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Lakeland Industries Inc – ‘10-Q’ for 10/31/19

On:  Monday, 12/9/19, at 4:05pm ET   ·   For:  10/31/19   ·   Accession #:  1654954-19-13729   ·   File #:  0-15535

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

12/09/19  Lakeland Industries Inc           10-Q       10/31/19   63:4.2M                                   Blueprint/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    458K 
 2: EX-31.1     Certification Pursuant to Rule 13A-14(A)/15D-14(A)  HTML     25K 
                Certifications Section 302 of the Sarbanes-Oxly                  
                Act of 2002                                                      
 3: EX-31.2     Certification Pursuant to Rule 13A-14(A)/15D-14(A)  HTML     25K 
                Certifications Section 302 of the Sarbanes-Oxly                  
                Act of 2002                                                      
 4: EX-32.1     Certificate Pursuant to Section 18 U.S.C. Pursuant  HTML     20K 
                to Section 906 of the Sarbanes-Oxley Act of 2002                 
 5: EX-32.2     Certificate Pursuant to Section 18 U.S.C. Pursuant  HTML     20K 
                to Section 906 of the Sarbanes-Oxley Act of 2002                 
59: R1          Document And Entity Information                     HTML     45K 
36: R2          Condensed Consolidated Statements of Operations     HTML     69K 
17: R3          Condensed Consolidated Statements of Comprehensive  HTML     32K 
                Income                                                           
48: R4          Condensed Consolidated Balance Sheets               HTML    119K 
58: R5          Condensed Consolidated Balance Sheets               HTML     41K 
                (Parenthetical)                                                  
34: R6          Consolidated Statements of Stockholders' Equity     HTML     63K 
16: R7          Condensed Consolidated Statements of Cash Flows     HTML    104K 
50: R8          Business                                            HTML     21K 
55: R9          Basis of Presentation                               HTML     23K 
46: R10         Summary of Significant Accounting Policies          HTML     63K 
52: R11         Inventories                                         HTML     23K 
39: R12         Leases                                              HTML     42K 
18: R13         Long-Term Debt                                      HTML     49K 
47: R14         Concentration of Risk                               HTML     24K 
53: R15         Stockholders' Equity                                HTML     62K 
40: R16         Income Taxes                                        HTML     25K 
19: R17         Earnings Per Share                                  HTML     30K 
45: R18         Contingencies                                       HTML     28K 
54: R19         Segment Reporting                                   HTML     95K 
27: R20         Summary of Significant Accounting Policies          HTML    104K 
                (Policies)                                                       
21: R21         Summary of Significant Accounting Policies          HTML     36K 
                (Tables)                                                         
41: R22         Inventories, net (Tables)                           HTML     25K 
60: R23         Leases (Tables)                                     HTML     49K 
28: R24         Long-Term Debt (Tables)                             HTML     42K 
23: R25         Stockholders' Equity (Tables)                       HTML     59K 
42: R26         Earnings Per Share (Tables)                         HTML     30K 
61: R27         Segment Reporting (Tables)                          HTML     97K 
29: R28         Summary of Significant Accounting Policies          HTML     43K 
                (Details)                                                        
20: R29         Summary of Significant Accounting Policies          HTML     23K 
                (Details Narrative)                                              
14: R30         Inventories, net (Details)                          HTML     30K 
38: R31         Leases (Details)                                    HTML     27K 
57: R32         Leases (Details 1)                                  HTML     23K 
51: R33         Leases (Details 2)                                  HTML     38K 
13: R34         Leases (Details 3)                                  HTML     23K 
37: R35         Leases (Details 4)                                  HTML     23K 
56: R36         Leases (Details 5)                                  HTML     22K 
49: R37         Leases (Details 6)                                  HTML     39K 
15: R38         Long-Term Debt (Details)                            HTML     29K 
35: R39         Long-Term Debt (Details 1)                          HTML     45K 
25: R40         Stockholders' Equity (Details)                      HTML     39K 
33: R41         Stockholders' Equity (Details 1)                    HTML     22K 
63: R42         Stockholders' Equity (Details 2)                    HTML     48K 
44: R43         Stockholders' Equity (Details 3)                    HTML     44K 
24: R44         Stockholders' Equity (Details 4)                    HTML     29K 
32: R45         Income Taxes (Details Narrative)                    HTML     25K 
62: R46         Earnings Per Share (Details)                        HTML     48K 
43: R47         Contingencies (Details Narrative)                   HTML     20K 
26: R48         Segment Reporting (Details)                         HTML     29K 
31: R49         Segment Reporting (Details 1)                       HTML     89K 
30: XML         IDEA XML File -- Filing Summary                      XML    109K 
12: EXCEL       IDEA Workbook of Financial Reports                  XLSX     70K 
 6: EX-101.INS  XBRL Instance -- lake-20191031                       XML   1.37M 
 8: EX-101.CAL  XBRL Calculations -- lake-20191031_cal               XML    161K 
 9: EX-101.DEF  XBRL Definitions -- lake-20191031_def                XML    197K 
10: EX-101.LAB  XBRL Labels -- lake-20191031_lab                     XML    580K 
11: EX-101.PRE  XBRL Presentations -- lake-20191031_pre              XML    462K 
 7: EX-101.SCH  XBRL Schema -- lake-20191031                         XSD    103K 
22: ZIP         XBRL Zipped Folder -- 0001654954-19-013729-xbrl      Zip     97K 


‘10-Q’   —   Quarterly Report


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
 
☒ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 31, 2019
 
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 of incorporation)
 
(IRS Employer Identification Number)
 
 
 
3555 Veterans Memorial Highway, Suite C, Ronkonkoma, New York
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
(631) 981-9700
(Registrant's telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 
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
 
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 and posted 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 such files).Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐ 
Smaller reporting company ☒
Emerging growth company ☐
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐ No ☒
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
Outstanding at December 6, 2019
Common Stock, $0.01 par value per share
8,006,829 shares
 

 
 
 
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
 
FORM 10-Q
 
The following information of the Registrant and its subsidiaries is submitted herewith:
 
PART I - FINANCIAL INFORMATION:
 
Item 1.
Financial Statements (Unaudited)
Page
 
 
 
 
Introduction
3
 
 
 
 
Condensed Consolidated Statements of Operations Three and Nine Months Ended October 31, 2019 and 2018
5
 
 

 
Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended October 31, 2019 and 2018
6
 

 
 
Condensed Consolidated Balance Sheets  October 31, 2019 and January 31, 2019
7
 
 
 
 
Condensed Consolidated Statements of Stockholders’ Equity Three and Nine Months Ended October 31, 2019 and 2018
8
 
 
 
 
Condensed Consolidated Statements of Cash Flows Nine Months Ended October 31, 2019 and 2018
9
 
 
 
 
Notes to Condensed Consolidated Financial Statements
10
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
29
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
35
 
 
 
Item 4.
Controls and Procedures
35
 
 
 
 
PART II - OTHER INFORMATION:
 
 
 
 
Item 6.
Exhibits
36
 
 
 
 
Signature Pages
37
 
 
2
 
 
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
 
PART I FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Introduction
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Form 10-Q may contain certain forward-looking statements. When used in this Form 10-Q or in any other presentation, statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “project” and similar expressions, are intended to identify forward-looking statements. They also include statements containing a projection of sales, earnings or losses, capital expenditures, dividends, capital structure or other financial terms.
 
The forward-looking statements in this Form 10-Q are based upon our management’s beliefs, assumptions and expectations of our future operations and economic performance, taking into account the information currently available to us. These statements are not statements of fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. Some of the important factors that could cause our actual results, performance or financial condition to differ materially from expectations are:
 
our ability to obtain additional funds, if necessary;
we are subject to risk as a result of our international manufacturing operations;
our results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates;
we may be exposed to continuing and other liabilities arising from our former Brazilian operations.
the implementation of our "Enterprise Resource Planning ("ERP") system had, and may continue to have, an adverse effect on operating results; in this connection, we incurred a net loss for the fourth quarter of fiscal 2019 and increased operating expenses for the first nine months of fiscal 2020;
in the fourth quarter of fiscal 2019, management identified material weaknesses in our control over financial reporting; if we continue to fail maintaining proper and effective internal controls or are unable to remediate material weaknesses in our internal controls, our ability to produce accurate and timely financial statements could be impaired, and investors’ views of us could be harmed;
we have manufacturing and other operations in China which may be adversely effected by tariff wars and other trade maneuvers;
We may be adversely effected by the withdrawal of the United Kingdom from the European Union
we deal in countries where corruption is an obstacle;
we are exposed to tax expense risk;
rapid technological change could negatively affect sales of our products, inventory levels and our performance;
we must estimate customer demand because we do not have long-term commitments from many of our customers, and errors in our estimates could negatively impact our inventory levels and net sales;
our operations are substantially dependent upon key personnel;
we rely on a limited number of suppliers and manufacturers for specific fabrics, and we may not be able to obtain substitute suppliers and manufacturers on terms that are as favorable, or at all, if our supplies are interrupted;
our inability to protect our intellectual property;
cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information and adversely impact our reputation and result of operations;
we face competition from other companies, a number of which have substantially greater resources than we do;
 
 
3
 
 
a substantial amount of our sales are to foreign buyers, which exposes us to additional risks;
environmental laws and regulations may subject us to significant liabilities;
our directors and executive officers have the ability to exert significant influence on us and on matters subject to a vote of our stockholders;
our failure to realize anticipated benefits from acquisitions, divestitures or restructurings, or the possibility that such acquisitions, divestitures or restructurings could adversely affect us;
covenants in our credit facilities may restrict our financial and operating flexibility;
our ability to make payments on our indebtedness and comply with the restrictive covenants therein; and
the other factors referenced in this Form 10-Q, including, without limitation, in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the factors described under “Risk Factors” disclosed in our fiscal 2019 Form 10-K.
 
We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. Furthermore, forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q might not occur. We qualify any and all of our forward-looking statements entirely by these cautionary factors.
 
 
 
 
 
 
 
 
 
 
 
 
 
4
 
 
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($000’s except for share and per share information)
 
 
 
Three Months Ended
October 31,
 
 
Nine Months Ended
 
 
   
 
2018
 
 
2019
 
 
2018
 
Net sales
 $27,464 
 $24,009 
 $79,620 
 $73,970 
Cost of goods sold
  18,166 
  15,691 
  52,349 
  46,995 
Gross profit
  9,298 
  8,318 
  27,271 
  26,975 
Operating expenses
  7,464 
  7,305 
  23,114 
  21,898 
Operating profit
  1,834 
  1,013 
  4,157 
  5,077 
Other income (expense), net
  (9)
  7 
  (33)
  36 
Interest expense
  (26)
  (25)
  (98)
  (93)
Income before taxes
  1,799 
  995 
  4,026 
  5,020 
Income tax expense
  653 
  494 
  1,950 
  1,634 
Net income
 $1,146 
 $501 
 $2,076 
 $3,386 
Net income per common share:
    
    
    
    
Basic
 $0.14 
 $0.06 
 $0.26 
 $0.42 
Diluted
 $0.14 
 $0.06 
 $0.26 
 $0.41 
Weighted average common shares outstanding:
    
    
    
    
Basic
  8,004,640 
  8,119,488 
  8,013,383 
  8,117,307 
Diluted
  8,035,929 
  8,186,130 
  8,044,159 
  8,174,560 
 
    
    
    
    
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
5
 
 
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
($000’s)
 
 
 
Three Months Ended
October 31,
 
 
Nine Months Ended
 
 
   
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 $1,146 
 $501 
 $2,076 
 $3,386 
Other comprehensive loss:
    
    
    
    
Foreign currency translation adjustments
  (177)
  (235)
  (402)
  (860)
Comprehensive income
 $969 
 $266 
 $1,674 
 $2,526 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
6
 
 
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000’s except for share information)
 
 ASSETS
 
October 31,
 
   
 
   
 
2019
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 $9,473 
 $12,831 
Accounts receivable, net of allowance for doubtful accounts of $602 and $434 at October 31, 2019 and January 31, 2019, respectively
  17,413 
  16,477 
Inventories
  47,797 
  42,365 
Prepaid VAT and other taxes
  1,316 
  1,478 
Other current assets
  2,622 
  2,319 
Total current assets
  78,621 
  75,470 
Property and equipment, net
  10,233 
  10,781 
Operating leases right-of-use assets
  2,482 
  ----- 
Deferred tax assets
  6,600 
  7,267 
Prepaid VAT and other taxes
  176 
  176 
Other assets
  121 
  158 
Goodwill
  871 
  871 
Total assets
 $99,104 
 $94,723 
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
Current liabilities
    
    
Accounts payable
 $6,246 
 $6,214 
Accrued compensation and benefits
  1,699 
  1,137 
Other accrued expenses
  3,227 
  2,825 
Current maturity of long-term debt
  1,194 
  158 
Current portion of operating lease liabilities
  254 
  ----- 
Total current liabilities
  12,620 
  10,334 
     Long-term portion of debt
  ----- 
  1,161 
     Long-term portion of operating lease liabilities
  2,243 
  ----- 
Total noncurrent liabilities
  2,243 
  1,161 
Total liabilities
  14,863 
  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 8,478,118 and 8,475,929; outstanding 8,006,829 and 8,013,840 shares at October 31, 2019 and January 31, 2019, respectively
  85 
  85 
Treasury stock, at cost; 471,289 and 462,089 shares at October 31, 2019 and January 31, 2019, respectively
  (4,614)
  (4,517)
Additional paid-in capital
  75,048 
  75,612 
Retained earnings
  16,376 
  14,300 
Accumulated other comprehensive loss
  (2,654)
  (2,252)
Total stockholders' equity
  84,241 
  83,228 
Total liabilities and stockholders' equity
 $99,104 
 $94,723 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
7
 
 
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(000’s except for share information)
 
 
 
Common Stock
 
 
 
Treasury Stock
 
 
Additional Paid-in
 
 
Retained
 
 
Accumulated Other Comprehensive
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
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
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  3,386 
  ----- 
  3,386 
Other comprehensive loss
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  (860)
  (860)
Stock-based compensation:
    
    
    
    
    
    
    
    
Restricted Stock Plan  
  3,289 
  ----- 
  ----- 
  ----- 
  467 
  ----- 
  ----- 
  467 
Balance, October 31, 2018
  8,475,929 
 $85 
  (356,441)
 $(3,352)
 $75,384 
 $16,227 
 $(2,511)
 $85,833 
 
    
    
    
    
    
    
    
    
Balance, July 31, 2018
  8,472,640 
 $85 
  (356,441)
 $(3,352)
 $75,221 
 $15,726 
 $(2,275)
 $85,405 
Net income
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  501 
  ----- 
  501 
Other comprehensive loss
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  (236)
  (236)
Stock-based compensation:
    
    
    
    
    
    
    
    
Restricted Stock Plan 
  3,289 
  ----- 
  ----- 
  ----- 
  163 
  ----- 
  ----- 
  163 
Balance, October 31, 2018
  8,475,929 
 $85 
  (356,441)
 $(3,352)
 $75,384 
 $16,227 
 $(2,511)
 $85,833 
 
    
    
    
    
    
    
    
    
Balance, January 31, 2019
  8,475,929 
 $85 
  (462,089)
 $(4,517)
 $75,612 
 $14,300 
 $(2,252)
 $83,228 
Net income
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  2,076 
  ----- 
  2,076 
Other comprehensive loss
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  (402)
  (402)
Stock-based compensation:
    
    
    
    
    
    
    
    
Restricted Stock Plan
  2,189 
  ----- 
  ----- 
  ----- 
  (559)
  ----- 
  ----- 
  (559)
Returned of shares in lieu of payroll tax withholding
  ----- 
  ----- 
  ----- 
  ----- 
  (5)
  ----- 
  ----- 
  (5)
Treasury stock purchased; inclusive of commissions
  ----- 
  ----- 
  (9,200)
  (97)
  ----- 
  ----- 
  ----- 
  (97)
Balance, October 31, 2019
  8,478,118 
 $85 
  (471,289)
 $(4,614)
 $75,048 
 $16,376 
 $(2,654)
 $84,241 
Balance, July 31, 2019
  8,475,929 
 $85 
  (471,289)
 $(4,614)
 $75,361 
 $15,230 
 $(2,477)
 $83,585 
Net income
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  1,146 
  ----- 
  1,146 
Other comprehensive loss
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
  (177)
  (177)
Stock-based compensation:
    
    
    
    
    
    
    
    
Restricted Stock Plan and stock options
  2,189 
  ----- 
  ----- 
  ----- 
  (308)
  ----- 
  ----- 
  (308)
Returned of shares in lieu of payroll tax withholding
  ----- 
  ----- 
  ----- 
  ----- 
  (5)
  ----- 
  ----- 
  (5)
Balance, October 31, 2019
  8,478,118 
 $85 
  (471,289)
 $(4,614)
 $75,048 
 $16,376 
 $(2,654)
 $84,241 
  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
8
 
 
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($000)’s
 
 
 
Nine Months Ended
 
 
   
 
2018
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 $2,076 
 $3,386 
Adjustments to reconcile net income to net cash used in operating activities
    
    
Provision for of doubtful accounts
  168 
  76 
Deferred income taxes
  667 
  352 
Depreciation and amortization
  1,267 
  642 
Stock based and restricted stock compensation
  (583)
  491 
Loss on disposal of property and equipment
  (2)
  14 
Non-cash operating lease expense
  797 
  ----- 
(Increase) decrease in operating assets
    
    
Accounts receivable
  (1,257)
  (2,655)
Inventories
  (5,584)
  (4,121)
Prepaid VAT and other taxes
  162 
  148 
Other current assets
  (355)
  (1,284)
Increase (decrease) in operating liabilities
    
    
Accounts payable
  67 
  1,019 
Accrued expenses and other liabilities
  517 
  265 
Operating lease liabilities
  (783)
  ----- 
Net cash used in operating activities
  (2,843)
  (1,667)
Cash flows used in investing activities:
    
    
Purchases of property and equipment
  (689)
  (2,227)
Cash flows from financing activities:
    
    
Loan repayments, short-term
  (124)
  (207)
Loan borrowings, short-term
  ----- 
  208 
Loan repayments, long-term
  ----- 
  (118)
UK borrowings (repayments) under line of credit facility, net
  491 
  (11)
       Purchase of Treasury Stock under stock repurchase program
  (97)
  ----- 
       Shares returned to pay employee taxes under restricted stock program
  (5)
  ----- 
Net cash provided by (used in) financing activities
  265 
  (128)
Effect of exchange rate changes on cash and cash equivalents
  (91)
  (106)
Net decrease in cash and cash equivalents
  (3,358)
  (4,128)
Cash and cash equivalents at beginning of period
  12,831 
  15,788 
Cash and cash equivalents at end of period
 $9,473
 $11,660 
 
    
    
Supplemental disclosure of cash flow information:
    
    
Cash paid for interest
 $98 
 $93 
Cash paid for taxes
 $1,202 
 $1,326 
 
    
    
Noncash investing and financing activities
    
    
Leased assets obtained in exchange for operating lease liabilities
 $3,218 
 $----- 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
9
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1.
Business
Lakeland Industries, Inc. and Subsidiaries (“Lakeland,” the “Company,” “we,” “our” or “us”), a Delaware corporation organized in April 1986, manufactures and sells a comprehensive line of safety garments and accessories for the industrial protective clothing market.
 
2.
Basis of Presentation
The unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments (consisting of only normal and recurring adjustments) which are, in the opinion of management, necessary to present fairly the unaudited condensed consolidated financial information required herein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequate to make the information presented not misleading, it is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended January 31, 2019.
 
The results of operations for the three and nine month periods ended October 31, 2019 are not necessarily indicative of the results to be expected for the full year.
 
In this Form 10-Q, (a) “FY means fiscal year; thus for example, FY20 refers to the fiscal year ending January 31, 2020, (b) “Q” refers to quarter; thus, for example, Q3 FY20 refers to the third quarter of the fiscal year ending January 31, 2020, (c) “Balance Sheet” refers to the unaudited condensed consolidated balance sheet and (d) “Statement of Operations” refers to unaudited condensed consolidated statement of operations.
 
3.
Summary of Significant Accounting Policies
 
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
 
Use of Estimates and Assumptions
The preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is reasonably possible that events could occur during the upcoming year that could change such estimates.
 
Accounts Receivable, Net. Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company recognizes losses when information available indicates that it is probable that a receivable has been impaired based on criteria noted below at the date of the unaudited condensed 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.
 
 
10
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
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 estimated net realizable value.
 
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.
 
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 three months ended October 31, 2019 and 2018 aggregated approximately $0.9 million and $0.6 million and $2.5 million and $2.1 million for the nine months ended October 31, 2019 and 2018, 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:
 
 
11
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
 
 
Three Months Ended
October 31,
(in millions of dollars)
 
 
Nine Months Ended
October 31,
(in millions of dollars)
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
External Sales by region:
 
 
 
 
 
 
 
 
 
 
 
 
USA
 $14.16 
 $11.82 
 $41.47 
 $37.54 
Other foreign
  0.91 
  0.72 
  2.61 
  2.30 
Europe (UK)
  2.38 
  2.22 
  7.24 
  7.35 
Mexico
  0.88 
  0.77 
  2.08 
  2.70 
Asia
  4.62 
  4.80 
  12.49 
  12.79 
Canada
  2.60 
  2.08 
  7.47 
  6.38 
Latin America
  1.91 
  1.60 
  6.26 
  4.91 
Consolidated external sales
 $27.46 
 $24.01 
 $79.62 
 $73.97 
 
 
 
Three Months Ended
October 31,
(in millions of dollars)
 
 
Nine Months Ended
October 31,
(in millions of dollars)
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
External Sales by product lines:
 
 
 
 
 
 
 
 
 
 
 
 
Disposables
 $12.52 
 $12.74 
 $39.19 
 $40.88 
Chemical
  5.68 
  4.74 
  16.30 
  12.42 
Fire
  2.81 
  1.02 
  6.64 
  3.57 
Gloves
  0.74 
  0.77 
  2.33 
  2.30 
Hi-Vis
  2.20 
  1.83 
  6.04 
  5.46 
Wovens
  3.51 
  2.91 
  9.12 
  9.34 
Consolidated external sales
 $27.46 
 $24.01 
 $79.62 
 $73.97 
 
Income Taxes
The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing the unaudited condensed consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss carryforwards and tax credits, are recorded as deferred tax assets or liabilities on the Company’s unaudited condensed consolidated balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event the Company determines that it may not be able to realize all or part of its deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to income in the period of such determination.
 
The Company recognizes tax positions that meet a “more likely than not” minimum recognition threshold. If necessary, the Company recognizes interest and penalties associated with tax matters as part of the income tax provision and would include accrued interest and penalties with the related tax liability in the unaudited condensed consolidated balance sheets. The Company does not have any uncertain tax positions at October 31, 2019 or January 31, 2019.
 
 
12
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
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 gains (losses) included in net income for the three months ended October 31, 2019 and 2018 was approximately $0.0 million and $0.2 million and for the nine months ended October 31, 2019 and 2018 was approximately $0.2 million and $(0.4) million, respectively.
 
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.
 
The financial instruments of the Company classified as current assets or liabilities, including cash and cash equivalents, accounts receivable, short-term borrowings, borrowings under revolving credit facility, accounts payable and accrued expenses, are recorded at carrying value, which approximates fair value based on the short-term nature of these instruments.
 
The Company believes that the fair values of its long-term debt approximates its carrying value based on the effective interest rate compared to the current market rate available to the Company.
 
Earnings Per Share
Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share are based on the weighted average number of common shares and common stock equivalents. The diluted earnings per share calculation takes into account unvested restricted shares and the shares that may be issued upon exercise of stock options and warrants, reduced by shares that may be repurchased with the funds received from the exercise, based on the average price during the fiscal period.
 
 
13
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Reclassifications
Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These reclassifications have no effect on the accompanying unaudited condensed consolidated financial statements.
 
Recent Accounting Pronouncements
The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued.
 
New Accounting Pronouncements Recently Adopted
In 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-balance sheet 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 unaudited condensed 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.
 
No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s unaudited condensed consolidated financial statements.
 
 
14
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
4.
Inventories
Inventories consist of the following (in $000s):
 
 
 
 
 
 
 
 
 
Raw materials
 $17,230 
 $14,986 
Work-in-process
  441 
  987 
Finished goods
 $30,126 
  26,392 
 
 $47,797 
 $42,365 
 
5.
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.
 
Leases recorded on the unaudited condensed consolidated balance sheet consist of the following:
 
Leases (000’s)
Classification
 
 
 
 
 
Assets
 
 
 
 
Operating lease assets
Operating lease right-of-use assets
 $2,482 
 
    
Liabilities
 
    
 Current
 
    
    Operating
Current portion of operating lease liabilities
 $254 
Noncurrent
 
    
    Operating
Long-term portion of operating lease liabilities
  2,243 
Total Lease Obligations
 
 $2,497 
 
 
15
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Lease cost
The components of lease expense are included on the unaudited condensed consolidated statement of operations as follows (in 000’s):
 
 
Classification
 Three Months Ended
October 31, 2019
 
 Nine Months Ended
October 31, 2019
 
Operating lease cost
Cost of goods sold
 $53 
 $342 

Operating expenses
 $269 
 $507 
Short-term lease cost
 
 $444 
 $572 
 
Maturity of Lease Liabilities
Maturity of lease liabilities as of October 31, 2019 was as follows (in $000’s):
 
Year ending January 31,
 
Operating Leases
(a)
 
Remainder of fiscal year 2020
  254 
2021
  955 
2022
  802 
2023
  686 
2024
  23 
Thereafter
  81 
Total lease payments
  2,801 
Less: Interest
  304 
Present value of lease liability
 $2,497 
 
(a)
Operating leases payments include $34,000 related to options to extend lease terms that are reasonably certain of being exercised and new leases entered into during the quarter.
 
Weighted-average lease terms and discount rates are as follows:
 
 
Weighted-average remaining lease term (years)
 
 
 
Operating leases
  2.72 
 
    
Weighted-average discount rate
    
Operating leases
  5.83%
 
Supplemental cash flow information related to leases for the nine months ended October 31, 2019 were as follows (in 000’s):
 
Cash paid for amounts included in the measurement of lease liabilities;
 
Nine Months Ended
 
Operating cash flows from operating leases
 $783 
Leased assets obtained in exchange for new operating lease liabilities
 $3,218 
 
 
16
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Disclosures related to periods prior to adoption of ASU 2016-02
The Company adopted ASU 2016-02 using a modified retrospective adoption method at February 1, 2019 as noted in Note 3. "Recent Accounting Pronouncements." As required, the following disclosure is provided for periods prior to adoption. Minimum lease commitments as of January 31, 2019 that have initial or remaining lease terms in excess of one year are as follows:
 
Leases
Total rental costs under all operating leases are summarized as follows (in 000’s):
 
Year ended January 31,
 
Gross rental
 
 
 
 
 
2019
 $1,022 
2018
 $841 
  
Minimum annual rental commitments for the remaining term of the Company’s noncancelable operating leases relating to manufacturing facilities, office space and equipment rentals at January 31, 2019, including lease renewals subsequent to year end, are summarized as follows (in 000’s):
 
Year ending
January 31
 
 
 
2020
 $761 
2021
  447 
2022
  435 
2023
  314 
2024
  8 
and thereafter
  9 
Total
 $1,974 
 
6.
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).
 
 
17
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
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 October 31, 2019, the rate of interest on the revolver was 3.78% per annum and the rate of interest on the term loan was 4.4% 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.
 
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.
 
As of October 31, 2019, the Company had no borrowings outstanding on the letter of credit sub-facility, no borrowings outstanding under the revolving credit facility, and $1.2 million outstanding on the term loan.
 
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” is waived for the fiscal quarters ending April 30, 2019, July 31, 2019 and October 31, 2019 and testing of the “fixed charge coverage ratio” will commence again for the fiscal quarter ending January 31, 2020. Pursuant to the Waiver, the Company has 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.
 
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 30, 2018 for the next review period and, as of March 9, 2019 the facility was extended to mature on March 30, 2020 with no additional changes to the terms. The balance under this loan outstanding at October 31, 2019 and January 31, 2019 was USD $0.5 million and USD $0.0 million, respectively, and is included in other accrued expenses on the accompanying unaudited condensed consolidated balance sheets. The amount of $0.4 million due from HSBC as of January 31, 2019 is included in Other Current Assets on the accompanying unaudited condensed consolidated balance sheet.
 
 
18
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Below is a table to summarize the debt amounts above (in 000’s):
 
 
 
Short-Term
 
 
Long-term
 
 
Current Maturity of
Long-term
 
 
 
October 31,
 
 
January 31,
 
 
October 31,
 
 
January 31,
 
 
October 31,
 
   
 
   
 
2019
 
 
2019
 
 
2019
 
 
2019
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
USA
 $1,194 
 $----- 
 $----- 
 $1,161 
 $----- 
 $158 
UK
 $494 
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
Totals
 $1,688 
 $----- 
 $----- 
 $1,161 
 $----- 
 $158 
 
Five-year Debt Payout Schedule
This schedule reflects the liabilities as of October 31, 2019, 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 USA
 $1,194 
 $1,194 
 $----- 
 $----- 
 $----- 
 $----- 
 $----- 
Borrowing in the UK
  494 
  494 
  ----- 
  ----- 
  ----- 
  ----- 
  ----- 
Total
 $1,688 
 $1,688 
 $----- 
 $----- 
 $----- 
 $----- 
 $----- 
 
7.
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 is approximately $1.3 million total included in the US bank accounts and approximately $8.2 million total in foreign bank accounts as of October 31, 2019.
 
 
 
19
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Major Customer
No customer accounted for more than 10% of net sales during the three and nine month periods ended October 31, 2019 and 2018.
 
Major Supplier
No supplier accounted for more than 10% of purchases during the three and nine month periods ended October 31, 2019 and 2018.
 
8.
Stockholders’ Equity
The 2017 Stock 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 grants are made by the full Board. The 2017 Plan provides for the grant of equity-based compensation in the form of stock options, restricted stock, restricted stock units, performance shares, performance units, or stock appreciation rights (“SARS”).
 
The Committee has the authority to determine the type of award, as well as the amount, terms and conditions of each award, under the 2017 Plan, subject to the limitations and other provisions of the 2017 Plan. An aggregate of 360,000 shares of the Company’s common stock are authorized for issuance under the 2017 Plan, subject to adjustment as provided in the 2017 Plan for stock splits, dividends, distributions, recapitalizations and other similar transactions or events. If any shares subject to an award are forfeited, expire, lapse or otherwise terminate without issuance of such shares, such shares shall, to the extent of such forfeiture, expiration, lapse or termination, again be available for issuance under the 2017 Plan. The following table summarizes the unvested shares granted on September 12, 2017 and June 7, 2018, which have been made under the 2017 Plan.
 
 
 
Number of shares awarded total
 
 
 
Minimum
 
 
Target
 
 
Maximum
 
 
Cap
 
Employees
  35,863 
  53,796 
  71,728 
  86,125 
Non-employee Directors
  14,414 
  21,622 
  28,829 
  34,595 
Total
  50,277 
  75,418 
  100,557 
  120,720 
 
 
 
Value at grant date (numbers below are rounded to the nearest $100)
 
 
 
Minimum
 
 
Target
 
 
Maximum
 
 
Cap
 
Employees
 $497,600 
 $746,400 
 $995,200 
 $1,194,900 
Non-employee Directors
  200,000 
  300,000 
  400,000 
  480,000 
Total
 $697,600 
 $1,046,400 
 $1,395,200 
 $1,674,900 
 
 
20
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
The actual number of shares of common stock of the Company, if any, to be earned by the award recipients is determined over a full three fiscal year performance period commencing on February 1, 2017 and ending on January 31, 2020, in the case of the 2017 grants, and commencing on February 1, 2018 and ending on January 31, 2021, in the case of the 2018 grants, based on the level of earnings before interest, taxes, depreciation and amortization (“EBITDA”) achieved by the Company over this period. The EBITDA targets have been set for each of the Minimum, Target, Maximum and Cap levels, at higher amounts for each of the higher levels. The actual EBITDA amount achieved is determined by the Committee and may be adjusted for items determined to be unusual in nature or infrequent in occurrence, which items may include, without limitation, the charges or costs associated with restructurings of the Company or any subsidiary, discontinued operations, and the cumulative effects of accounting changes.
 
The Company recognizes expense related to performance-based restricted share awards over the requisite performance period using the straight-line attribution method based on the most probable outcome (Minimum, Target, Maximum, Cap or Zero) at the end of the performance period and the price of the Company’s common stock price at the date of grant. The Company began recognizing expense, except as set forth below, related to awards under the 2017 Plan at Maximum award level, including SARS. During the period ended October 31, 2019, the Company revised its estimate of the 2017 and 2018 grants that will be earned for the designated performance period.  Based on actual EBITDA achieved by the Company to date, it was deemed improbable that such performance would meet even the Minimum level required for such grants to vest, including SARS. As a result, stock-based compensation expense was adjusted to account for the change in estimate.  The total amount of previously recognized stock-based compensation attributable to the 2017 and 2018 grants that has been reversed is approximately $835,000, of which approximately $25,000 related to the SARS.

 
The Company recognized total stock-based compensation costs, net of the above change in estimate, which are reflected in operating expenses (in 000's):
 
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
October 31,
 
 
October 31
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
2017 Plan
 $(345)
 $189 
 $(596)
 $491 
Total stock-based compensation
 $(345)
 $189 
 $(596)
 $491 
 
Shares issued under
2017 Stock Plan
 
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
 
Restricted stock grants – employees
  84,126 
  ----- 
  ----- 
  12,397 
  71,729 
Restricted stock grants – non-employee directors
  28,829 
  ----- 
  ----- 
  ----- 
  28,829 
Retainer in stock – non-employee directors
  25,044 
  7,292 
  2,675 
  ----- 
  29,661 
  Total restricted stock
  137,999 
  7,292 
  2,675 
  12,397 
  130,219 
 
    
    
    
    
    
Weighted average grant date fair value
 $13.77 
 $11.63 
 $15.85 
 $13.87 
 $13.66 
 
 
21
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Other Compensation Plans/Programs
Pursuant to the Company’s restrictive stock program, all directors are eligible to elect to receive any director fees in shares of restricted stock in lieu of cash. Such restricted shares are subject to a two-year vesting period. The valuation is based on the stock price at the grant date and is amortized to expense over the two-year period, which approximates the performance period. Since the director is giving up cash for unvested shares, and is subject to a vesting requirement, the amount of shares awarded is 133% of the cash amount based on the grant date stock price. As of October 31, 2019, unrecognized stock-based compensation expense related to these restricted stock awards totaled $41,766 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 October 31, 2019, the Company granted awards for up to an aggregate of 32,336 shares from the 2017 Plan.
 
Stock Options
During the third quarter ending October 31, 2019 a stock option was granted pursuant to the Company’s 2017 Equity Incentive Plan in the amount of 24,900 shares at a a weighted-average 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 third quarter of FY20.
 
 
Stock Options
 
Number of Shares
 
 
Weighted Average Exercise Price per Share
 
 
Weighted Average Remaining Contractual Term (in years)
 
 
Aggregate Intrinsic Value
 
Outstanding at July 31, 2019
  ----- 
 $----- 
  ----- 
 $----- 
Granted during the quarter ended October 31, 2019
  24,900 
 $11.17 
  ----- 
  ----- 
Outstanding at October 31, 2019
  24,900 
 $11.17 
  9.79 
  ----- 
Exercisable at October 31, 2019
  ----- 
 $----- 
  ----- 
 $----- 
 
The Company recognized approximately $13,000 of stock-based compensation expense during the three and nine months ended October 31, 2019 associated with the grant of the stock option. As of October 31, 2019 there is approixmatley $162,000 of unrecognized stock-based compensation expense, to be expensed over approximately three years.
 
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 period ended October 31, 2019 are as follows:
 
 
 
FY20
 
 
 
 
 
Expected volatility
  53%
Expected life in years
  10 
Expected dividend yield
  0.00%
Risk-free interest rate
  1.65%

Stock Repurchase Program
On July 19, 2016, the Company’s board of directors approved a stock repurchase program under which the Company may repurchase up to $2,500,000 of its outstanding common stock. The Company has repurchased 114,848 shares of stock under this program as of the date of this filing which amounted to $1,261,656, inclusive of commissions. During the three month period ended October 31, 2019 the Company repurchased zero shares. At October 31, 2019, the dollar value of remaining shares that may by repurchased under the share repurchase program was $1,238,344.
 
 
22
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Warrant
In October 2014, the Company issued a five-year warrant that was immediately exercisable to purchase up to 55,500 shares of the Company’s common stock at an exercise price of $11.00 per share. As of October 31, 2019, such warrant has expired.
 
Authorized Shares
On June 27, 2018, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to the Company’s Restated Certificate of Incorporation, increasing the number of authorized shares from 11,500,000 to 21,500,000, of which 20,000,000 shares are of the Company’s common stock and 1,500,000 shares are of the Company’s preferred stock. The Certificate of Amendment was deemed effective as of June 25, 2018. The increase effected solely the number of authorized shares of common stock.
 
9.
Income Taxes
Deferred Taxes and Valuation Allowance
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. The valuation allowance was $1.3 million at October 31, 2019 and January 31, 2019. The valuation allowance stayed the same for the three and nine months ended October 31, 2019 and 2018, respectively.
 
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 $0.3 million and $0.6 million for the three and nine months ended October 31, 2019, respectively. 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
 
Income Tax Expense
Income tax expenses consists of federal, state and foreign income taxes. Items impacting the effective rate are foreign income subject to US tax (including Tax Reform impacts), tax rates in foreign jurisdictions, US state income taxes, timing differences for tax deductions for restricted stock vesting, company borrowing structures, and other permanent tax differences.
 
 
23
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
10.
Earnings Per Share
 
The following table sets forth the computation of basic and diluted earnings per share at October 31, 2019 and 2018 as follows:
 
 
 Three Months Ended
October 31,
 
 Nine Months Ended
October 31,
 
 
 (in $000s except share and per share information)
 
 2019 
 2018 
 2019 
 2018 
Numerator:
   
   
   
   
Net income
 $1,146 
 $501 
 $2,076 
 $3,386 
Denominator:
    
    
    
    
Denominator for basic earnings per share (weighted-average shares which reflect shares in the treasury, 471,289 and 356,441 for October 31, 2019 and 2018, respectively)
  8,004,640 
  8,119,448 
  8,013,383 
  8,117,307 
Effect of dilutive securities from restricted stock plan and from dilutive effect of warrants
  31,289 
  66,682 
  30,776 
  57,253 
Denominator for diluted earnings per share (adjusted weighted average shares)
  8,035,929 
  8,186,130 
  8,044,159 
  8,174,560 
Basic earnings per share
 $0.14 
 $0.06 
 $0.26 
 $0.42 
Diluted earnings per share
 $0.14 
 $0.06 
 $0.26 
 $0.41 
Warrants, restricted stock, and stock options excluded from the computation of diluted earnings per share because the effect of inclusion would have been anti-dilutive
  125,457
 
    
    
    
 
11.
Contingencies
 
Labor and other contingencies 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 (“Lakeland Brazil”). While the vast majority of these labor suits have been resolved, there are two (2) labor cases that remain active, and in which Lakeland was named as a co-defendant.
 
The first case was filed against Lakeland by a former officer of Lakeland Brazil, 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 appealed within the Labor Court system, which was dismissed by the Labor Court of Appeal on November 27, 2019. The claimant may still further appeal to the Superior Labor Court.
 
The second case was filed by a former Lakeland Brazil manager, in 2014, was ruled upon in Labor Court and awarded the claimant USD $100,000. Lakeland was removed by the court from the case in February 2017 and no appeals were filed in respect to such removal. Both the claimant and Lakeland Brazil have appealed the award and The Labor Court of Appeal has ruled in favor of Lakeland Brazil to annul the first decision and re-open the case. The claimant has appealed from the latter decision to the Superior Labor Court, which is yet to rule on the matter.
 
A former officer of Lakeland Brazil also filed a civil claim seeking approximately USD $700,000 that he alleges is due to him against an unpaid promissory note. While Lakeland may be sought as a party, 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.
 
 
24
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
Lakeland Brazil may face new labor lawsuits in the short term as a result of the recent commencement of the winding down of its operations in our first quarter. In order to mitigate this risk, the management of Lakeland Brazil has been proposing settlement agreements to employees dismissed due to the winding down and to the extent possible seeking confirmation of Labor Courts. The Company has no obligation under the 2015 Shares Transfer Agreement pursuant to which Agreement, the Company eliminated its interest in Lakeland Brazil to make any additional payments in connection with these potential new labor lawsuits. The Company also understands that under the labor laws of Brazil, a parent company may be held liable for the labor liabilities of a former Brazilian subsidiary in the case of fraud, misconduct, or under various theories.
 
Although the Company would have the right of adversary system, full defense and due process in case of a potential litigation, there can be no assurance as to the findings of the courts of Brazil. 
  
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 litigation reserves associated with labor claims in Brazil. During the nine months ending October 31, 2019 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 October 31, 2019 and January 31, 2019 is $0.2 million and $1.2 million, respectively.
 
Other 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 October 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.
 
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 arrangement. The severance amount will be paid through June 5, 2020 pursuant to the terms of the separation agreement.
 
12.
Segment Reporting
 
 
 
Three Months Ended
October 31,
 
 
Nine Months Ended
 
 
   
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 $14.16 
  51.56%
 $11.82 
  49.24%
 $41.47 
  52.08%
 $37.54 
  50.75%
International
  13.30 
  48.44%
  12.19 
  50.76%
  38.15 
  47.92%
  36.43 
  49.25%
Total
 $27.46 
  100.00%
 $24.01 
  100.00%
 $79.62 
  100.00%
 $73.97 
  100.00%
 
Domestic and international sales from continuing operations are as follows in millions of dollars:
 
The Company manages its operations by evaluating each of its geographic locations. The US operations include a facility in Alabama (primary US distribution facility and 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 products), a manufacturing facility in Argentina and a small manufacturing facility in India. The China facilities produce the majority of the Company’s products and China generates a significant portion of the Company’s international revenues. The Company evaluates the performance of these entities based on operating profit, which is defined as income before income taxes, interest expense and other income and expenses. The Company maintains sales forces in North America South America, Europe, and Asia, which sell and distribute products shipped from the United States, Mexico, Argentina, China, India or Vietnam.
 
 
25
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
The table below represents information about reported segments for the years noted therein:
 
 
 
Three Months Ended
October 31,
(in millions of dollars)
 
 
Nine Months Ended
October 31,
(in millions of dollars)
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
 
USA
 $15.84 
 $13.00 
 $45.36 
 $41.07 
Other foreign
  1.65 
  1.29 
  4.81 
  4.33 
Europe (UK)
  2.38 
  2.22 
  7.24 
  7.35 
Mexico
  1.22 
  1.15 
  3.09 
  3.83 
Asia
  13.34 
  12.68 
  43.97 
  40.27 
Canada
  2.60 
  2.08 
  7.50 
  6.39 
Latin America
  2.01 
  1.74 
  6.45 
  5.27 
Corporate
  ----- 
  ----- 
  ----- 
  0.75 
Less intersegment sales
  (11.58)
  (10.15)
  (38.80)
  (35.29)
Consolidated sales
 $27.46 
 $24.01 
 $79.62 
 $73.97 
External Sales:
    
    
    
    
USA
 $14.16 
 $11.82 
 $41.47 
 $37.54 
Other foreign
  0.91 
  0.72 
  2.61 
  2.30 
Europe (UK)
  2.38 
  2.22 
  7.24 
  7.35 
Mexico
  0.88 
  0.77 
  2.08 
  2.70 
Asia
  4.62 
  4.80 
  12.49 
  12.79 
Canada
  2.60 
  2.08 
  7.47 
  6.38 
Latin America
  1.91 
  1.60 
  6.26 
  4.91 
Consolidated external sales
 $27.46 
 $24.01 
 $79.62 
 $73.97 
Intersegment Sales:
    
    
    
    
USA
 $1.68 
 $1.18 
 $3.89 
 $3.53 
Other foreign
  0.74 
  0.57 
  2.20 
  2.02 
Mexico
  0.34 
  0.38 
  1.01 
  1.13 
Asia
  8.71 
  7.88 
  31.48 
  27.49 
Canada
  ----- 
  ----- 
  0.03 
  0.02 
Latin America
  0.11 
  0.14 
  0.19 
  0.35 
Corporate
  ----- 
  ----- 
  ----- 
  0.75 
Consolidated intersegment sales
 $11.58 
 $10.15 
 $38.80 
 $35.29 
 
 
26
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
 
 
Three Months Ended
October 31,
(in millions of dollars)
 
 
Nine Months Ended
October 31,
(in millions of dollars)
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Operating Profit :
 
 
 
 
 
 
 
 
 
 
 
 
USA
 $2.60 
 $1.66 
 $6.04 
 $6.45 
Other foreign
  0.14 
  0.02 
  0.30 
  0.23 
Europe (UK)
  0.02 
  0.03 
  (0.02)
  0.21 
Mexico
  0.02 
  (0.03)
  (0.39)
  0.13 
Asia
  1.04 
  0.63 
  2.87 
  1.81 
Canada
  0.25 
  0.32 
  0.77 
  0.75 
Latin America
  0.21 
  0.16 
  0.81 
  0.52 
Corporate
  (2.46)
  (1.61)
  (6.33)
  (4.96)
Less intersegment profit
  0.01 
  (0.17)
  0.11 
  (0.06)
Consolidated operating profit
 $1.83 
 $1.01 
 $4.16 
 $5.08 
Depreciation and Amortization Expense:
    
    
    
    
USA
 $0.04 
 $0.03 
 $0.21 
 $0.09 
Other foreign
  ----- 
  ----- 
  0.02 
  0.02 
Europe (UK)
  ----- 
  ----- 
  ----- 
  0.01 
Mexico
  0.04 
  0.03 
  0.12 
  0.09 
Asia
  0.14 
  0.04 
  0.40 
  0.19 
Canada
  0.03 
  0.02 
  0.08 
  0.05 
Latin America
  0.01 
  0.01 
  0.03 
  0.03 
Corporate
  0.18 
  0.09 
  0.43 
  0.19 
Less intersegment
  (0.01)
  ----- 
  (0.02)
  (0.03)
Consolidated depreciation & amortization expense
 $0.43 
 $0.22 
 $1.27 
 $0.64 
Interest Expense:
    
    
    
    
Europe (UK)
 $----- 
 $----- 
 $0.01 
 $---- 
Latin America
  0.01 
  0.01 
  0.04 
  0.03 
Corporate
  0.02 
  0.02 
  0.05 
  0.06 
Consolidated interest expense
 $0.03 
 $0.03 
 $0.10 
 $0.09 
Income Tax Expense:
    
    
    
    
   Europe (UK)
 $0.01 
 $0.01 
 $0.01 
  0.05 
   Asia
  0.16 
  0.29 
  0.67 
  0.80 
   Canada
  0.10 
  0.02 
  0.32 
  0.17 
   Latin America
  ----- 
  0.15 
  0.13 
  0.21 
   Corporate
  0.38 
  0.05 
  0.81 
  0.39 
   Less intersegment
  ----- 
  (0.03)
  0.01 
  0.01 
Consolidated income tax expense
 $0.65 
 $0.49 
 $1.95 
 $1.63 
Capital Expenditures:
    
    
    
    
USA (including Corporate)
 $(0.04)
 $0.54 
 $0.28 
 $0.85 
Other foreign
  0.01 
  0.36 
  0.02 
  1.13 
Mexico
  0.02 
  0.09 
  0.07 
  0.20 
Asia
  0.12 
  0.02 
  0.31 
  0.05 
Latin America
  ----- 
  ----- 
  0.01 
  ----- 
Consolidated capital expenditure
 $0.11 
 $1.01 
 $0.69 
 $2.23 
 
    
    
    
    
 
 
27
Lakeland Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
 
 
(in millions of dollars)
 
 
(in millions of dollars)
 
Total Assets
 
 
 
 
 
 
USA
 $31.05 
 $29.76 
Other foreign
  3.57 
  2.85 
Europe (UK)
  5.13 
  4.36 
Mexico
  5.45 
  5.13 
Asia
  23.31 
  20.97 
Canada
  6.00 
  6.64 
Latin America
  5.46 
  5.27 
    Corporate
  19.13 
  19.74 
      Consolidated assets
 $99.10 
 $94.72 
Property and Equipment
    
    
USA (including Corporate)
 $3.55 
 $3.87 
Other foreign
  0.17 
  0.19 
Europe (UK)
  ----- 
  0.01 
Mexico
  2.10 
  2.14 
Asia
  3.10 
  3.17 
Canada
  1.18 
  1.26 
Latin America
  0.05 
  0.07 
Less intersegment
  0.08 
  0.07 
Consolidated property and equipment
 $10.23 
 $10.78 
Goodwill:
    
    
USA
 $0.87 
 $0.87 
Consolidated goodwill
 $0.87 
 $0.87 
 
 
28

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Form 10-Q 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. See “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS” at the beginning of Part I, Item 1.
 
Overview
We 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 approximately 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, heavy and light industry, 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 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 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.
 
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. Our facilities and capabilities outside the United States allow access to a less expensive labor pool than is available in the United States and permit us to purchase certain raw materials at a lower cost than they are available domestically. More recently we have initiated startup manufacturing operations in Vietnam and India to offset increasing manufacturing costs in China. This shift in manufacturing, and the redundant manufacturing capability it provides, also serves to insulate the company from the cost implications of bilateral trade disputes. Our China operations will continue to manufacture primarily for the Chinese market and other markets where duty advantages exist. Manufacturing expansion is not only necessary to control rising costs, it is also necessary for Lakeland to achieve its growth objectives. Our net sales attributable to customers outside the United States were $13.3 million and $12.2 million for the three months ended October 31, 2019 and 2018, respectively, and $38.2 and $36.4 for the nine months ended October 31, 2019 and 2018, respectively.
 
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and disclosure of contingent assets and liabilities. We base our estimates on the past experience and on various other assumptions that we believe to be reasonable under the circumstances, and we periodically evaluate these estimates.
 
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements.
 
Revenue Recognition. Substantially all of 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 three months ended October 31, 2019 and 2018 aggregated approximately $0.9 million and $0.6 million, respectively, and $2.5 million and $2.1 million for the nine months ended October 31, 2019 and 2018, respectively. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue.
 
 
29

 
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:

 
 
Three Months Ended
October 31,
(in millions of dollars)
 
 
Nine Months Ended
October 31,
(in millions of dollars)
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
External Sales by geographic region:
 
 
 
 
 
 
 
 
 
 
 
 
USA
 $14.16 
 $11.82 
 $41.47 
 $37.54 
Other foreign
  0.91 
  0.72 
  2.61 
  2.30 
Europe (UK)
  2.38 
  2.22 
  7.24 
  7.35 
Mexico
  0.88 
  0.77 
  2.08 
  2.70 
Asia
  4.62 
  4.80 
  12.49 
  12.79 
Canada
  2.60 
  2.08 
  7.47 
  6.38 
Latin America
  1.91 
  1.60 
  6.26 
  4.91 
Consolidated external sales
 $27.46 
 $24.01 
 $79.62 
 $73.97 
 
 
 
Three Months Ended
October 31,
(in millions of dollars)
 
 
Nine Months Ended
October 31,
(in millions of dollars)
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
External Sales by product lines:
 
 
 
 
 
 
 
 
 
 
 
 
Disposables
 $12.52 
 $12.74 
 $39.19 
 $40.88 
Chemical
  5.68 
  4.74 
  16.30 
  12.42 
Fire
  2.81 
  1.02 
  6.64 
  3.57 
Gloves
  0.74 
  0.77 
  2.33 
  2.30 
Hi-Vis
  2.20 
  1.83 
  6.04 
  5.46 
Wovens
  3.51 
  2.91 
  9.12 
  9.34 
Consolidated external sales
 $27.46 
 $24.01 
 $79.62 
 $73.97 
 
 
30

 
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 below at the date of the unaudited condensed 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.
 
Impairment of Long-Lived Assets. The Company evaluates the carrying value of long-lived assets to be held and used when events or changes in circumstances indicate the carrying value may not be recoverable. The Company measures any potential impairment on a projected undiscounted cash flow method. Estimating future cash flows requires the Company’s management to make projections that can differ materially from actual results. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from the asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset.
 
Income Taxes. The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing the unaudited condensed consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss carryforwards and tax credits, are recorded as deferred tax assets or liabilities on the Company’s unaudited condensed consolidated balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event the Company determines that it may not be able to realize all or part of its deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to income in the period of such determination.
 
The Company recognizes tax positions that meet a “more likely than not” minimum recognition threshold. If necessary, the Company recognizes interest and penalties associated with tax matters as part of the income tax provision and would include accrued interest and penalties with the related tax liability in the unaudited condensed consolidated balance sheets. The Company does not have any uncertain tax positions at October 31, 2019 or January 31, 2019.
 
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.
 
 
31

 
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.
  
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.
 
Recent Accounting Pronouncements
See Note 3 in the unaudited condensed consolidated financial statements for management’s periodic review of new accounting standards that were issued.
 
Significant Balance Sheet Fluctuation October 31, 2019, As Compared to January 31, 2019
 
Balance Sheet Accounts. Cash decreased by $3.4 million, primarily as a result of a net increase in other working capital elements. Accounts receivable increased $0.9 million and inventory increased by $5.4 million in the nine months ended October 31, 2019. The increase in accounts receivable was due to the increases in sales for the three months ended October 31, 2019. The increase in inventory was due to the scale up of our Vietnam operations; increased raw materials and finished goods (“FG”); to catch up on remaining Gloves, Fire, and High Visability orders delayed due to our ERP installation and increases in raw materials and FG required to ramp up product of our new, high value utilities product line at a major distributor. Accounts payable, accrued compensation, and other accrued expenses increased $1.0 million due to increased compensation accruals primarily due to timing of pay dates and severance and an increase in borrowing in the UK.
 
Three Months ended October 31, 2019, As Compared to the Three Months Ended October 31, 2018
 
Net Sales. Net sales increased to $27.5 million for the three months ended October 31, 2019 compared to $24.0 million for the three months ended October 31, 2018, an increase of 14.4%. Sales in the US were up $2.3 million or 19.5% primarily due to improved customer deliveries enabling us to reduce high order backlogs. No other region had a material change during the period.
 
Gross Profit. Gross profit increased $1.0 million, or 11.8%, to $9.3 million for the three months ended October 31, 2019, from $8.3 million for the three months ended October 31, 2018. Gross profit as a percentage of net sales decreased to 33.9% for the three-month period ended October 31, 2019, from 34.6% for the three months ended October 31, 2018. Major factors impacting gross margins were:
 
Pricing promotions in Asia in the quarter.
 
Manufacturing curtailments to reduce inventory levels.
 
 
32

 
Operating expenses. Operating expenses increased 2.2% from $7.3 million for the three months ended October 31, 2018 to $7.5 million for the three months ended October 31, 2019. Operating expenses as a percentage of net sales was 27.1% for the three months ended October 31, 2019, down from 30.4% for the three months ended October 31, 2018. Operating expenses in the quarter included increases in outgoing freight, compensation (including severance), marketing, depreciation, and bad debt expenses, offset by decreases in stock-based compensation due to a change in estimate.
 
Operating Profit. Operating profit increased to $1.8 million for the three months ended October 31, 2019 as compared to $1.0 million for the three months ended October 31, 2018, due to the impacts detailed above. In connection with the 2018 restricted stock grants, stock-based compensation expense was reversed in an amount of $359,000 as a result of a change in estimate in the number of shares expected to be earned under the performance plan.
 
Interest Expense. Interest expense was $0.03 million for the three months ended October 31, 2019, the same as the three months ended October 31, 2018 as a result of very little borrowings during each period.
 
Income Tax Expense.  Income tax expense consists of federal, state and foreign income taxes. Income tax expense was $0.7 million for the three months ended October 31, 2019, as compared to $0.5 million for the three months ended October 31, 2018. The increase is due to the increased provision of $0.3 million due to the re-measurement and reassessment of the GILTI tax.
 
Net Income.  Net Income was $1.1 million for the three months ended October 31, 2019 compared to net income of $0.5 million for the three months ended October 31, 2018.
 
Nine Months ended October 31, 2019, As Compared to the Nine Months Ended October 31, 2018
 
Net Sales. Net sales increased to $79.6 million for the nine months ended October 31, 2019 as compared to $74.0 million for the nine months ended October 31, 2018, an increase of 7.6%. Sales in the US were up $3.9 million or 10.5% primarily due to improved customer deliveries enabling us to reduce high order backlogs carried over from the fourth quarter of fiscal 2019. No other region had a material change during the period.
 
Gross Profit. Gross profit increased $0.3 million, or 1.1%, to $27.3 million for the nine months ended October 31, 2019, from $27.0 million for the nine months ended October 31, 2018. Gross profit as a percentage of net sales decreased to 34.3% for the nine-month period ended October 31, 2019, from 36.5% for the nine months ended October 31, 2018. Gross profits for the nine months ended October 31, 2019 were adversely effected by inefficiencies in the first three months of the period due to the Company’s recent conversion to an ERP software system. Those inefficiencies resulted in increased freight and labor expenses required to expedite shipments of materials and customer orders. While many of these issues with the system implementation have been resolved and the Company began to realize the resulting benefits in the last part of the period, remediation activities are continuing and we expect such adverse effects to continue lessening, and ultimately yield improved financial performance. Gross profit was also reduced due to pricing promotions in the Asia market.
 
Operating expenses. Operating expenses increased 5.5% to $23.1 million for the nine months ended October 31, 2019 from $21.9 million for the nine months ended October 31, 2018. Operating expenses as a percentage of net sales was 29.0% for the nine months ended October 31, 2019 down from 29.6% for the nine months ended October 31, 2018. Factors contributing to the increase in operating expenses are increases in freight out, marketing, legal fees, compensation (including severance), and depreciation offset by a decrease in stock-based compensation and currency fluctuations. In connection with the 2017 and 2018 restricted stock grants, stock-based compensation expense was reversed in an amount of $835,000 as a result of a change in estimate in the number of shares expected to be earned under the performance plan.
 
 
33

 
Operating Profit . Operating profit decreased to $4.2 million for the nine months ended October 31, 2019 from of $5.1 million for the nine months ended October 31, 2018, due to the impacts detailed above. Operating margins were 5.2% for the nine months ended October 31, 2019, as compared to 6.9% for the nine months ended October 31, 2018.
 
Interest Expense. Interest expense was $0.1 million for the nine months ended October 31, 2019, the same as the nine months ended October 31, 2018 as a result of very little borrowings for each quarter
 
Income Tax Expense.  Income tax expense consists of federal, state and foreign income taxes. Income tax expense was $2.0 million for the nine months ended October 31, 2019, as compared to $1.6 million for the nine months ended October 31, 2018. The increase is due to the increased provision of $0.6 million due to the re-measurement and reassessment of the GILTI tax.
 
Net Income.  Net income was $2.0 million for the nine months ended October 31, 2019 compared to net income of $3.4 million for the nine months ended October 31, 2018. The results for nine months ended October 31, 2019 are primarily due to a reduction in gross profit and an increase in operating expenses. See “Significant Balance Sheet Fluctuations October 31, 2019, as compared to January 31, 2019 above.
 
Liquidity and Capital Resources
 
As of October 31, 2019, we had cash and cash equivalents of approximately $9.5 million and working capital of approximately $66.0 million. Cash and cash equivalents decreased $3.4 million and working capital increased approximately $0.9 million from January 31, 2019. As a result of the new lease standard, working capital decreased by approximately $0.3 million as a result of the recognition of the current portion of the operating lease liability as of October 31, 2019
 
Of the Company’s total cash and cash equivalents of $9.5 million as of October 31, 2019, cash held in the US of $1.3, cash held in Latin America of $0.8 million, cash held in Russia and Kazakhstan of $0.5 million, cash held in the UK of $0.1 million, cash held in India of $0.1 million, cash held in Mexico of $0.8 million, cash held in Vietnam of $0.5 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 $4.6 million balance at October 31, 2019 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. There were no dividends declared in the nine months ended October 31, 2019.
 
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).
 
Net cash used in operating activities of $2.8 million for the nine months ended October 31, 2019 was primarily due to non-cash expenses of $1.3 million for depreciation and amortization, an increase in accounts receivable of $1.3 million, an increase in inventory of $5.6 million offset by an increase in accounts payable and accrued expenses of $0.7 million. Net cash used in investing activities of $0.7 million for the nine months ended October 31, 2019 reflects purchases of property and equipment. Net cash provided by financing activities was $0.3 million for the nine months ended October 31, 2019 and was primarily due to net borrowings of $0.4 million offset by $0.1 million of Treasury Stock purchases.
 
 
34

 
Stock Repurchase Program. On October 19, 2016, the Company’s board of directors approved a stock repurchase program under which the Company may repurchase up to $2,500,000 of its outstanding common stock. The Company has repurchased 114,848 shares under this program as of the date of this filing. There were no shares repurchased during the nine months period ended October 31, 2019. At October 31, 2019, the dollar value of remaining shares that may by repurchased under the share repurchase program was $1,238,344
 
Capital Expenditures. Our capital expenditures in the first nine months of FY20 of $0.7 million is principally relate to planned equipment purchases in Mexico, China and the U.S. We anticipate FY20 capital expenditures to be approximately $1.2 million as we work to fully implement the ERP project currently in process and continue to expand our manufacturing capacity in our Vietnam and India operations.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
 
Item 4. 
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive officer and principal financial officer, with assistance from other members of management. We have reviewed for the effectiveness of our disclosure controls and procedures as of October 31, 2019 and, based on our evaluation, we have concluded the disclosure controls and procedures were not effective as of that date due to material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2019.
 
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the third quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Remediation
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2019, we began implementing a remediation plan to address the material weaknesses mentioned above. The weaknesses will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of these material weaknesses will be completed prior to the end of fiscal 2020.
 
 
35

 
 
PART II. OTHER INFORMATION
 
Items 1, 1A, 3, 4 and 5 are not applicable
 
Item 6. 
Exhibits:
 
Exhibits:* Filed herewith
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
Certification of Chief Executive Officer as adopted pursuant to Rule 13a-14(a) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer as adopted pursuant to 18 U.S.C. Section 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Definitions Document
101.DEF
XBRL Taxonomy Extension Labels Document
101.LAB
XBRL Taxonomy Extension Labels Document
101.PRE
XBRL Taxonomy Extension Presentations Document
 
 
 
 
 
 
 
 
36

 
 
SIGNATURES
 
 
Pursuant to the requirements 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.
(Registrant)
 
 
 
 
 
Christopher J. Ryan,
Chief Executive Officer, President and Secretary (Principal Executive Officer and Authorized Signatory)
 
 
 
 
 
Allen E. Dillard,
(Principal Financial Officer and Authorized Signatory)
 
 
 
 
 
37

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
8/12/22
8/12/21
1/31/21
8/12/20
6/5/20
5/10/20
3/30/20
1/31/2010-K,  4
12/31/19
12/15/19
Filed on:12/9/194,  8-K
12/6/19
11/27/19
For Period end:10/31/194
7/31/1910-Q,  4,  SC 13G/A
7/22/19
6/14/19
6/7/19
5/31/19
4/30/1910-Q,  4
3/9/19
2/1/19
1/31/1910-K,  4
12/15/18
10/31/1810-Q,  4,  8-K,  NT 10-Q
7/31/1810-Q,  4
6/27/188-K
6/25/18
6/7/18
3/30/18
2/1/184
1/31/1810-K,  4
1/1/18
12/22/17
12/19/17
12/4/17
10/31/1710-Q,  4
9/12/17
6/21/178-K,  DEF 14A
6/1/17
5/10/178-K
2/1/17
1/1/17
12/31/16
12/19/16
10/19/16
7/19/168-K
12/31/14
12/5/14
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