latin
America
|
5.66
|
5.27
|
|
Consolidated
assets
|
$99.41
|
$94.72
|
|
Property and
Equipment:
|
|
|
|
USA
Operations
|
$3.32
|
$3.87
|
|
Other
foreign
|
0.15
|
0.19
|
|
Europe
(UK)
|
0.01
|
0.01
|
|
Mexico
|
2.17
|
2.14
|
|
Asia
|
3.19
|
3.17
|
|
Canada
|
1.15
|
1.26
|
|
Latin
America
|
0.04
|
0.07
|
|
Less
intersegment
|
0.08
|
0.07
|
|
Consolidated
long-lived assets
|
$10.11
|
$10.78
|
|
Capital
Expenditures:
|
|
|
|
USA Operations
(including Coprorate)
|
$0.25
|
$1.08
|
|
Other
foreign
|
0.01
|
0.07
|
|
Europe
(UK)
|
0.01
|
-----
|
|
Mexico
|
0.17
|
0.28
|
|
Asia
|
0.58
|
1.64
|
|
Canada
|
-----
|
0.03
|
|
Latin
America
|
0.01
|
-----
|
|
Consolidated
capital expenditure
|
$1.03
|
$3.10
|
|
Goodwill:
|
|
|
|
USA
Operations
|
$0.87
|
$0.87
|
|
Consolidated
goodwill
|
$0.87
|
$0.87
|
|
*
Negative assets reflect intersegment amounts eliminated in
consolidaiton
|
14.
SUBSEQUENT EVENT
In
December 2019, a novel strain of coronavirus (COVID-10) surfaced.
The spread of COVID-10 around the world in the first quarter of
FY21 has caused significant volatility in U.S and international
markets. There is significant uncertainty around the breadth and
duration of business disruptions related to COVID-10 as well as its
impact on the U.S and international economies and,as such, the
Company is unable to determine if it will have a material impact to
its operations.
67
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, 2020. 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
a material weakness 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, 2020. Notwithstanding the existence of this material
weakness, 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 and
includes those policies and procedures that: (1) pertain to the
maintenance of records that in reasonable detail accurately and
fairly reflect our transactions and the disposition of our assets;
(2) provide reasonable assurance that our transactions are recorded
as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles and that
our receipts and expenditures are being made only in accordance
with appropriate authorizations; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a
material effect on our consolidated financial
statements.
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, 2020,
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 an identified material weakness 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
weakness identified is disclosed below:
The
Company did not design, implement, and consistently operate
effective process-level controls over the product costing and
valuation process to ensure the appropriate valuation of the
inventory on hand at year-end.
68
As a
result of this material weakness, the Company’s
management has concluded that, as of January 31, 2020 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, 2020 in the audit report that appears in Item 8 of
this Annual Report on Form 10-K.
Remediation Plan for Existing Material Weakness
Management is
committed to the remediation of the material
weakness described above, as well as the continued improvement
of the Company’s internal control over financial reporting.
Management has implemented, and continues to implement, the actions
described below to remediate the underlying causes of the control
deficiencies that gave rise to the material weakness. Until
the remediation efforts described below, including any additional
measures management identifies as necessary, are completed,
the material weakness described above will continue to
exist.
To
address the material weakness associated with inventory valuation,
management has completed, or is in the process of:
■
evaluating and
remediating the design of controls related to 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.
While
some of these remedial measures have been completed as of the date
of this report, management has not yet implemented all the planned
corrective actions. Moreover, these corrective actions need to be
determined, via testing, to have been operating effectively for a
sufficient period of time for management to conclude that the
control environment is operating effectively. Accordingly,
the material weakness has 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.
Remediation Efforts to Address Prior Material
Weaknesses
Revenue
Recognition - We implemented new operational policies and
procedures supporting pricing and sales orders; eliminated
segregation of duties deficiencies or placed mitigating controls
into service; and developed enhancements to the companies systems
and processes, including data input controls, and review of revenue
transactions.
Monitoring Entity
Level Controls - We developed and documented appropriate variance
thresholds for monitoring controls to enhance the precision of
review and the controls’ ability to detect material
misstatement due to error, omission, or fraud; involved more
supervisory personnel to allow for additional levels of review
within the financial reporting and monitoring functions; and
developed policies and procedures to ensure that related monitoring
and review controls are conducted and documented in a consistent
manner, in accordance with the controls’ design
objectives.
69
Relative
to the IT general computing control (“ITGC”)
deficiencies associated with these previously reported material
weaknesses - We engaged a third-party firm, which specializes in
outsourced internal audit services, including those related to
ITGC, to assist us with our remediation efforts related to change
management and system access controls; conduct staff training
addressing ITGCs and related policies and procedures; and identify
other opportunities to enhance our system of internal controls over
technology.
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, 2020, 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, 2020 that materially affected,
or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
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 2020,
to be filed with the Securities and Exchange Commission within 120
days following the end of Lakeland’s fiscal year ended
January 31, 2020. 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
2020.
Equity Compensation Plans
The
following sets forth information relating to Lakeland’s
equity compensation plans as of January 31, 2020:
|
|
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
|
218,839
|
$11.49
|
141,161
|
|
Equity compensation
plans not approved by security holders
|
-----
|
-----
|
-----
|
|
Total
|
218,839
|
$11.49
|
141,161
|
|
|
|
|
|
(1)
The total reflected
in column (c) includes shares available for grant as any type of
equity award under our 2017 Equity Incentive Plan.
70
PART IV
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, 2020 and
2019
(B)
Consolidated
Statements of Comprehensive Income for the years ended January 31,
2020 and 2019
(C)
Consolidated
Balance Sheets at January 31, 2020 and 2019
(D)
Consolidated
Statements of Stockholders’ Equity for the years ended
January 31, 2020 and 2019
(E)
Consolidated
Statements of Cash Flows for the years ended January 31, 2020 and
2019
(F)
Notes to
Consolidated Financial Statements
(4) Exhibits
– See (b) below
b.
Exhibits
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
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).
|
|
|
|
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).
|
|
|
|
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).
|
|
|
|
Employment
Agreement dated July 19, 2019, between Allen E. Dillard and the
Company (incorporated by reference to Exhibit 10.1 of Lakeland
Industries, Inc. Form 8-K filed July 24, 2019).
|
|
|
|
Employment
Agreement dated January 27, 2020, between Charles D. Roberson and
the Company (incorporated by reference to Exhibit 10.1 of Lakeland
Industries, Inc. Form 8-K filed January 29, 2020).
|
|
|
|
Form of
Stock Option Certificate and Agreement (incorporated by reference
to Exhibit 10.1 of Lakeland Industries, Inc. Form 10-Q filed
September 9, 2019).
|
|
|
|
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).
|
|
|
|
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).
|
|
|
|
|
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).
|
|
|
|
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).
|
|
|
Standard
Terms & Conditions dated May 15, 2018, for the debt provided by
between HSBC Invoice Finance (UK) Limited and Lakeland Industries
Europe Limited (incorporated by reference to Exhibit 10.20 of
Lakeland Industries, Inc.’s Form 10-K filed April 10,
2019).
|
|
|
|
|
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).
|
71
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
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).
|
|
|
|
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).
|
|
|
|
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).
|
|
|
|
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).
|
|
|
|
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)
|
|
|
|
Amended
Bank Covenant, dated June 7, 2019, by and between Lakeland
Industries, Inc. and SunTrust Bank (incorporated by reference to
Exhibit 10.1 of Lakeland Industries, Inc. Form 10-Q filed June 10,
2019).
|
|
|
|
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)
|
|
|
|
Lease
Agreement dated December 1, 2018, between Tamash S.A., as lessor
and Lakeland Argentina S.R.L, as lessee (incorporated by reference
to Exhibit 10.20 of Lakeland Industries, Inc.’s Form 10-K
filed April 10, 2019)
|
|
|
|
Lakeland
Industries, Inc. Code of Ethics, as amended on September 29, 2017
(incorporated by reference to Exhibit 14.1 of Lakeland Industries,
Inc.’s Form 10-K filed April 10, 2019)
|
|
|
21
|
|
Subsidiaries
of Lakeland Industries, Inc. (wholly owned) and jurisdictions of
incorporation:
Lakeland Protective Wear, Inc. (Ontario, Canada)
Weifang Meiyang Protective Products Co., Ltd. (China)
Weifang Lakeland Safety Products Co., Ltd. (China)
Lakeland (Beijing) Safety Products Co., Ltd. (Beijing &
Shanghai China)
Lakeland Industries Europe Ltd. (Cardiff, United Kingdom)
Industrias Lakeland S.A. de C.V. (Zacatecas, Mexico)
Lakeland
Industries Chile Limitado (Santiago, Chile)
Indian Pan-Pacific Sales Ltd. (Hong Kong, China)
Lakeland (Hong Kong) Trading Co., Ltd. (Hong Kong,
China)
Lakeland
Argentina, SRL (Buenos Aires, Argentina)
Lakeland Glove and Safety Apparel Private, Ltd. (Noida,
India)
Lakeland India Private Limited, New Delhi, India)
RussIndProtection, Ltd. (Moscow, Russia)
Art Prom, LLC (Kazakhstan, Russia)
SpecProtect LLC (St. Petersburg, Russia)
Lakeland (Vietnam) Industries Co., Ltd. (Nam Dinh,
Vietnam)
Lakeland Industries Australia Pty Ltd. (Mornington,
Australia)
|
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
LAKELAND
INDUSTRIES, INC.
|
|
|
|
|
|
|
|
|
Dated:
April 15, 2020
|
By:
|
/s/
Charles D. Roberson
|
|
|
|
|
Charles
D. Roberson,
|
|
|
|
|
Chief
Executive Officer and President
|
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated:
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Christopher J. Ryan
|
|
Executive
Chairman of the Board
|
|
April
15, 2020
|
|
Christopher
J. Ryan
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Charles D. Roberson
|
|
Chief
Executive Officer, President,
|
|
April
15, 2020
|
|
Charles
D. Roberson
|
|
Secretary
and Director
|
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Allen E. Dillard
|
|
Chief
Financial Officer
|
|
April
15, 2020
|
|
Allen
E. Dillard
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ A. John Kreft
|
|
Chairman
of the Board
|
|
April
15, 2020
|
|
A. John
Kreft
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jeffrey Schlarbaum
|
|
Director
|
|
April
15, 2020
|
|
Jeffrey
Schlarbaum
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Thomas McAteer
|
|
Director
|
|
April
15, 2020
|
|
Thomas
McAteer
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James Jenkins
|
|
Director
|
|
April
15, 2020
|
|
James
Jenkins
|
|
|
|
|
73