LAKELAND INDUSTRIES INC - Quarter Report: 2020 October (Form 10-Q)

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, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _______________ to _______________

COMMISSION FILE NUMBER: 0-15535

LAKELAND INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

Delaware		13-3115216
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

202 Pride Lane SW, Decatur, AL		35603
(Address of Principal Executive Offices)		(Zip Code)

(Registrant’s telephone number, including area code) (256) 350-3873

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	LAKE	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 definitions 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	☒
Nonaccelerated 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 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 registrant’s classes of common stock, as of the latest practicable date.

Class		Outstanding at December 8, 2020
Common Stock, $0.01 par value per share		8,019,980 Shares

LAKELAND INDUSTRIES, INC.

AND SUBSIDIARIES

FORM 10-Q

The following information of the Registrant and its subsidiaries is submitted herewith:

		Page
PART I - FINANCIAL INFORMATION:

Item 1.	Financial Statements (Unaudited)	3

	Introduction	3

	Condensed Consolidated Statements of Income Three and Nine Months Ended October 31, 2020 and 2019	5

	Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended October 31, 2020 and 2019	6

	Condensed Consolidated Balance Sheets October 31, 2020 and January 31, 2020	7

	Condensed Consolidated Statements of Stockholders’ Equity Three and Nine Months Ended October 31, 2020 and 2019	8

	Condensed Consolidated Statements of Cash Flows Nine Months Ended October 31, 2020 and 2019	9

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitiative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

PART II - OTHER INFORMATION:

Item 6.	Exhibits	36

	Signature Pages	37

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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:

	·	we are subject to risk as a result of our international manufacturing operations;
	·	a terrorism attack, other geopolitical crisis, or widespread outbreak of an illness or other health issue, such as the COVID 19 Coronavirus outbreak, could negatively impact our domestic and/or international operations;
	·	the COVID 19 pandemic poses a threat to manufacturing capacity and could temporarily disrupt operations at our facilities;
	·	as a result of the COVID 19 pandemic, a recession may result which would negatively affect our results of operations;
	·	sales and operating profits for the nine month period ended October 31, 2020 were positively affected by COVID 19 related demand; upon diminishment of this pandemic, we will no longer experience this effect;
	·	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 in the future have, an adverse effect on operating results;
	·	in fiscal 2020, we identified a material weakness in our internal controls over financial reporting; if we continue to fail maintaining proper and effective internal controls or are unable to remediate a material weakness in our internal controls, our ability to produce accurate and timely financial statements could be impaired, and investors’ views of us could be harmed;
	·	we have manufacturing and other operations in China which may be adversely affected by tariff wars and other trade maneuvers;
	·	we may be adversely affected by the withdrawal of the United Kingdom from the European Union;

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	·	our results of operations may vary widely from quarter to quarter;
	·	some of our sales are to foreign buyers, which exposes us to additional risks;
	·	we deal in countries where corruption is an obstacle;
	·	we are exposed to tax expense risks;
	·	covenants in our credit facilities may restrict our financial and operating flexibility;
	·	because we do not have long-term commitments from many of our customers, we must estimate customer demand, and errors in our estimates could negatively impact our inventory levels and net sales;
	·	we face competition from other companies, a number of which have substantially greater resources than we do;
	·	our operations are substantially dependent upon key personnel;
	·	technological change could negatively affect sales of our products and our performance;
	·	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 may be subject to product liability claims, and insurance coverage could be inadequate or unavailable to cover these claims;
	·	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;
	·	provisions in our restated certificate of incorporation and by-laws and Delaware law could make a merger, tender offer or proxy contest difficult;
	·	acquisitions could be unsuccessful;
	·	we may need additional funds, and if we are unable to obtain these funds, we may not be able to expand or operate our business as planned;
	·	rapid technological change could negatively affect sales of our products, inventory levels and our performance; and;
	·	the other factors referenced in this Form 10-Q, including, without limitation, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the factors described under “Risk Factors” disclosed in our fiscal 2020 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.

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

($000’s except for share and per share information)

	Three Months Ended October 31,						Nine Months Ended October 31,
	2020			2019			2020			2019

Net sales	$	41,451		$	27,464		$	122,054		$	79,620
Cost of goods sold		19,763			18,166			60,882			52,349
Gross profit		21,688			9,298			61,172			27,271
Operating expenses		9,195			7,464			26,575			23,114
Operating profit		12,493			1,834			34,597			4,157
Other income (expense), net		12			(9	)		49			(33	)
Interest expense		(4	)		(26	)		(23	)		(98	)
Income before taxes		12,501			1,799			34,623			4,026
Income tax expense		3,237			653			7,386			1,950
Net income	$	9,264		$	1,146		$	27,237		$	2,076
Net income per common share:
Basic	$	1.16		$	0.14		$	3.41		$	0.26
Diluted	$	1.14		$	0.14		$	3.36		$	0.26
Weighted average common shares outstanding:
Basic		7,979,902			8,004,640			7,976,228			8,013,383
Diluted		8,123,848			8,035,929			8,110,435			8,044,159

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES'

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

($000’s)

	Three Months Ended October 31,					Nine Months Ended October 31,
	2020		2019			2020		2019

Net income	$	9,264	$	1,146		$	27,237	$	2,076
Other comprehensive income (loss):
Foreign currency translation adjustments		216		(177	)		225		(402	)
Comprehensive income	$	9,480	$	969		$	27,462	$	1,674

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(000’s except for share information)

	October 31,			January 31,
	2020			2020
ASSETS
Current assets
Cash and cash equivalents	$	40,186		$	14,606
Accounts receivable, net of allowance for doubtful accounts of $812 and $497 at October 31, 2020 and January 31, 2020, respectively		26,750			17,702
Inventories		44,978			44,238
Prepaid VAT and other taxes		1,238			1,228
Other current assets		2,805			2,033
Total current assets		115,957			79,807
Property and equipment, net		10,023			10,113
Operating leases right-of-use assets		2,266			2,244
Deferred tax assets		2,744			5,939
Prepaid VAT and other taxes		292			333
Other assets		99			98
Goodwill		871			871
Total assets	$	132,252		$	99,405
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	8,066		$	7,204
Accrued compensation and benefits		3,629			1,300
Other accrued expenses		4,685			2,445
Current maturity of long-term debt		—			1,155
Current portion of operating lease liabilities		925			835
Total current liabilities		17,305			12,939
Long-term portion of operating lease liabilities		1,326			1,414
Total liabilities		18,631			14,353
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 8,491,260 and 8,481,665; outstanding 7,982,018 and 7,972,423 at October 31, 2020 and January 31, 2020, respectively		85			85
Treasury stock, at cost; 509,242 shares		(5,023	)		(5,023	)
Additional paid-in capital		76,278			75,171
Retained earnings		44,818			17,581
Accumulated other comprehensive loss		(2,537	)		(2,762	)
Total stockholders’ equity		113,621			85,052
Total liabilities and stockholders’ equity	$	132,252		$	99,405

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(000’s except for share information)

																Accumulated
											Additional					Other
	Common Stock				Treasury Stock						Paid-in			Retained		Comprehensive
	Shares		Amount		Shares			Amount			Capital			Earnings		Loss			Total
			($000’s)					($000’s)			($000’s)			($000’s)		($000’s)			($000’s)

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:		2,189		—		—			—			(559	)		—		—			(559	)
Restricted Stock Plan		—		—		—			—			(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		2,189		—		—			—			(308	)		—		—			(308	)
Treasury stock purchased, inclusive of commissions		—		—		—			—			(5	)		—		—			(5	)
Balance, October 31, 2019		8,478,118	$	85		(471,289	)	$	(4,614	)	$	75,048		$	16,376	$	(2,654	)	$	84,241

Balance, January 31, 2020		8,481,665	$	85		(509,242	)	$	(5,023	)	$	75,171		$	17,581	$	(2,762	)	$	85,052
Net Income		—		—		—			—			—			27,237		—			27,237
Other comprehensive income		—		—		—			—			—			—		225			225
Stock-based compensation:
Restricted stock issued		9,595		—		—			—		—				—		—		—
Restricted stock plan		—		—		—			—			1,186			—		—			1,186
Return of shares in lieu of payroll withholding												(79	)							(79	)
Balance, October 31, 2020		8,491,260	$	85		(509,242	)	$	(5,023	)	$	76,278		$	44,818	$	(2,537	)	$	113,621

Balance, July 31, 2020		8,489,144	$	85		(509,242	)	$	(5,023	)	$	75,494		$	35,554	$	(2,753	)	$	103,357
Net Income		—		—		—			—			—			9,264		—			9,264
Other comprehensive income		—		—		—			—			—			—		216			216
Stock-based compensation:
Restricted stock issued		2,116		—		—			—			—			—		—			—
Restricted stock plan		—		—		—			—			808			—		—			808
Return of shares in lieu of payroll withholding		—		—		—			—			(24	)		—		—			(24	)
Balance, October 31, 2020		8,491,260	$	85		(509,242	)	$	(5,023	)	$	76,278		$	44,818	$	(2,537	)	$	113,621

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

($000)’s

	Nine Months Ended October 31,
	2020			2019
Cash flows from operating activities:
Net income	$	27,237		$	2,076
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Provision for doubtful accounts		315			168
Deferred income taxes		3,194			667
Depreciation and amortization		1,425			1,267
Stock based and restricted stock compensation		1,245			(583	)
Gain (loss) on disposal of property and equipment		5			(2	)
Non-cash operating lease expense		267			797
(Increase) decrease in operating assets
Accounts receivable		(9,249	)		(1,257	)
Inventories		(808	)		(5,584	)
Prepaid VAT and other taxes		(10	)		162
Other current assets		(484	)		(355	)
Increase (decrease) in operating liabilities
Accounts payable		810			67
Accrued expenses and other liabilities		4,365			517
Operating lease liabilities		(286	)		(783	)
Net cash provided by (used in) operating activities		28,026			(2,843	)
Cash flows from investing activities:
Purchases of property and equipment		(1,325	)		(689	)
Cash flows from financing activities:
Loan repayments, short-term		(1,319	)		(124	)
Loan borrowings, short-term		158			—
UK borrowings under line of credit facility, net		—			491
Purchase of Treasury Stock under stock repurchase program		—			(97	)
Shares returned to pay employee taxes under restricted stock program		(79	)		(5	)
Net cash (used in) provided by financing activities		(1,240	)		265
Effect of exchange rate changes on cash and cash equivalents		119			(91	)
Net increase (decrease) in cash and cash equivalents		25,580			(3,358	)
Cash and cash equivalents at beginning of period		14,606			12,831
Cash and cash equivalents at end of period	$	40,186		$	9,473

Supplemental disclosure of cash flow information:
Cash paid for interest	$	22		$	98
Cash paid for taxes	$	2,376		$	1,202

Noncash investing and financing activities
Leased assets obtained in exchange for operating lease liabilities	$	870		$	3,218

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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, 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 inhouse sales teams, our customer service group, and authorized independent sales representatives to a network of over 1,600 global safety and industrial supply distributors. Our authorized distributors supply end users, such as integrated oil, chemical/petrochemical, automobile, steel, glass, construction, smelting, cleanroom, janitorial, pharmaceutical, and high technology electronics manufacturers, as well as scientific, medical laboratories and the utilities industry. In addition, we supply federal, state and local governmental agencies and departments, such as fire and law enforcement, airport crash rescue units, the Department of Defense, the Department of Homeland Security and the Centers for Disease Control. Internationally, we sell to a mixture of end users directly, and to industrial distributors depending on the particular country and market. In addition to the United States, sales are made to more than 50 foreign countries, the majority of which were in Southeast Asia, the European Economic Community (“EEC”), and Latin America.

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, 2020.

The results of operations for the three and nine month periods ended October 31, 2020 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, FY21 refers to the fiscal year ending January 31, 2021, (b) “Q” refers to quarter; thus, for example, Q3 FY21 refers to the third quarter of the fiscal year ending January 31, 2021, (c) “Balance Sheet” refers to the unaudited condensed consolidated balance sheet and (d) “Statement of Income” refers to the unaudited condensed consolidated statement of income.

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.

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Included in Accounts Receivable is the UK factoring account representing trade receivables collected on our behalf that have not yet been conveyed to the Company by HSBC Finance (UK) LTD ("HSBC"). The balance at October 31, 2020 was $1.2 million.

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.

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 and when the customer has obtained the benefit of the goods, which can occur upon shipment or delivery depending on the nature of our agreements. 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 and these costs are included in operating expenses Shipping and handling costs for the three months ended October 31, 2020 and 2019, were approximately $0.7 million and $0.9 million, respectively, and for the nine months ended October 31, 2020 and 2019 were approximately $2.9 million and $2.5 million, respectively. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue.

The transaction price includes estimates of variable consideration, related to rebates, and discounts (primarily driven by volumes) 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 adjusted for estimates of variable consideration.

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

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, 2020 or January 31, 2020.

Stock-Based Compensation

The Company records the cost of stock-based compensation plans based on the fair value of the award on the grant date. For awards that contain a vesting provision, the cost is recognized over the requisite service period (generally the vesting period of the equity award) which approximates the performance period. For awards based on services already rendered, the cost is recognized immediately.

Foreign Operations and Foreign Currency Translation

The Company maintains manufacturing operations in Mexico, India, Argentina, Vietnam and the People’s Republic of China and can access independent contractors in China, Vietnam, Argentina and Mexico. It also maintains sales and distribution entities located in India, Canada, the U.K., Chile, China, Argentina, Russia, Kazakhstan, Uruguay and Mexico. The Company is vulnerable to currency risks in these countries. The functional currency for the United Kingdom subsidiary is the Euro; the trading company in China, the RMB; the Russian operation, the Russian Ruble, and the Kazakhstan operation the Kazakhstan Tenge. All other operations have the US dollar as its functional currency.

Pursuant to US GAAP, assets and liabilities of the Company’s foreign operations with functional currencies, other than the US dollar, are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’ equity. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Foreign currency transaction (loss) gain included in net income (loss) for the three months ended October 31, 2020 and 2019, were approximately $0.5 million and $0.0 million and for the nine months ended October 31, 2020 and 2019, was approximately $0.9 million and $0.2 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.

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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

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 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 has adopted this guidance using prospective transition method, which had no material impact on its unaudited condensed consolidated financial statements and related disclosures.

New Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions for performing intra-period allocation and calculating income taxes in interim periods. It also simplifies the accounting for income taxes by requiring recognition of franchise tax partially based on income as an income-based tax, requiring reflection of enacted changes in tax laws in the interim period and making improvements for income taxes related to employee stock ownership plans. ASU 2019-12 is effective for fiscal years and interim periods within those years, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. The Company is currently evaluating the impact the standard will have on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting in response to the risk of cessation of the London Interbank Offered Rate (LIBOR). This amendment provides for optional expedients and exceptions for applying generally accepted accounting principles to contracts and hedging relationships that are affected by LIBOR and other reference rates. The ASU generally allows for a hedge accounting to continue if the hedge was highly effective or met other standards prior to reference rate reform. Entities are permitted to apply the amendments to all contracts, cash flow and net investment hedge relationships that exist as of March 12, 2020. The relief provided in this ASU is only available for a limited time, generally through December 31, 2022. Our debt agreement that utilizes LIBOR has not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. To the extent our debt arrangements change to another accepted rate, we will utilize the relief available in this ASU.

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s unaudited condensed consolidated financial statements.

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4. Inventories

Inventories consist of the following (in $000s):

	October 31, 2020		January 31, 2020

Raw materials	$	18,812	$	16,709
Work-in-process		621		670
Finished goods		25,545		26,859
	$	44,978	$	44,238

5. Leases

We lease real property, equipment and certain automobiles. 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 consolidated balance sheet consist of the following (in $000’s):

	Classification	October 31, 2020		January 31, 2020

Assets
Operating lease assets	Operating lease right-of-use assets	$	2,266	$	2,244

Liabilities
Current
Operating	Current portion of operating lease liabilities		925		835
Noncurrent
Operating	Long-term portion of operating lease liabilities		1,326		1,414
Total Lease Obligations		$	2,251	$	2,249

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Lease cost

The components of lease expense are included on the unaudited condensed consolidated statement of income as follows (in 000’s):

Three Months Ended

October 31, 2020

Nine Months Ended

October 31, 2020

Operating lease cost

288

868

Short-term lease cost

355

Maturity of Lease Liabilities

Maturity of lease liabilities as of October 31, 2020 was as follows (in $000’s):

For the 12 months ended October 31,	Operating Leases (a)
2021	$	984
2022		815
2023		224
2024		94
2025		93
Thereafter		426
Total lease payments		2,636
Less: Interest		(385	)
Present value of lease liability	$	2,251

(a)

Operating lease payments include $72 related to options to extend lease terms that are reasonably certain of being exercised.

Weighted-average lease terms and discount rates are as follows:

Weighted-average remaining lease term (years)	October 31, 2020			January 31, 2020
Operating leases		4.03			3.14

Weighted-average discount rate
Operating leases		6.86	%		5.87	%

Supplemental cash flow information related to leases for the three months and nine months ended October 31, 2020 were as follows (in 000’s):

Cash paid for amounts included in the measurement of lease liabilities:

Three Months

Ended

October 31, 2020

Nine Months

Ended

October 31, 2020

Operating cash flows from operating leases

288

868

Leased assets obtained in exchange for new operating lease liabilities

457

870

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6. Other Current Assets

As of October 31, 2020, and January 31, 2020, the Company’s other current assets were comprised of the following (in $000s):

	October 31, 2020		January 31, 2020

Prepaid maintenance contracts	$	187	$	144
Prepaid insurance		164		49
Prepaid material and supplies		2,239		1,313
Prepaid other		215		527
	$	2,805	$	2,033

7. Other Accrued Expenses

As of October 31, 2020, and January 31, 2020, the Company’s other accrued expenses were comprised of the following (in $000s):

	October 31, 2020		January 31, 2020

Other employee related costs, including employee benefits	$	—	$	199
Freight expenses and material purchases		1,148		673
Professional fees		34		279
Sales commissions		—		234
Other vendor accruals		1,577		718
Income tax accrual		1,926		342
	$	4,685	$	2,445

The increase in income tax accrual is due to the increase in profitability and the resulting tax obligations.

8. Long-Term Debt

Revolving Credit Facility

On June 25, 2020, the Company entered into a Loan Agreement (the “Loan Agreement”) with Bank of America (“Lender”). The Loan Agreement provides the Company with a secured $12.5 million revolving credit facility, which includes a $5.0 million letter of credit sub-facility. The Company may request from time to time an increase in the revolving credit loan commitment of up to $5.0 million (for a total commitment of up to $17.5 million). Borrowing pursuant to the revolving credit facility is subject to a borrowing base amount calculated as (a) 80% of eligible accounts receivable, as defined, plus (b) 50% of the value of acceptable inventory, as defined, minus (c) certain reserves as the Lender may establish for the amount of estimated exposure, as reasonably determined by the Lender from time to time, under certain interest rate swap contracts. The borrowing base limitation only applies during periods when the Company’s quarterly funded debt to EBITDA ratio, as defined, exceeds 2.00 to 1.00. The credit facility will mature on June 25, 2025.

Borrowings under the revolving credit facility bear interest at a rate per annum equal to the sum of the LIBOR Daily Floating Rate (“LIBOR”), plus 125 basis points. LIBOR is subject to a floor of 100 basis points. All outstanding principal and unpaid accrued interest under the revolving credit facility is due and payable on the maturity date. On a one-time basis, and subject to there not existing an event of default, the Company may elect convert up to $5.0 million of the then outstanding principal of the revolving credit facility to a term loan facility with an assumed amortization of 15 years and the same interest rate and maturity date as the revolving credit facility. The Loan Agreement provides for an annual unused line of credit commitment fee, payable quarterly, of 0.25%, based on the difference between the total credit line commitment and the average daily amount of credit outstanding under the facility during the preceding quarter.

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The Company made certain representations and warranties to the Lender in the Loan Agreement that are customary for credit arrangements of this type. The Company also agreed to maintain, as of the end of each fiscal quarter, a minimum “basic fixed charge coverage ratio” (as defined in the Loan Agreement) of at least 1.15 to 1.00 and a “funded debt to EBITDA ratio” (as defined in the Loan Agreement) not to exceed 3.00 to 1.00, in each case for the trailing 12-month period ending with the applicable quarterly reporting period. The Company also 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, make substantial change in the present executive or management personnel and incur additional indebtedness, which negative covenants are subject to certain exceptions.

The Loan Agreement contains customary events of default that include, among other things (subject to any applicable cure periods and materiality qualifier), non-payment of principal, interest or fees, defaults under related agreements with the Lender, cross-defaults under agreements for other indebtedness, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgements and material adverse change. Upon the occurrence of an event of default, the Lender may terminate all loan commitments, declare all outstanding indebtedness owing under the Loan Agreement and related documents to be immediately due and payable, and may exercise its other rights and remedies provided for under the Loan Agreement.

In connection with the Loan Agreement, the Company entered into with the Lender (i) a security agreement dated June 25, 2020, pursuant to which the Company granted to the Lender a first priority perfected security interest in substantially all of the personal property and the intangibles of the Company, and (ii) a pledge agreement, dated June 25, 2020, pursuant to which the Company granted to the Lender a first priority perfected security interest in the stock of its subsidiaries (limited to 65% of those subsidiaries that are considered “controlled foreign subsidiaries” as set forth in the Internal Revenue Code and regulations). The Company’s obligations to the Lender under the Loan Agreement are also secured by a negative pledge evidenced by a Non-encumbrance Agreement covering the real property owned by the Company in Decatur, Alabama.

As of October 31, 2020, the Company had no borrowings outstanding on the letter of credit sub-facility and no borrowings outstanding under the revolving credit facility.

Prior to the execution of the Loan Agreement with Bank of America, the Company repaid a $1.2million term loan that was outstanding under a similar agreement with SunTrust Bank. The Company has terminated the borrowing agreement with SunTrust Bank.

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 reduction of the service charge from 0.9% to 0.85%, all other terms of the facility remained the same. On December 4, 2017 the facility was extended to March 31, 2018 for the next review period. On March 9, 2019 the facility was extended to March 31, 2020 and on March 6, 2020 further extended to March 31, 2021 with no additional changes to the terms. There were no borrowings outstanding under this facility at either October 31, 2020 or January 31, 2020. The amounts due from HSBC of USD $1.2 million as of October 31, 2020, is included in accounts receivable on the accompanying condensed consolidated balance sheets.

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Borrowing in Argentina

On March 20, 2020 Lakeland Argentina and AP Partners entered into an agreement for Lakeland Argentina to obtain a loan in the amount of ARS $10 million (approximately USD $158k, based on exchange rates at time of closing); such loan is for a term of one year at an interest rate of 30% per annum. There was no outstanding balance at October 31, 2020.

9. 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 $10.3 million total included in the US bank accounts and approximately $29.9million total in foreign bank accounts as of October 31, 2020, of which $39.5 million was uninsured.

Major Customer

One customer accounted for more than 10% of net sales during the three month and nine-month periods ended October 31, 2020. No customer accounted for more than 10% of net sales during the three month and nine-month periods ended October 31, 2019.

Major Supplier

No supplier accounted for more than 10% of purchases during the three month and nine month periods ended October 31, 2020 and 2019.

10. 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 Committee shall be deemed to include the full Board. The 2017 Plan provides for the grant of equity-based compensation in the form of stock options, restricted stock, restricted stock units, performance shares, performance units, or stock appreciation rights (“SARS”).

The Committee has the authority to determine the type of award, as well as the amount, terms and conditions of each award, under the 2017 Plan, subject to the limitations and other provisions of the 2017 Plan. An aggregate of 360,000 shares of the Company’s common stock are authorized for issuance under the 2017 Plan, subject to adjustment as provided in the 2017 Plan for stock splits, dividends, distributions, recapitalizations and other similar transactions or events. If any shares subject to an award are forfeited, expire, lapse or otherwise terminate without issuance of such shares, such shares shall, to the extent of such forfeiture, expiration, lapse or termination, again be available for issuance under the 2017 Plan. The following tables summarize the unvested shares granted on June 7, 2018, December 4, 2019 and April 9, 2020 which have been made under the 2017 Plan.

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Granted June 7, 2018

	Number of shares awarded total
	Minimum		Target		Maximum		Cap
Employees		17,834		26,753		35,670		42,805
Non-Employee Directors		7,168		10,752		14,336		17,204
Total		25,002		37,505		50,006		60,009

	Value at grant date
	Minimum		Target		Maximum		Cap
Employees	$	248,800	$	373,200	$	497,600	$	597,120
Non-Employee Directors		100,000		150,000		200,000		240,000
Total	$	348,800	$	523,200	$	697,600	$	837,120

Granted December 4, 2019 and April 9, 2020

	Number of shares awarded total
	Minimum		Target		Maximum
Employees		78,004		120,006		144,009
Non-Employee Directors		27,664		42,560		51,072
Total		105,668		162,566		195,081

	Value at grant date
	Minimum		Target		Maximum
Employees	$	943,540	$	1,451,600	$	1,741,920
Non-Employee Directors		338,000		520,000		624,000
Total	$	1,281,540	$	1,971,600	$	2,365,920

The Company recognized total stock-based compensation costs, which are reflected in operating expenses (in $000s):

	Three Months Ended October 31,					Nine Months Ended October 31,
	2020		2019			2020		2019
2017 Plan:
Restricted Stock Program	$	793	$	(345	)	$	1,143	$	(596	)
Stock Options		15		—			44		—
Other		27		—			58		—
Total stock-based compensation	$	835	$	(345	)	$	1,245	$	(596	)

Total income tax benefit (expense) recognized for stock-based compensation arrangement	$	175	$	(72	)	$	262	$	(125	)

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Restricted Stock Units

Under the 2017 Plan, as described above, the Company awarded performance-based and service based restricted stock units to eligible employees and directors. The following table summarizes the activity under the 2017 Plan for the quarter ended October 31, 2020. This table reflects the amount of awards granted at the maximum number of shares that would be issued if the Company were to achieve the maximum performance level under the June 2018, December 2019 and April 2020 grants. The table includes the shares issued on October 30, 2020 described below.

	Performance- Based		Service- Based		Total		Weighted Average Grant Date Fair Value
Outstanding at January 31, 2020		159,241		9,930		169,171	$	11.40
Awarded		90,591		6,326		96,917		16.38
Vested		—		—		—		—
Forfeited		—		—		—		—
Outstanding at October 31, 2020		249,832		16,256		266,088	$	13.22

The actual number of shares of common stock of the Company, if any, to be earned by the award recipients is determined over a three year performance measurement period based on measures that include Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”) with respect to the June 7, 2018 grant and revenue growth, EBITDA margin, and cash flow for the December 4, 2019 grant. The performance targets have been set for each of the Minimum, Target, and Maximum levels. The actual performance amount achieved is determined by the Board and may be adjusted for items determined to be unusual in nature or infrequent in occurrence, at the discretion of the Board.

The 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. During the period ended October 31, 2019, the Company revised its estimate of grants issued in 2017 and 2018 (described above) that will be earned for the designated performance period. Based on actual EBITDA achieved by the Company at October 31, 2019, it was deemed improbable that such performance would meet even the Minimum level required for the 2017 and 2018 grants to vest, including SARS. As a result, stock-based compensation expense for the 2017 and 2018 grants 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 was reversed was approximately $0.8 million of which approximately $0.03 million related to the SARS.Due to significantly increased profitability during the nine months ended October 31, 2020, the Company has determined that it is probable that the 2018 grants will now vest and has recorded approximately $0.7 million in stock based compensation expense in Q3 FY21 and will recognize an additional $0.1 million in Q4 FY21 related to the 2018 grants.

On October 30, 2020, the Company made a grant of restricted stock units of 21,000 shares of our common stock to two key employees under the 2017 Plan. Non-cash stock-based compensation expense associated with the grant is approximately $0.5 million, which will be expensed over the requisite service period of one year.

The compensation cost is based on the fair value at the grant date, is recognized over the requisite performance/service period using the straight-line method, and is periodically adjusted for the probable number of shares to be awarded. The Company is recognizing expense related to the June 2018 grant at Maximum and the December 2019 and April 2020 grants at Target. These expenses were approximately $0.9 million for the three months and $1.2 million for the nine months ended October 31, 2020. As of October 31, 2020, unrecognized stock-based compensation expense totaled $1.8 million pursuant to the 2017 Plan based on outstanding awards under the Plan. This expense is expected to be recognized over of the next 2.25 years.

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Stock Options

During the year ended January 31, 2020 a stock option was granted pursuant to the Company’s 2017 Equity Incentive Plan in the amount of 24,900shares at an exercise price of $11.17 per share. Such shares vest at 8,300 shares on each of August 12, 2020, August 12, 2021 and August 12, 2022.

The following table represents stock options granted, exercised and forfeited during the period.

Stock Options	Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at January 31, 2020		24,900	$	11.17		9.53	$	—
Granted		—		—		—		—
Outstanding at October 31, 2020		24,900	$	11.17		8.78	$	—
Exercisable at October 31, 2020		8300		11.17		8.78		—

The Company recognized approximately $15,000 of stock-based compensation expense during the quarter ended October 31, 2020 associated with the grant of the stock option. As of October 31, 2020 there is approximately $103,000 of unrecognized stock-based compensation expense.

Other Compensation Plans/Programs

Pursuant to the Company’s restricted stock program, all directors are eligible to elect to receive any director fees in shares of restricted stock in lieu of cash. Such restricted shares are subject to a two-year vesting period. The valuation is based on the stock price at the grant date and is amortized to expense over the two-year period, which approximates the performance period. Since the director is giving up cash for unvested shares, and is subject to a vesting requirement, the amount of shares awarded is 133% of the cash amount based on the grant date stock price. As of October 31, 2020, unrecognized stock-based compensation expense related to these restricted stock awards totaled $5,749 for the 2017 Plan. The cost of these non-vested awards is expected to be recognized over a two-year weighted-average period.

Stock Repurchase Program

On July 19, 2016, the Company’s board of directors approved a stock repurchase program under which the Company may repurchase up to $2,500,000 of its outstanding common stock. During the nine months ended October 31, 2020, the Company did not repurchase any shares of its common stock. The Company has repurchased 152,801 shares of stock under this program as of October 31, 2020 for $1,671,188, inclusive of commissions.

11. 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 $1.5 million and $1.3million at October 31, 2020 and January 31, 2020, respectively.

The federal net operating loss (“NOL”) carryforwards as of October 31, 2020 were approximately $2.0 million before tax effects. If not utilized, then NOL generated from the January 31, 2015 tax year will expire after January 31, 2035, and the NOL generated after January 31, 2018 will be carried forward indefinitely.

The state net operating loss (“NOL”) carryforwards as of October 31, 2020 were approximately $20.5 million before tax effects.The state NOLs with carry forward limitations will begin to expire after January 31, 2025 and will continue to expire at various periods up until January 31, 2039 when they will be fully expired.The states have a larger spread because some only carryforward for 10 years and some allow 20 years. The Georgia NOLs generated after January 31, 2018 can be carried forward indefinitely.

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(UNAUDITED)

Tax Reform

On December 22, 2017, new federal tax reform legislation was enacted in the United States, resulting in significant changes from previous tax law. The 2017 Tax Cuts and Jobs Act (the Tax Act) 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 assessment of the GILTI tax resulted in an increase to the annual effective tax rate of 8.3%. On July 23, 2020, the GILTI regulations were modified with respect to the treatment of income subject to a high foreign tax rate and provided guidance on the treatment of these available exclusions. As a result of these modifications, the Company will be able to amend the FY19 tax returns and recapture NOL previously utilized. The Company applied this modification to the GILTI tax reported in their FY20 tax return which allowed recapture of federal NOL previously utilized. As a result of the recapture of these NOLs, the Company recorded a tax benefit of $1.7 million for the nine months ended October 31, 2020. The Company intends to account for the GILTI tax impact in the period in which it is incurred. Though this non-cash expense (due to use of existing NOLs) has a materially negative impact on 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.

We previously considered substantially all of the earnings in our non-U.S. subsidiaries to be indefinitely reinvested outside the U.S. and, accordingly, recorded no deferred income taxes on such earnings. At this time, the applicable provisions of the Tax Act have been fully analyzed and our intention with respect to unremitted foreign earnings is to continue to indefinitely reinvest outside the U.S. those earnings needed for working capital or additional foreign investment. If all of these earnings were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to tax. Due to the timing and circumstances of the repatriation of such earnings, if any, it is not practical to determine the amount of funds subject to unrecognized deferred tax liability.

Income Tax Expense

Income tax expenses consists of federal, state and foreign income taxes. Items impacting the effective rate are state taxes, an adjustment for foreign tax rates lower than the US statutory tax rate, GILTI, and an adjustment to reflect the recapture of U.S. NOLs as a result of applying the GILTI high tax exclusion in tax years FY19 and FY20.

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

12. Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share at October 31, 2020 and 2019 as follows (in $000s except per share amounts):

	Three Months Ended October 31,				Nine Months Ended October 31,
	(in $000s except share and per share information)
	2020		2019		2020		2019
Numerator:
Net income	$	9,264	$	1,146	$	27,237	$	2,076
Denominator:
Denominator for basic net income per share (weighted-average shares which exclude shares in the treasury, 509,242 at October 31, 2020 and 471,289 for October 31, 2019		7,979,902		8,004,640		7,976,228		8,013,383
Effect of dilutive securities from restricted stock plan		143,946		31,289		134,207		30,776
Denominator for diluted net income per share (adjusted weighted average shares)		8,123,848		8,035,929		8,110,435		8,044,159
Basic net income per share	$	1.16	$	0.14	$	3.41	$	0.26
Diluted net income per share	$	1.14	$	0.14	$	3.36	$	0.26

13. 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. While the vast majority of these labor suits have been resolved, there are labor cases that remain active and a civil case filed by a former officer of our former Brazilian subsidiary, in which Lakeland was named as a co-defendant.

The first case was initially filed in 2010 claiming USD $100,000 owed to plaintiff. This case is on its final appeal to the Brazilian Supreme Court, having already been ruled upon in favor of Lakeland three times, most recently by the Labor Court Supreme Court. The claimant having lost three times previously, management firmly believes that Lakeland will continue to prevail in this case. A second case filed against Lakeland by a former officer of our former Brazilian subsidiary, was filed in Labor court in 2014 claiming Lakeland owed USD $300,000. The Labor court ruled that the claimant’s case was outside of the scope of the Labor court and the case was dismissed. The claimant appealed the dismissal, and this appeal was also dismissed. The claimant then failed to timely bring a further appeal, so this claim should effectively be time-barred. A third case filed by a former manager of our former Brazilian subsidiary in 2014 was ruled upon in Labor court and awarded the claimant USD $100,000. Both the claimant and Lakeland have appealed this decision and the appeals court sent the case back to the trail court for a rehearing on only one (the calculation of the amount of $100,000) of the claimant’s multiple claims. The claimant thereupon appealed again to a higher court. In the last case a former officer of our former Brazilian subsidiary filed a claim in 2016 seeking approximately USD $700,000 that he alleges is due to him against an unpaid promissory note. Lakeland was defectively 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.

Our former Brazilian subsidiary may face new labor lawsuits in the short term as a result of the shutdown of its operations in March 2019. The Company has no obligation under the Shares Transfer Agreement (the agreement pursuant to which Lakeland disposed of all of its equity in its former Brazilian subsidiary) 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.

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

The Company has provided for professional fees and litigation reserves associated with potential residual labor claims in Brazil. The accrual on the balance sheet at October 31, 2020 is $0.03 million and at January 31, 2020 is $0.2 million.

General litigation contingencies:

The Company is involved in various litigation proceedings arising during the normal course of business which, in the opinion of the management of the Company, will not have a material effect on the Company’s financial position, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these matters.

14. Segment Reporting

We manage our operations by evaluating each of our geographic locations. Our US operations include a facility in Alabama (primarily the distribution to customers of the bulk of our products and the light manufacturing of our chemical, wovens, reflective, and fire products). The Company also maintains one manufacturing company in China (primarily disposable and chemical suit production), a manufacturing facility in Mexico (primarily disposable, reflective, fire and chemical suit production), a manufacturing facility in Vietnam (primarily disposable production) and a small manufacturing facility in India. Our China facilities produce the majority of the Company’s products and China generates a significant portion of the Company’s international revenues. We evaluate the performance of these entities based on operating profit, which is defined as gross profit less operating expenses. We have sales forces in the USA, Canada, Mexico, Europe, Latin America, India, Russia, Kazakhstan, Australia and China, which sell and distribute products shipped from the United States, Mexico, India, Vietnam or China.

The table below represents information about reported segments for the years noted therein:

	Three Months Ended October 31,						Nine Months Ended October 31,
	(in millions of dollars)						(in millions of dollars)
	2020			2019			2020			2019
Net Sales:
USA Operations (including Corporate)	$	17.43		$	15.84		$	57.11		$	45.36
Other foreign		3.39			1.65			8.81			4.81
Europe (UK)		5.58			2.38			12.75			7.24
Mexico		2.12			1.22			4.84			3.09
Asia		23.25			13.34			67.42			43.97
Canada		4.20			2.60			10.92			7.50
Latin America		3.75			2.01			9.38			6.45
Less intersegment sales		(18.27	)		(11.58	)		(49.18	)		(38.80	)
Consolidated sales	$	41.45		$	27.46		$	122.05		$	79.62
External Sales:
USA Operations (including Corporate)	$	17.04		$	14.16		$	54.60		$	41.47
Other foreign		2.72			0.91			7.04			2.61
Europe (UK)		5.58			2.38			12.75			7.24
Mexico		1.91			0.88			3.89			2.08
Asia		6.36			4.62			23.80			12.49
Canada		4.20			2.60			10.92			7.47
Latin America		3.64			1.91			9.05			6.26
Consolidated external sales	$	41.45		$	27.46		$	122.05		$	79.62
Intersegment Sales:
USA Operations (including Corporate)	$	0.39		$	1.68		$	2.50		$	3.89
Other foreign		0.67			0.74			1.77			2.20
Mexico		0.21			0.34			0.95			1.01
Asia		16.90			8.71			43.62			31.48
Canada		—			—			—			0.03
Latin America		0.10			0.11			0.34			0.19
Consolidated intersegment sales	$	18.27		$	11.58		$	49.18		$	38.80

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Three Months Ended October 31,						Nine Months Ended October 31,
	(in millions of dollars)						(in millions of dollars)
	2020			2019			2020			2019
Operating Profit (Loss):
USA Operations (including Corporate)	$	2.17		$	0.14		$	7.86		$	(0.29	)
Other foreign		0.96			0.14			3.35			0.30
Europe (UK)		1.75			0.02			3.35			(0.02	)
Mexico		0.11			0.02			0.12			(0.39	)
Asia		6.04			1.04			15.51			2.87
Canada		0.55			0.25			1.95			0.77
Latin America		1.24			0.21			2.93			0.81
Less intersegment profit		(0.33	)		0.01			(0.47	)		0.11
Consolidated operating profit	$	12.49		$	1.83		$	34.60		$	4.16
Depreciation and Amortization Expense:
USA Operations (including Corporate)	$	0.21		$	0.22		$	0.63		$	0.64
Other foreign		0.01			—			0.03			0.02
Mexico		0.05			0.04			0.13			0.12
Asia		0.19			0.14			0.55			0.40
Canada		0.03			0.03			0.07			0.08
Latin America		0.01			0.01			0.03			0.03
Less intersegment		—			(0.01	)		(0.02	)		(0.02	)
Consolidated depreciation & amortization expense	$	0.50		$	0.43		$	1.42		$	1.27
Interest Expense:
Europe (UK)	$	—		$	—		$	0.01		$	0.01
USA Operations (including Corporate)		—		$	0.02			—		$	0.05
Latin America		—			0.01			—			0.04
Consolidated interest expense	$	—		$	0.03		$	0.01		$	0.10
Income Tax Expense:
USA Operations (including Corporate)	$	1.99		$	0.38		$	3.43		$	0.81
Europe (UK)		0.33		$	0.01		$	0.61		$	0.01
Asia		0.51			0.16			2.24			0.67
Canada		0.20			0.10			0.58			0.32
Latin America		0.27			—			0.67			0.13
Less intersegment		(0.06	)		—			(0.14	)		0.01
Consolidated income tax expense	$	3.24		$	0.65		$	7.39		$	1.95

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	October 31, 2020			January 31, 2020
	(in millions of dollars)
Total Assets: *
USA Operations (including Corporate)	$	89.19		$	88.08
Other foreign		4.49			1.69
Europe (UK)		9.02			4.52
Mexico		6.01			5.00
Asia		58.86			44.22
Canada		7.82			6.09
Latin America		7.01			5.77
Less intersegment		(50.15	)		(55.96	)
Consolidated assets	$	132.25		$	99.41
Total Assets Less Intersegment: *
USA Operations (including Corporate)	$	53.73		$	49.94
Other foreign		6.39			3.41
Europe (UK)		9.00			4.52
Mexico		6.02			5.16
Asia		42.51			24.65
Canada		7.79			6.07
Latin America		6.81			5.66
Consolidated assets	$	132.25		$	99.41
Property and Equipment:
USA Operations (including Corporate)	$	3.21		$	3.40
Other foreign		0.27			0.15
Europe (UK)		0.01			0.01
Mexico		2.39			2.17
Asia		2.96			3.19
Canada		1.09			1.15
Latin America		0.09			0.04
Consolidated property and equipment	$	10.02		$	10.11
Capital Expenditures:
USA Operations (including Corporate)	$	0.42		$	0.25
Other foreign		0.22			0.01
Europe (UK)		—			0.01
Mexico		0.35			0.17
Asia		0.19			0.58
Latin America		0.15			0.01
Consolidated capital expenditure	$	1.33		$	1.03
Goodwill:
USA Operations	$	0.87		$	0.87
Consolidated goodwill	$	0.87		$	0.87
* Negative assets reflect intersegment amounts eliminated in consolidation

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LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The table below presents external sales by product line:

	Three Months Ended October 31, (in millions of dollars)				Nine Months Ended October 31, (in millions of dollars)
	2020		2019		2020		2019
External Sales by product lines:
Disposables	$	25.78	$	12.52	$	80.77	$	39.19
Chemical		9.71		5.68		24.77		16.30
Fire		1.62		2.81		4.74		6.64
Gloves		0.54		0.74		1.86		2.33
High Visibility		1.40		2.20		3.70		6.04
High Performance Wear		0.74		0.83		1.56		1.26
Wovens		1.66		2.68		4.65		7.86
Consolidated external sales	$	41.45	$	27.46	$	122.05	$	79.62

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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; Response to COVID 19 Outbreak

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 over 1,600 global safety and industrial supply distributors. Our authorized distributors supply end users, such as integrated oil, chemical/petrochemical, automobile, steel, glass, construction, smelting, cleanroom, janitorial, pharmaceutical, and high technology electronics manufacturers, as well as scientific, medical laboratories and the utilities industry. In addition, we supply federal, state and local governmental agencies and departments, such as fire and law enforcement, airport crash rescue units, the Department of Defense, the Department of Homeland Security and the Centers for Disease Control. Internationally, we sell to a mixture of end users directly, and to industrial distributors depending on the particular country and market. In addition to the United States, sales are made to more than 50 foreign countries, the majority of which were into China, the European Economic Community (“EEC”), Canada, Chile, Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador, India and Southeast Asia.

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 in China and Mexico 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 added manufacturing operations in Vietnam and India to offset increasing manufacturing costs in China and further diversify our manufacturing capabilities. Our China operations will continue primarily manufacturing 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 $24.4 million and $13.3 million for the three months ended October 31, 2020 and 2019, respectively.

The last two weeks of FY20 and the first nine months of FY21 were dominated by response to the COVID 19 outbreak. The virus’ progression into a global pandemic will likely continue to impact our business for the remainder of FY21 and into the first half of FY22. We believe that COVID 19 demand will begin to diminish in Q4 FY21 and continuing into Q2 FY22, when vaccines become widely available. As COVID 19 demand, currently estimated at approximately 35% of revenue, decreases we anticipate a continuation of an increase in our core businesses (industrial) that began in Q2 FY21 and continued through Q3 FY21. The negative impact of lock downs and stay at home orders peaked in Q2 FY21 with core business sales down by approximately 25%. Through the second half of Q2 and through Q3 FY21 our core business sales have been recovering steadily. Based on recent, third quarter U.S. GDP Growth of 33.1%; November 2020 manufacturing Purchasing Manager Index of 57.5%, up from 56.0% at August 2020, and our increased market penetration and new customers, we expect our core business sales to recover fully and continue to grow through FY22. We anticipate that COVID 19 related sales will continue for the remainder of FY21 and into the first half of FY22, however not at the levels experienced in the first three quarters of FY21 as demand for immediate use diminishes and give way to stockpiling demand and increased core business sales.

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At present, raw materials supply appears to have caught up with demand, albeit at prices well above pre-COVID 19 pricing. We anticipate raw material pricing to continue at inflated levels into FY22. Our future sales would be affected should there be an industry-wide shortage of necessary raw materials in the event of another rise or surge in COVID 19 cases. As noted, we did experience significant price increases for fabric during the first nine months of FY21 and managed our available manufacturing capacity to lower costs, and increase prises to meet customer demand at these higher prices. With the exception of our India export manufacturing operation, which did not qualify for “essential status” due to its export only restrictions we have not experienced any manufacturing capacity issues due to inability to source raw materials, government quarantine, or shelter-in-place orders, or due to COVID 19 outbreaks in any of our factories, however there can be no assurance that this will continue to be the case. While leading economic indicators indicate a relatively robust industrial market recovery, potential headwinds to revenue as we emerge from pandemic sales include the possibility of a recession and consumer stockpiled inventories, as well as a decline in our oil and gas industrial sector that may temper demand within our regular markets in the second half of FY21.

Reference is made to “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 31, 2020. Offsetting these risks are changes to our sales environment, as a result of COVID 19, that we believe represent considerable upside to sales. We believe that once the pandemic subsides, there will be continued demand establishing PPE stockpiles for the long-term. This stockpiling will be filled in part by inventory that is in the distribution channels as the pandemic ends. When specific governments will issue RFQs for additional product is unknown, but some RFQs are already pending release; others are expected to be released over the next several months. Additionally, we believe the private sector will also engage in stockpiling of PPE as supply channels catch up to demand. And finally, we are seeing the emergence of institutional cleaning as a new market segment as countries and states reopen and seek to prevent further infections. For these reasons we are maximizing our manufacturing capacity in the near-term and evaluating expansion opportunities to allow us to further increase our industrial market penetration as our competitors abandon their industrial customers as they seek to maximize COVID 19 related sales. This strategy combined with new product development, manufacturing expansion, and the addition of key senior personnel also serves to prepare us for any economic slowdown that may occur as COVID 19 business ends and our industry transitions to a more traditional product mix.

Lakeland’s strategy for response to these “black swan” events is to remain focused on our long term growth strategies and tailor our response to these events so as to accelerate our strategic plans. We believe that focusing on our long-term growth strategy is also a solid strategy for minimizing the impact of any post-pandemic recession. In this particular case, our long-term strategy for revenue and margin improvement is to increase market penetration into markets that use higher value, higher margin products, that are recession resistant. Our manufacturing flexibility allows the Company to maximize the manufacture of disposable and chemical garments without degrading its ability to supply higher end, flame resistant and arc flash resistant garments. In order to maximize our response to pandemic demand, we have increased the daily working hours for our disposables and chemical manufacturing product lines, and we have significantly reduced the number of SKUs in these product lines in order to maximize efficiencies. This will have the effect of increasing throughput and reducing manufacturing costs to help mitigate any raw materials prices increases. Additionally, by focusing on a few core styles, we believe we can minimize the impact on inventory of any production over run when the pandemic subsides. SKU reduction also affords Lakeland the opportunity to discontinue any styles that have ceased being profitable due to pricing or sales volume We are not deviating from our growth strategy, rather we are looking to utilize the short-term, increased demand as a catalyst to accelerate attainment of growth objectives.

Having successfully implemented the above strategy, as evidenced by significantly increased market penetration in international markets, the addition of new customers accounting for additional sales of approximately $10 million, and realizing efficiency gains that we intend to make permanent, we are now focused on adding human and IT resources required to accelerate our growth rate in a post-COVID 19 environment. We believe that we will emerge from FY21 a full year ahead of our pre-COVID 19 growth plan, and we are committed to leveraging our position to accelerate growth in Critical Environment Markets such as pharmaceutical cleanrooms, isolation gowns, and Chemo-gowns; the Electric Utility Market; and to continue improving efficiencies by rationalizing our product offering in non-Covid product lines. To do this we will be acquiring additional senior and middle managers with specific skills in Sales and Marketing, Quality Control, Supply Chain Management, and Industrial Engineering. These personnel will facilitate future manufacturing expansion.by assuring that we have the skill sets necessary to meet our growth targets.

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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. 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 time’s price per unit.

Accounts Receivable, Net. Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company recognizes losses when information available indicates that it is probable that a receivable has been impaired based on criteria noted above at the date of the consolidated financial statements, and the amount of the loss can be reasonably estimated. Management considers the following factors when determining the collectability of specific customer accounts: Customer creditworthiness, past transaction history with the customers, current economic industry trends and changes in customer payment terms. Past due balances over 90 days and other less creditworthy accounts are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.

Inventories. Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or net 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.

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Income Taxes. The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing the consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss carryforwards and tax credits, are recorded as deferred tax assets or liabilities on the Company’s consolidated balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event the Company determines that it may not be able to realize all or part of its deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to income in the period of such determination.

Foreign Operations and Foreign Currency Translation. The Company maintains manufacturing operations in the People’s Republic of China, Mexico, Vietnam, India, and Argentina and can access independent contractors in China, Vietnam, Argentina, and Mexico. It also maintains sales and distribution entities located in China, Canada, the U.K., Chile, Argentina, Russia, Kazakhstan, India, Mexico, Uruguay, Australia, and Vietnam. The Company is vulnerable to currency risks in these countries. The functional currency for the United Kingdom subsidiary is the Euro; the trading company in China, the RMB; and the Russian operation, the Russian Ruble, and the Kazakhstan operation the Kazakhstan Tenge. All other operations have the US dollar as its functional currency.

Pursuant to US GAAP, assets and liabilities of the Company’s foreign operations with functional currencies other than the US dollar, are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’ equity. Cash flows are also translated at average translation rates for the periods, therefore amounts reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Fair Value of Financial Instruments. US GAAP defines fair value, provides guidance for measuring fair value and requires certain disclosures utilizing a fair value hierarchy which is categorized into three levels based on the inputs to the valuation techniques used to measure fair value. The following is a brief description of those three levels:

Level 1:	Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:	Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3:	Unobservable inputs that reflect management’s own assumptions.

Foreign currency forward and hedge contracts are recorded in the consolidated balance sheets at their fair value as of the balance sheet dates based on current market rates.

Significant Balance Sheet Fluctuation October 31, 2020, Compared to January 31, 2020

Cash increased by $25.6 million, primarily as a result of increased profitability and improved accounts receivable collection efficiency, offset by the payoff of the term loan outstanding at January 31, 2020. Accounts receivable increased due to the increase in sales. Inventory increased $0.8 million to support the increase in sales. Accounts payable, accrued compensation, and other accrued expenses increased $5.2 million. Capital expenditures for the three and nine months ended October 31, 2020 were $0.6 million and $1.3 million, respectively.

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Three Months ended October 31, 2020, Compared to the Three Months Ended October 31, 2019

Reference is made to “Overview; Response to COVID 19 Outbreak” above which should be read in conjunction with this Section.

Net Sales. Net sales increased to $41.5 million for the three months ended October 31, 2020 compared to $27.5 million for the three months ended October 31, 2019, an increase of 50.9%. Sales globally were driven by COVID 19 demand, as we realized increased sales in all markets for our disposable and chemical product lines. In addition to the increased volumes, sales were also impacted by price increases based on our normal, annual adjustments, special price increases due to increases in raw material costs, which we expect will be temporary, and increased sales to new customers, which are typically at prices above those for our recurring customers. We were able to meet this demand by increasing our manufacturing capacity with expanded operating hours. We estimate that approximately 35% of our revenues in the current quarter were related to COVID 19 demands. Other product lines such as fire, high performance high visibility, and wovens, which are primarily used by industrial customers, declined during the period due to various global shutdowns and quarantines.

Gross Profit. Gross profit increased $12.4 million, or 133.5%, to $21.7 million for the three months ended October 31, 2020, from $9.3 million for the three months ended October 31, 2019. Gross profit as a percentage of net sales increased to 52.3% for the three month period ended October 31, 2020, from 33.9% for the three months ended October 31, 2019. Major factors driving gross margins were:

	·	Significant increases in volumes driven by COVID 19 demand.
	·	Price increases described above.
	·	Improved manufacturing efficiency in substantially all locations as we increased the number of hours per shift and number of days per week.
	·	Increase in direct container sales.

Operating Expense. Operating expenses increased 23.2% from $7.5 million for the three months ended October 31, 2019 to $9.2 million for the three months ended October 31, 2020. Operating expenses as a percentage of net sales was 22.2% for the three months ended October 31, 2020, down from 27.1% for the three months ended October 31, 2019. Selling expenses were essentially flat, with increases in sales compensation and commissions offset by decreases in freight out, travel, advertising and marketing. General and administrative expenses were increased primarily due to increases in stock-based compensation, currency fluctuations, and increased incentive accruals. During the three months ended October 31, 2020 stock-based compensation of $0.7 million was recorded as a result of an increase in estimate of the number of shares expected to be earned under the stock performance plan due to increase in profitability over the measurement period. In the period ended October 31, 2019, stock-based compensation was reduced by $0.4 million due to a reduction in the number of shares expected to be earned under the performance plan.

Operating Profit. Operating profit increased to $12.5 million for the three months ended October 31, 2020 from $1.8 million for the three months ended October 31, 2019, due to the impacts detailed above. Operating margins were 30.1% for the three months ended October 31, 2020, as compared to 6.7% for the three months ended October 31, 2019

Interest Expense. Interest expense decreased slightly to $0.01 million for the three months ended October 31, 2020 from $0.03 million for the three months ended October 31, 2019 as a result of reduced borrowings.

Income Tax Expense. Income tax expense consists of federal, state and foreign income taxes. Income tax expense was $3.2 million for the three months ended October 31, 2020, compared to $0.7 million for the three months ended October 31, 2019, due to the increase in operating profit.

Net Income. Net income increased by $8.2 million to $9.3 million for the three months ended October 31, 2020 from $1.1 million for the three months ended October 31, 2019.

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Nine Months ended October 31, 2020, Compared to the Nine Months Ended October 31, 2019

Reference is made to “Overview; Response to COVID 19 Outbreak” above which should be read in conjunction with this Section.

Net Sales. Net sales increased to $122.1 million for the nine months ended October 31, 2020 compared to $79.6 million for the nine months ended October 31, 2019, an increase of 53.3%. Sales globally were driven by COVID 19 demand, as we realized significant increases in all markets for our disposable and chemical product lines. In addition to the increased volumes, sales were also impacted by price increases based on our normal, annual adjustments, special price increases due to increases in raw material costs, which we expect will be temporary, and increased sales to new customers, which are typically at prices above those for our recurring customers. We were able to meet this demand with inventory on hand by increasing our manufacturing capacity with expanded operating hours. Other product lines such as wovens, which are primarily used by industrial customers, declined during the period due to various global shutdowns and quarantines.

Gross Profit. Gross profit increased $33.9 million, or 124.3%, to $61.2 million for the nine months ended October 31, 2020, from $27.3 million for the nine months ended October 31, 2019. Gross profit as a percentage of net sales increased to 50.1% for the nine months ended October 31, 2020, from 34.3% for the nine months ended October 31, 2019. Major factors driving gross margins were:

	·	Significant increases in volumes driven by COVID 19 demand.
	·	Price increases described above.
	·	Improved manufacturing efficiency in substantially all locations as we increased the number of hours per shift and number of days per week.
	·	Reduction in SKUs led to increased run size that increased manufacturing throughput and improved efficiency.
	·	Increase in direct container sales.
	·	Sales of reserved inventory into COVID 19 applications.

Operating Expense. Operating expenses increased 15.0% from $23.1 million for the nine months ended October 31, 2019 to $26.6 million for the nine months ended October 31, 2020. Operating expenses as a percentage of net sales was 21.8% for the nine months ended October 31, 2020, down from 29.0% for the nine months ended October 31, 2019. Selling expenses increased $1.8 million, primarily due to sales compensation, external commissions, volume rebates to certain customers, and freight out, offset in part by decreases in travel, advertising and marketing. General and administrative expenses were increased due to increases in stock-based compensation, currency fluctuations, and incentive accruals, which were offset by decreases in salaries (including severance), temporary staffing, and professional fees. During the nine months ended October 31, 2020 stock-based compensation of $0.7 million was recorded as a result of an increase in estimate of the number of shares expected to be earned under the stock performance plan due to significant improvement in profitability for the period. For the nine months ended October 31, 2019, stock-based compensation was reduced by $0.8 million as it was deemed improbable that such shares would vest based on performance to date.

Operating Profit. Operating profit increased to $34.6 million for the nine months ended October 31, 2020 from $4.2 million for the nine months ended October 31, 2019, due to the impacts detailed above. Operating margins were 28.3% for the nine months ended October 31, 2020, as compared to 5.2% for the nine months ended October 31, 2019.

Interest Expense. Interest expense decreased to $0.01 million for the nine months ended October 31, 2020 from $0.1 million for the nine months ended October 31, 2019, as a result of less borrowings for the more current period.

Income Tax Expense. Income tax expense consists of federal, state and foreign income taxes. Income tax expense was $7.4 million for the nine months ended October 31, 2020, compared to $2.0 million for the nine months ended October 31, 2019, due to the increase in operating profit. Income tax expense for the nine months ended October 31, 2020 was reduced by $1.7 million due to certain modifications to the GILTI tax provisions enacted in the period.

Net Income. Net income increased by $25.2 million to $27.2 million for the nine months ended October 31, 2020 from $2.1 million for the nine months ended October 31, 2019.

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Liquidity and Capital Resources

At October 31, 2020, cash and cash equivalents were approximately $40.2 million and working capital was approximately $98.7 million. Cash and cash equivalents increased $25.6 million and working capital increased $31.8 million from January 31, 2020, due to increased profitability and a focus on working capital efficiencies.

Of the Company’s total cash and cash equivalents of $40.2 million as of October 31, 2020, cash held in Latin America of $1.8 million, cash held in Russia and Kazakhstan of $1.3 million, cash held in the UK of $1.4 million, cash held in India of $0.9 million and cash held in Canada of $3.1 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 $18.8 million balance at October 31, 2020 there would be an additional 10% withholding tax incurred in that country. The Company has strategically employed a dividend plan subject to declaration and certain approvals in which its Canadian subsidiary sends dividends to the US in the amount of 100% of the previous year’s earnings, the UK subsidiary sends dividends to the US in the amount of 50% of the previous year’s earnings, and the Weifang China subsidiary sends dividends to the US in declared amounts of the previous year’s earnings. No dividends were proposed by management or declared by our Board of Directors for our China subsidiary in the nine months ended October 31, 2020.

Net cash provided by operating activities of $28.0 million for the nine months ended October 31, 2020 was primarily due to net income of $27.2 million, non-cash expenses of $6.2 million for deferred taxes, depreciation and amortization, stock compensation, other non-cash charges and a $5.4 million increase in net working capital accounts. Net cash used in investing activities of $1.3 million for the nine months ended October 31, 2020 reflects planned investments in property and equipment. Net cash used in financing activities of $1.2 million for the nine months ended October 31, 2020, was due to the repayment of a term loan under a previous credit facility as the Company transitioned to the new Loan Agreement with Bank of America described below.

The Company has a $12.5 million revolving credit facility with Bank of America which commenced June 25, 2020, and which will expire on June 25, 2025. This facility currently carries an interest rate of 2.25% per annum. There are no borrowings outstanding under this facility at October 31, 2020. Maximum availability under this facility at October 31, 2020 was approximately $12.5 million. Our current credit facility requires, and any future credit facilities may also require, that we comply with specified financial covenants relating to fixed charge coverage ratio and limits on capital expenditures and investments in foreign subsidiaries. Our ability to satisfy these financial covenants can be affected by events beyond our control, and we cannot guarantee that we will meet the requirements of these covenants. These restrictive covenants could affect our financial and operational flexibility or impede our ability to operate or expand our business. Default under our credit facilities would allow the lenders to declare all amounts outstanding to be immediately due and payable. Our primary lender, Bank of America, has a security interest in substantially all of our US assets and pledges of 65% of the equity of the Company’s foreign subsidiaries. If our lender declares amounts outstanding under the credit facility to be due, the lender could proceed against our assets. Any event of default, therefore, could have a material adverse effect on our business.

The Company has experienced increased sales and order activity as a result of the COVID 19 pandemic and may need to increase inventories in order to continue to respond to this increased demand. Additionally, the Company intends to invest in capacity expansion which may require significant capital expenditures. See “Capital Expenditures” below. At this time the Company believes it has sufficient cash balances and other capital to fund operations, working capital, and future capital expenditures on both a short-term and long-term basis.

Stock Repurchase Program. On July 19, 2016, the Company’s board of directors approved a stock repurchase program under which the Company may repurchase up to $2,500,000 of its outstanding common stock. During the nine months ended October 31, 2020, the Company repurchased no shares of stock. The Company has repurchased 152,801 shares of stock under this program as of the date of this filing which amounted to $1,671,188, inclusive of commissions.

Capital Expenditures. Our capital expenditures for first nine months of FY21 of $1.3 million principally relate to capital purchases for our manufacturing facilities in Mexico, Vietnam and India, and the enhancement of our global IT infrastructure. We anticipate FY21 capital expenditures to be approximately $2.0 million as we continue to deploy our ERP solution globally, invest in strategic capacity expansion, and replace existing equipment in the normal course of operations.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item and therefore, no disclosure is required under Item 7A for the Company.

Item 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, with assistance from other members of management. We have reviewed the effectiveness of our process controls and procedures as of October 31, 2020 and, based on our evaluation, we have concluded that the disclosure controls and procedures were not effective as of that date due to the same material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

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 2021 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, 2020, we began implementing a remediation plan to address the material weakness mentioned above. The weakness 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 this material weakness will be completed prior to the end of fiscal 2021.

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PART II. OTHER INFORMATION

Items 1, 1A, 2, 3, 4 and 5 are not applicable.

Item 6. Exhibits:

Exhibits:*		Filed herewith

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934
31.2*		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934
32.1*		Certification of Chief Executive Officer as adopted pursuant to 18 U.S.C. Section 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		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
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101

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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)

Date: December 10, 2020		/s/ Charles D. Roberson
		Charles D. Roberson, Chief Executive Officer, President and Secretary (Principal Executive Officer and Authorized Signatory)

Date: December 10, 2020		/s/ Allen E. Dillard
		Allen E. Dillard, (Principal Financial Officer and Authorized Signatory)