LAKELAND INDUSTRIES INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page No. Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 32 Consolidated Statements of Income for the Years Ended January 31, 2022 and 2021 35 Consolidated Statements of Comprehensive Income for the Years Ended January 31, 2022 and 2021 36 Consolidated Balance Sheets as of January 31, 2022 and 2021 37 Consolidated Statements of Stockholders’ Equity for the Years Ended January 31, 2022 and 2021 38 Consolidated Statements of Cash Flows for the Years Ended January 31, 2022 and 2021 39 Notes to Consolidated Financial Statements 40-60 31 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Lakeland Industries, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Lakeland Industries, Inc. and subsidiaries (the “Company”) as of January 31, 2022 and 2021, the related statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the two years in the period ended January 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended January 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 21, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Inventories – Refer to Notes 1 and 2 to the financial statements Critical Audit Matter Description The Company’s inventory includes costs to acquire and produce the goods and is stated at the lower of cost or net realizable value on a first-in, first-out method (FIFO). The assessment of estimated obsolescence or unmarketable inventory involved judgment and is based upon assumptions about future sales and supply on-hand for certain inventory items. Total inventory of approximately $48 million is in part composed of products which were deemed to be slow moving based on historical inventory turns and sales history. An excess and obsolete adjustment of approximately $3 million was recorded by the Company. 32 Table of Contents Given the significant judgments made by management to evaluate the net realizable value of certain of its inventory products, performing audit procedures to evaluate the reasonableness of management’s assumptions related to those inventory adjustments required a high degree of auditor judgment and an increased extent of effort. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to valuation of slow moving, excess and obsolete inventory included, among others: · We tested the effectiveness of controls over management’s process to evaluate the need for adjustments for its slow-moving, obsolete or unusable inventory. · We tested the mathematical accuracy of management’s estimates of the net realizable value for slow-moving, obsolete or unusable inventory. · We evaluated management’s judgments as to the historical lookback period utilized in determining slow-moving, obsolete or unusable inventory. · We evaluated the valuation of slow moving, excess and obsolete inventory in relation to: ○ Historical results and actions ○ Communications between management and the board of directors ○ Industry information related to the market for these products ○ Subsequent events /s/ Deloitte & Touche LLP Memphis, Tennessee April 21, 2022 We have served as the Company’s auditor since 2020. 33 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Lakeland Industries, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Lakeland Industries, Inc. and subsidiaries (the “Company”) as of January 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended January 31, 2022, of the Company and our report dated April 21, 2022, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Memphis, Tennessee April 21, 2022 34 Table of Contents Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME For the Years Ended January 31, 2022 and 2021 ($000’s) except share information 2022 2021 Net sales $ 118,386 $ 159,000 Cost of goods sold 67,473 79,717 Gross profit 50,913 79,283 Operating expenses 34,866 35,397 Operating profit 16,047 43,886 Other income, net 121 50 Interest expense ( 15 ) ( 23 ) Income before taxes 16,153 43,913 Income tax expense 4,781 8,583 Net income $ 11,372 $ 35,330 Net income per common share: Basic $ 1.44 $ 4.43 Diluted $ 1.41 $ 4.34 Weighted average common shares outstanding: Basic 7,900,131 7,977,683 Diluted 8,053,876 8,141,189 The accompanying notes are an integral part of these consolidated financial statements. 35 Table of Contents Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended January 31, 2022 and 2021 ($000)’s 2022 2021 Net income $ 11,372 $ 35,330 Other comprehensive income: Foreign currency translation adjustments 114 1,150 Comprehensive income $ 11,486 $ 36,480 The accompanying notes are an integral part of these consolidated financial statements. 36 Table of Contents Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS January 31, 2022 and 2021 ($000’s) except share information ASSETS 2022 2021 Current assets Cash and cash equivalents $ 52,719 $ 52,596 Accounts receivable, net of allowance for doubtful accounts of $ 666 and $ 700 at January 31, 2022 and 2021, respectively 14,771 21,702 Inventories 47,711 43,566 Prepaid VAT and other taxes 1,675 1,343 Other current assets 3,770 4,134 Total current assets 120,646 123,341 Property and equipment, net 8,714 9,819 Operating leases right-of-use assets 5,296 2,347 Deferred tax assets 2,072 2,731 Other assets 1,361 1,312 Investments 2,704 - Total assets $ 140,793 $ 139,550 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 5,855 $ 7,397 Accrued compensation and benefits 3,225 4,694 Other accrued expenses 1,372 1,793 Income tax payable 321 1,534 Current maturity of long-term debt — — Current portion of operating lease liability 1,242 768 Total current liabilities 12,015 16,185 Long-term portion of operating lease liability 3,678 1,613 Total liabilities 15,693 17,799 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 8,555,672 and 8,498,457 ; outstanding 7,615,967 and 7,984,518 at January 31, 2022 and 2021, respectively 86 85 Treasury stock, at cost; 939,705 and 509,242 shares at January 31, 2022 and 2021, respectively ( 14,206 ) ( 5,023 ) Additional paid-in capital 77,826 76,781 Retained earnings 62,892 51,520 Accumulated other comprehensive loss ( 1,498 ) ( 1,612 ) Total stockholders’ equity 125,100 121,751 Total liabilities and stockholders’ equity $ 140,793 $ 139,550 The accompanying notes are an integral part of these consolidated financial statements. 37 Table of Contents Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Years Ended January 31, 2022 and 2021 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, 2020 as previously reported 8,481,665 $ 85 ( 509,242 ) $ ( 5,023 ) $ 75,171 $ 17,581 $ ( 2,762 ) $ 85,052 Impact of immaterial restatement (see Note 1) — — — — ( 1,391 ) — ( 1,391 ) Balance, January 31, 2020 as restated 8,481,665 $ 85 ( 509,242 ) $ ( 5,023 ) $ 75,171 $ 16,190 $ ( 2,762 ) $ 83,661 Net Income — — — — — 35,330 — 35,330 Other comprehensive loss — — — — — — 1,150 1,150 Stock-based compensation: Restricted stock issued 16,792 — — — — — — — Restricted stock plan — — — — 1,726 — — 1,726 Return of shares in lieu of payroll tax withholding — — — — ( 116 ) — — ( 116 ) Treasury stock purchased — — —- — — — — — Balance, January 31, 2021 8,498,457 $ 85 ( 509,242 ) $ ( 5,023 ) $ 76,781 $ 51,520 $ ( 1,612 ) $ 121,751 Net Income — — — — — 11,372 — 11,372 Other comprehensive income — — — — — — 114 114 Stock-based compensation: Restricted stock issued 57,215 1 — — — — — 1 Restricted stock plan — — — — 1,667 — — 1,667 Return of shares in lieu of payroll tax withholding — — — — ( 622 ) — — ( 622 ) Treasury stock purchased — — ( 430,463 ) ( 9,183 ) — — — ( 9,183 ) Balance, January 31, 2022 8,555,672 $ 86 ( 939,705 ) $ ( 14,206 ) $ 77,826 $ 62,892 $ ( 1,498 ) $ 125,100 38 Table of Contents Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended January 31, 2022 and 2021 ($000’s) 2022 2021 Cash flows from operating activities: Net income $ 11,372 $ 35,330 Adjustments to reconcile net income to net cash provided by operating activities Provision for (recovery of) doubtful accounts ( 34 ) 203 Deferred income taxes 659 2,909 Depreciation and amortization 1,868 1,965 Stock based and restricted stock compensation 1,667 1,727 Loss on disposal of property and equipment 39 7 Equity in (earnings) loss of equity investment 79 - (Increase) decrease in operating assets: Accounts receivable 6,732 ( 3,980 ) Inventories ( 4,413 ) 814 Prepaid VAT and other taxes ( 333 ) ( 115 ) Other current assets 271 ( 1,698 ) Increase (decrease) in operating liabilities: Accounts payable ( 1,533 ) 191 Accrued expenses and other liabilities ( 3,178 ) 3,283 Operating lease liabilities ( 411 ) 30 Net cash provided by operating activities 12,782 40,666 Cash flows from investing activities: Purchases of property and equipment ( 801 ) ( 1,662 ) Investments ( 2,783 ) Net cash used in investing activities ( 3,584 ) ( 1,662 ) Cash flows from financing activities Loan repayments, short-term — ( 1,161 ) Purchase of Treasury Stock under stock repurchase program ( 9,183 ) — Shares returned to pay employee taxes under restricted stock program ( 622 ) ( 116 ) Net cash used in financing activities ( 9,805 ) ( 1,277 ) Effect of exchange rate changes on cash and cash equivalents 727 263 Net increase in cash and cash equivalents 123 37,990 Cash and cash equivalents at beginning of year 52,596 14,606 Cash and cash equivalents at end of year $ 52,719 $ 52,596 Cash paid for interest $ 15 $ 23 Cash paid for taxes $ 5,315 $ 3,561 Noncash investing and financing activities Leased assets obtained in exchange for operating lease liabilities $ 3,368 $ 437 The accompanying notes are an integral part of these consolidated financial statements. 39 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Lakeland Industries, Inc. and Subsidiaries (“Lakeland,” the “Company,” “we,” “our” or “us”), a Delaware corporation organized in April 1986, manufacture and sell a comprehensive line of industrial protective clothing and accessories for the industrial and public protective clothing market. Our products are sold globally by our in-house sales teams, our customer service group, and authorized independent sales representatives to a network of over 1,600 global safety and industrial supply distributors. Our authorized distributors supply end users, such as integrated oil, chemical/petrochemical, automobile, steel, glass, construction, smelting, cleanroom, janitorial, pharmaceutical, and high technology electronics manufacturers, as well as scientific, medical laboratories and the utilities industry. In addition, we supply federal, state and local governmental agencies and departments, such as fire and law enforcement, airport crash rescue units, the Department of Defense, the Department of Homeland Security and the Centers for Disease Control. Internationally, we sell to a mixture of end users directly, and to industrial distributors depending on the particular country and market. Sales are made to more than 50 countries, the majority of which were into China, countries within the European Economic Community (“EEC”), Canada, Chile, Argentina, Russia, Kazakhstan, Colombia, Mexico, Ecuador, India and countries within Southeast Asia. For purposes of this Form 10-K, FY refers to a fiscal year ended January 31; for example, FY22 refers to the fiscal year ended January 31, 2022. Basis of Presentation The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The following is a description of the Company’s significant accounting policies. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates and Assumptions The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is reasonably possible that events could occur during the upcoming year that could change such estimates. Cash and Cash Equivalents The Company considers highly liquid temporary cash investments with original maturities of three months or less to be cash equivalents. Cash equivalents consist of money market funds. Accounts Receivable, Net . Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company estimates credit losses by considering historical credit losses, the current economic environment, customer credit ratings or bankruptcies. Inventories Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out or moving average basis) or net realizable value. Adjustments are recorded for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future sales and supply on-hand, if necessary. If actual market conditions are less favorable than those projected by management, additional inventory adjustments may be required. 40 Table of Contents Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives on a straight-line basis. Leasehold improvements and leasehold costs are amortized over the term of the lease or service lives of the improvements, whichever is shorter. The costs of additions and improvements which substantially extend the useful life of a particular asset are capitalized. Repair and maintenance costs are charged to expense. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the account, and the gain or loss on disposition is reflected in operating income. Assets held for sale are measured at the lower of carrying value or fair value less cost to sell. Gains or losses are recognized for any subsequent changes to fair value less cost to sell. However, gains are limited to cumulative losses previously recognized. Assets classified as held for sale are not depreciated. Impairment of Long-Lived Assets The Company evaluates the carrying value of long-lived assets to be held and used when events or changes in circumstances indicate the carrying value may not be recoverable. The Company measures any potential impairment on a projected undiscounted cash flow method. Estimating future cash flows requires the Company’s management to make projections that can differ materially from actual results. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from the asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Revenue Recognition Substantially all the Company’s revenue is derived from product sales, which consist of sales of the Company’s personal protective wear products to distributors. The Company considers purchase orders to be a contract with a customer. Contracts with customers are considered to be short-term when the time between order confirmation and satisfaction of the performance obligations is equal to or less than one year, and virtually all of the Company’s contracts are short-term. The Company recognizes revenue for the transfer of promised goods to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. The Company typically satisfies its performance obligations in contracts with customers upon shipment of the goods. Generally, payment is due from customers within 30 to 90 days of the invoice date, and the contracts do not have significant financing components. The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Shipping and handling costs associated with outbound freight are included in operating expenses, and for the years ended in FY22 and FY21 aggregated approximately $ 2.9 million and $ 3.9 million, respectively. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue. The transaction price includes estimates of variable consideration, related to rebates, allowances, and discounts that are reductions in revenue. All estimates are based on the Company’s historical experience, anticipated performance, and the Company’s best judgment at the time the estimate is made. Estimates for variable consideration are reassessed each reporting period and are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur upon resolution of uncertainty associated with the variable consideration. All the Company’s contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as quantity times price per unit. 41 Table of Contents The Company has seven revenue generating reportable geographic segments under ASC Topic 280 “Segment Reporting” and derives its sales primarily from its limited use/disposable protective clothing and secondarily from its sales of reflective clothing, high-end chemical protective suits, firefighting and heat protective apparel, reusable woven garments and gloves and arm guards. The Company believes disaggregation of revenue by geographic region and product line best depicts the nature, amount, timing, and uncertainty of its revenue and cash flows (see table below). Net sales by geographic region and by product line are included below: Year Ended January 31, (in millions of dollars) 2022 2021 External Sales by product lines: Disposables $ 67.2 $ 103.8 Chemical 24.5 31.2 Fire 8.2 7.5 Gloves 2.2 3.1 High Visibility 5.6 4.4 High Performance Wear 3.6 2.3 Wovens 7.1 6.7 Consolidated external sales $ 118.4 $ 159.0 Year Ended January 31, (in millions of dollars) 2022 2021 External Sales by region: USA $ 47.6 $ 70.6 Other foreign 7.1 9.0 Europe (UK) 10.3 16.8 Mexico 4.1 5.7 Asia 29.8 31.2 Canada 8.2 13.6 Latin America 11.3 12.1 Consolidated external sales $ 118.4 $ 159.0 42 Table of Contents Advertising Costs Advertising costs are expensed as incurred and included in operating expenses on the consolidated statement of income. Advertising and co-op costs amounted to $ 0.5 million and $ 0.7 million in FY22 and FY21, respectively, net of a co-op advertising allowance received from a supplier. Stock-Based Compensation The Company records the cost of stock-based compensation plans based on the fair value of the award on the grant date. For awards that contain a vesting provision, the cost is recognized over the requisite service period (generally the vesting period of the equity award) which approximates the performance period. For awards based on services already rendered, the cost is recognized immediately. Income Taxes The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing the consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss carryforwards and tax credits, are recorded as deferred tax assets or liabilities on the Company’s consolidated balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event the Company determines that it may not be able to realize all or part of its deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to income in the period of such determination. The Company recognizes tax positions that meet a “more likely than not” minimum recognition threshold. If necessary, the Company recognizes interest and penalties associated with tax matters as part of the income tax provision and would include accrued interest and penalties with the related tax liability in the consolidated balance sheets. Foreign Operations and Foreign Currency Translation The Company maintains manufacturing operations in Mexico, India, Argentina, Vietnam and the People’s Republic of China and can access independent contractors in China, Vietnam, Argentina and Mexico. It also maintains sales and distribution entities located in India, Canada, the U.K., Chile, China, Argentina, Russia, Kazakhstan, Uruguay, Australia and Mexico. The Company is vulnerable to currency risks in these countries. The functional currency for the United Kingdom subsidiary is the Euro; the trading company in China, the RMB; the Russian operation, the Russian Ruble, and the Kazakhstan operation the Kazakhstan Tenge. All other operations have the US dollar as its functional currency. Pursuant to US GAAP, assets and liabilities of the Company’s foreign operations with functional currencies, other than the US dollar, are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the periods. Translation adjustments are reported in accumulated other comprehensive loss, a separate component of stockholders’ equity. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Foreign currency transaction income (loss) included in net income for the years ended January 31, 2022 and 2021, were approximately $ 0.3 million and ($ 0.5 ) million, respectively. Fair Value of Financial Instruments US GAAP defines fair value, provides guidance for measuring fair value and requires certain disclosures utilizing a fair value hierarchy which is categorized into three levels based on the inputs to the valuation techniques used to measure fair value. The following is a brief description of those three levels: 43 Table of Contents Level1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. Level2: 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. Level3: Unobservable inputs that reflect management’s own assumptions. There were no foreign currency forward or hedge contracts at January 31, 2022 or January 31, 2021. 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. Net Income Per Share Net income per share are based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted net income per share are based on the weighted average number of common shares and common stock equivalents. The diluted net income per share calculation takes into account unvested restricted shares and the shares that may be issued upon exercise of stock options, reduced by shares that may be repurchased with the funds received from the exercise, based on the average price during the fiscal year. Recent Accounting Pronouncements The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued. Recently Adopted Accounting Standards In 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) . The new guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the tax basis of goodwill after a business combination, and the recognition of deferred tax liabilities for outside basis differences. The new guidance also changes the calculation of the income tax impact of hybrid taxes and the methodology for calculating income taxes in an interim period. We adopted this standard as of January 31, 2021 on either a prospective basis, or through a modified retrospective approach, as required by the standard. There was no cumulative effect adjustment recorded to retained earnings as the amount was not material. The effects of this standard on our financial position, results of operations and cash flows were not material. New Accounting Pronouncements Not Yet Adopted 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 consolidated financial statements. 44 Table of Contents Restatement For Correction of Immaterial Errors in Previously Issued Consolidated Financial Statements In connection with the preparation of the consolidated financial statements for the fiscal year ended January 31, 2022, the Company identified errors in its previously filed annual consolidated financial statements and unaudited quarterly consolidated financial statements. The errors were not material to any individual prior quarterly or annual period. The prior period errors were related to assumptions and estimates made related to intercompany profit in ending inventory, use of a blended rate to calculate state net operating losses within the income tax provision and assumptions made concerning compensation information used to calculate employee benefits in one of our foreign entities. These errors accumulated over time and prior to the beginning of FY 2022. In accordance with SEC Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (codified as Topic 1-N), the Company concluded that the correction of the errors was not material to any of its previously issued annual or interim financial statements. The Company has revised its previously issued consolidated financial statements contained in this Annual Report on Form 10-K to correct the effect of these immaterial errors for the corresponding periods. Accordingly, for these prior periods we revised the affected line items of our consolidated balance sheets, consolidated statements of income and comprehensive income, consolidated statements of stockholders’ equity, and consolidated statements of cash flows. The correction of the errors resulted in a $ 1.4 million decrease in retained earnings as of January 31, 2020. The effects of the correction of immaterial errors on the impacted accounts within the Consolidated Balance Sheets were as follows (in thousands): January 31, 2021 As Previously Reported Adjustment As Revised Inventories $ 43,833 ($ 267 ) $ 43,566 Deferred tax assets 2,839 ( 108 ) 2,731 Total Assets 139,925 ( 375 ) 139,550 Accrued compensation and benefits 3,902 792 4,694 Total Liabilities 17,007 792 17,799 Retained earnings 52,687 ( 1,167 ) 51,520 Total Stockholders’ Equity $ 122,918 ($ 1,167 ) $ 121,751 The effects of the correction of immaterial errors on the impacted accounts within the Consolidated Statements of Income were as follows (in thousands): Year ended January 31, 2021 As Previously Reported Adjustment As Revised Cost of goods sold $ 79,750 ($ 33 ) $ 79,717 Income before taxes 43,880 ( 33 ) 43,913 Income tax expense 8,774 ( 191 ) 8,583 Net income 35,106 224 35,330 Basic net income per common share $ 4.40 $ 0.03 $ 4.43 Diluted income per common share $ 4.31 $ 0.03 $ 4.34 45 Table of Contents The effects of the correction of immaterial errors on the impacted accounts within the Consolidated Statements of Cash Flows were as follows (in thousands): Year ended January 31, 2021 As Previously Reported Adjustment As Revised Net income $ 35,106 $ 224 $ 35,330 Deferred taxes 3,103 ( 194 ) 2,909 Inventory 547 267 814 Accrued expenses and other liabilities 3,580 ( 297 ) 3,283 Net cash provided by operating activities 40,666 --- 40,666 2. INVENTORIES Inventories consist of the following (in $000s): January 31, 2022 2021 Raw materials $ 20,231 $ 18,941 Work-in-process 626 409 Finished goods 29,910 26,780 Excess and obsolete adjustments ( 3,056 ) ( 2,564 ) $ 47,711 $ 43,566 3. PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following: Useful Life in Years January 31, 2022 2021 (000’s) (000’s) Machinery and equipment 3 - 10 $ 4,826 $ 5,095 Furniture and fixtures 3 - 10 1,067 1,065 Leasehold improvements Lease term 2,237 1,735 Computer hardware and software 3 4,741 4,652 Land and building 20 - 30 9,183 9,183 22,054 21,730 Less accumulated depreciation and amortization ( 13,372 ) ( 12,007 ) Construction-in-progress 32 96 $ 8,714 $ 9,819 Depreciation and amortization expense for FY22 and FY21 amounted to $ 1.9 million and $ 2.0 million, respectively. 46 Table of Contents 4. INVESTMENTS On October 18, 2021, the Company entered into an Investment Agreement (the “Investment Agreement”) with Inova Design Solutions Ltd, a private limited company incorporated under the laws of England and Wales and headquartered in the United Kingdom, doing business as Bodytrak ® (“Bodytrak”), and the other parties thereto, pursuant to which Bodytrak agreed to issue and sell to the Company 508,905 cumulative convertible series A shares of Bodytrak (“Series A Shares”) in exchange for a payment by the Company of £2,000,000 ($ 2.8 million). The closing of this minority investment transaction occurred on October 18, 2021. Bodytrak provides wearable monitoring solutions for customers in industrial health, safety, defense and first responder markets wanting to achieve better employee health and performance. Bodytrak’s solution is provided as a platform as a service (PaaS), delivering real-time data and cloud-based analytics, and hardware that includes a patented earpiece for, physiological monitoring and audio communications. The Series A Shares issued to the Company at the closing represent approximately 11.43 % of Bodytrak’s total share capital. Under the terms of the Investment Agreement, the Company may also elect, within 30 months of the date of the initial investment, to acquire up to an additional 381,679 Series A Shares of Bodytrak for £1,500,000 (approximately $ 2.0 million at current exchange rates) assuming all 381,679 Series A Shares are acquired by the Company), which would result in the Company owning an aggregate of 18.42 % of Bodytrak’s share capital, assuming no other shares are issued by Bodytrak. The investment in Bodytrak will be accounted for under the equity method given our board representation and the resulting ability to exercise significant influene. A substantial portion of our investment represents differences in our investment and our share of the underlying recognized net assets of Bodytrak. These differences are predominately attributable to non-amortizing intangible assets, including internally developed intellectual property, of Bodytrak. For the period October 18, 2021 (date of investment) through January 31, 2022, the Company recognized a loss of $ 0.1 million as the Company’s share of Bodytrak’s net loss. The loss is reflected in other income (expense), net in the consolidated statements of income. 5. 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 (i) $ 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 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. 47 Table of Contents On June 18, 2021, the Company entered into an Amendment No. 1 to Loan Agreement (the “Amendment”) with the Lender, which modifies certain terms of the Company’s existing Loan Agreement with the Lender. The Amendment increases the credit limit under the Loan Agreement’s senior secured revolving credit facility from $ 12.5 million to $ 25.0 million. The Amendment also amends the covenant in the Loan Agreement that restricts acquisitions by the Company or its subsidiaries in order to allow, without the prior consent of the Lender, acquisitions of a business or its assets if there is no default under the Loan Agreement and the aggregate consideration does not exceed $ 7.5 million for any individual acquisition or $ 15.0 million on a cumulative basis for all such acquisitions. The Loan Agreement requires the Company to maintain a Funded Debt to EBITDA (as each such term is defined in the Loan Agreement) ratio of 3.0 to 1.0 or less and a Basic Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of at least 1.15 to 1.0. The Loan Agreement also contains customary covenants, including covenants that, among other things, limit or restrict the Company’s and/or the Company’s subsidiaries’ ability, subject to certain exceptions and qualifications, to incur liens or indebtedness, pay dividends, or merge, consolidate or sell or otherwise transfer assets. The Company was in compliance with all of its debt covenants as of January 31, 2022. 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 January 31, 2022, 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 $ 1.2 million term loan that was outstanding under a similar agreement with SunTrust Bank. The Company has terminated the borrowing agreement with SunTrust Bank. 48 Table of Contents 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. On April 6, 2021 the facility was extended to March 31, 2022 and to reflect a reduction of the service charge from 0.85% to 0.765%. The agreement can be terminated with three months notice. There were no borrowings outstanding under this facility at January 31, 2022 and January 31, 2021. The amounts due from HSBC of $ 1.2 million and $ 2.0 million as of January 31, 2022, and January 31, 2021, respectively, is included in other current assets on the accompanying consolidated balance sheets. 6. CONCENTRATION OF RISK Credit Risk Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents, and trade receivables. Concentration of credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company’s customer base and their dispersion across geographic areas principally within the United States. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. The Company does not require customers to post collateral. The Company’s foreign financial depositories are Bank of America; China Construction Bank; Bank of China; China Industrial and Commercial Bank; HSBC (UK); Rural Credit Cooperative of Shandong; Postal Savings Bank of China; Punjab National Bank; HSBC in India, Argentina and UK; Raymond James in Argentina; TD Canada Trust; Banco Itaú S.A., Banco Credito Inversione in Chile; Banco Mercantil Del Norte SA in Mexico; ZAO KB Citibank Moscow in Russia, and JSC Bank Centercredit in Kazakhstan. The Company monitors its financial depositories by their credit rating which varies by country. In addition, cash balances in banks in the United States of America are insured by the Federal Deposit Insurance Corporation subject to certain limitations. There was approximately $ 13.3 million total included in the U.S. bank accounts and approximately $ 39.9 million total in foreign bank accounts as of January 31, 2022, of which $ 52.0 million was uninsured. Major Customer No customer accounted for more than 10 % of net sales during FY22 and FY21. Major Supplier No vendor accounted for more than 10 % of purchases during FY22 and FY21. 49 Table of Contents 7. STOCKHOLDERS’ EQUITY On June 21, 2017, the stockholders of the Company approved the Lakeland Industries, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). 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”). On June 16, 2021, the stockholders of the Company approved Amendment No. 1 (the “Amendment”) to the 2017 Plan. The Amendment increases the number of shares of common stock, par value $ 0.01 per share (the “Common Stock”), of the Company reserved for issuance under the Plan by 480,000 shares. An aggregate of 840,000 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 Company recognized total stock-based compensation costs, which are reflected in operating expenses (in 000’s): Year Ended January 31, 2022 2021 2017 Plan: Total restricted stock and stock option programs $ 1,667 $ 1,727 Total income tax expense recognized for stock-based compensation arrangements $ 350 $ 363 Restricted Stock Under the 2017 Plan, as described above, the Company awarded performance-based and service-based shares of restricted stock and restricted stock units to eligible employees and directors. The following table summarizes the activity under the 2017 Plan for the year ended January 31, 2022. This table reflects the amount of awards granted at the number of shares that would be vested if the Company were to achieve the maximum performance level under the December 2019, April 2020 and June 2021 grants. Performance- Based Service-Based Total Weighted Average Grant Date Fair Value Outstanding at January 31, 2021 245,210 30,930 276,140 $ 13.24 Awarded 46,202 14,970 61,172 $ 24.84 Vested ( 58,574 ) ( 30,930 ) (89,504 ) Forfeited ---- ---- ---- Outstanding at January 31, 2022 232,838 14,970 247,808 $ 20.89 50 Table of Contents 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”) margin, revenue growth, and free cash flow for the December 2019, April 2020 and June 2021 grants. The performance targets have been set for each of the Minimum, Target, and Maximum levels. The actual performance amount achieved is determined by the Committee and may be adjusted for items determined to be unusual in nature or infrequent in occurrence, at the discretion of the Committee. 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. As of January 31, 2022, unrecognized stock-based compensation expense totaled $ 1.6 million pursuant to the 2017 Plan based on outstanding awards under the Plan. This expense is expected to be recognized over approximately two years. Stock Repurchase Program On February 17, 2021, the Company’s Board of Directors approved a stock repurchase program under which the Company may repurchase up to $ 5 million of its outstanding common stock. On July 6, 2021, the Board of Directors authorized an increase in the Company’s current stock repurchase program under which the Company may repurchase up to an additional $ 5 million of its outstanding common stock (the "Existing Shares Repurchase Program") Shares repurchased in FY22 totaled 430,463 shares at a cost of $ 9.2 million leaving $ 0.8 million remaining under the stock repurchase program at January 31, 2022. On April 7, 2022, the Board of Directors authorized a new stock repurchase program under which the Company may repurchase up to $ 5 million of its outstanding common stock (the “New Share Repurchase Program”). The New Share Repurchase Program will become effective upon the completion of the Existing Share Repurchase Program, which has approximately $ 800,000 remaining for repurchases as of April 21, 2022. The New Share Repurchase Program has no expiration date but may be terminated by the Board of Directors at any time. 8. INCOME TAXES The provision for income taxes is based on the following pretax income (loss): Years Ended January 31, Domestic and Foreign Pretax Income 2022 2021 Domestic $ 1,519 $ 8,147 Foreign 14,634 35,766 Total $ 16,153 $ 43,913 Years Ended January 31, 2022 2021 Income Tax Expense (Benefit) Current: Federal ($ 171 ) $ 41 State and other taxes 88 54 Foreign 4,205 5,483 Total Current Tax Expense $ 4,122 $ 5,578 Deferred: Domestic $ 526 $ 3,005 Foreign 133 ---- Total Deferred Tax Expense $ 659 $ 3,005 Total Income Taxes $ 4,781 $ 8,583 51 Table of Contents The following is a reconciliation of the effective income tax rate to the Federal statutory rate: Years Ended January 31, 2022 2021 Statutory rate 21.00 % 21.00 % State Income Taxes, Net of Federal Tax Benefit ( 0.01 ) 0.90 Adjustment to Deferred ( 0.26 ) 0.29 GILTI 4.11 4.43 Permanent Differences ( 0.83 ) ( 0.09 ) Valuation Allowance-Deferred Tax Asset 4.81 2.20 Foreign Tax Credit ( 7.34 ) ( 7.61 ) Argentina Flow Through Loss 1.36 0.58 Foreign Dividend & Subpart F ( 5.27 ) 2.14 Foreign Rate Differential 9.22 ( 4.01 ) Change in State Apportionment Rate 3.52 - Other ( 0.71 ) ( 0.28 ) Effective Rate 29.60 % 19.55 % The tax effects of temporary cumulative differences which give rise to deferred tax assets are summarized as follows: Years Ended January 31, 2022 2021 Deferred tax assets: Inventories $ 806 $ 955 US tax loss carryforwards, including work opportunity credit 167 167 Accounts receivable and accrued rebates 145 378 Accrued compensation and other 211 446 India reserves - US deduction 32 43 Equity based compensation 807 535 Foreign tax credit carry-forward 3,209 2,430 State and local carry-forwards 16 287 Depreciation and amortization ( 186 ) ( 265 ) Prepaid expenses ( 219 ) ( 121 ) Brazil write-down 196 220 Right-of-use asset ( 738 ) ( 239 ) Operating lease liability 762 241 Other 93 93 Deferred tax asset 5,282 5,170 Less valuation allowance ( 3,210 ) ( 2,439 ) Net deferred tax asset $ 2,072 $ 2,731 52 Table of Contents Tax Reform On December 22, 2017, federal tax reform legislation was enacted in the United States, resulting in significant changes from previous tax law. The 2017 Tax Cuts and Jobs Act (the Tax Act) reduced the federal corporate income tax rate to 21 % from 35 % effective January 1, 2018. The Tax Act requires us to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring our US deferred tax assets as well as reassessing the net realizability of our deferred tax assets. The Company completed this re-measurement and reassessment in FY18. While the Tax Act provides for a modified territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Re-measurement and reassessment of the GILTI tax resulted in a charge to tax expense of $ 0.7 million and $ 1.1 million in FY22 and FY21, respectively. The Company intends to account for the GILTI tax in the period in which it is incurred. Though this non-cash expense (due to available NOL’s) had a materially negative impact on FY22 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. The Company strategically employs a dividend plan with respect to our non-U.S. subsidiaries subject to subsidiary profitability, cash requirements and withholding taxes. During FY22 the Company’s subsidiaries in Canada, Uruguay and Hong Kong declared and paid dividends of $ 2.6 million, $ 1.0 million and $ 4.4 million respectively. Withholding taxes totaling $ 0.2 million are included in income tax expense. No dividends were proposed by management or declared by our Board of Directors for our China subsidiary in FY22 or FY21. Income Tax Audits The Company is subject to US federal income tax, as well as income tax in multiple US state and local jurisdictions and a number of foreign jurisdictions. Returns for the years since FY18 are still open based on statutes of limitation only. Chinese tax authorities have performed limited reviews on all Chinese subsidiaries as of tax years 2008 through 2018 with no significant issues noted and we believe our tax positions are reasonably stated as of January 31, 2022. Weifang Meiyang Products Co., Ltd. (“Meiyang”), one of our Chinese operations, was changed to a trading company from a manufacturing company in Q1 FY16 and all direct workers and equipment were transferred from Meiyang to Weifang Lakeland Safety Products Co., Ltd., (“WF”), another entity of our Chinese operation thereby reducing our tax exposure. The 2021 tax review will be performed before May 30, 2022 in China. Change in Valuation Allowance We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. The valuation allowance for the year ended January 31, 2022 and January 31, 2021 was $ 3.2 million and $ 2.4 million, respectively. 53 Table of Contents 9. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income per share as follows: Years Ended January 31, (000’s except share information) 2022 2021 Numerator – Net Income $ 11,372 $ 35,330 Denominator for basic net income per share (weighted-average shares which reflect 939,705 and 509,242 treasury shares at January 31, 2022 and 2021, respectively) 7,900,131 7,977,683 Effect of dilutive securities from restricted stock plan and from dilutive effect of stock options 153,745 163,506 Denominator for diluted net income per share (adjusted weighted average shares) 8,053,876 8,141,189 Basic net income per share $ 1.44 $ 4.43 Diluted net income per share $ 1.41 $ 4.34 10. Derivative Instruments and Foreign Currency Exposure The Company is exposed to foreign currency risk. Management has commenced a derivative instrument program to partially offset this risk by purchasing forward contracts to sell the Canadian Dollar and the Euro other than the cash flow hedge discussed below. Such contracts are largely timed to expire with the last day of the fiscal quarter, with a new contract purchased on the first day of the following quarter, to match the operating cycle of the Company. We designated the forward contracts as derivatives but not as hedging instruments, with loss and gain recognized in current earnings. The Company accounts for its foreign exchange derivative instruments by recognizing all derivatives as either assets or liabilities at fair value, which may result in additional volatility in current period earnings or other comprehensive income, depending whether the instrument was designated as a cash flow hedge, as a result of recording recognized and unrecognized gains and losses from changes in the fair value of derivative instruments. We have one type of derivatives to manage the risk of foreign currency fluctuations. We enter into forward contracts with financial institutions to manage our currency exposure related to net assets and liabilities denominated in foreign currencies. Those forward contract derivatives, not designated as hedging instruments, were generally settled quarterly. Gain and loss on those forward contracts are included in current earnings. There were no outstanding forward contracts at January 31, 2022 or 2021. 11. COMMITMENTS AND CONTINGENCIES Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. 54 Table of Contents If the assessment of a contingency indicates that it is probable that a material loss has been or is probable of being incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. General litigation contingencies The Company is involved in various litigation proceedings arising during the normal course of business which, in the opinion of the management of the Company, will not have a material effect on the Company’s financial position, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these matters. As of January 31, 2022, to the best of the Company’s knowledge, there were no significant outstanding claims or litigation. Leases We lease real property, equipment and automobiles. The Company made the accounting policy election to account for short-term leases as described herein. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. The Company determines if a contract contains a lease at inception. US GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option would result in an economic penalty. All of the Company’s real estate leases are classified as operating leases. Most of our real estate leases include one or more options to renew, with renewal terms that generally can extend the lease term for an additional four to five years. The exercise of lease renewal options is at the Company’s discretion. The Company evaluates renewal options at lease inception and on an ongoing basis, and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants. 55 Table of Contents Lease cost The components of lease expense are included on the consolidated statement of operations as follows (in 000’s): Classification Year Ended January 31, 2022 Year Ended January 31, 2021 Operating lease cost Cost of goods sold $ 656 $ 727 Operating expenses $ 908 $ 625 Short-term lease cost $ 114 $ 176 Weighted-average lease terms and discount rates are as follows: January 31, 2022 January 31, 2021 Weighted-average remaining lease term (years) Operating leases 8.25 3.96 Weighted-average discount rate Operating leases 4.32 % 7.15 % Supplemental cash flow information related to leases were as follows (in 000’s): Year Ended January 31, 2022 Year Ended January 31, 2021 Cash paid for amounts included in the measurement of lease liabilities; Operating cash flows from operating leases $ 406 $ 1,154 Leased assets obtained in exchange for new operating lease liabilities $ 3,368 $ 981 Maturity of Lease Liabilities Maturity of lease liabilities as of January 31, 2022 was as follows (in $000’s): Year ending January 31, Operating Leases 2023 $ 1,242 2024 850 2025 484 2026 452 2027 446 Thereafter 2,215 Total lease payments 5,689 Less: Interest 769 Present value of lease liability $ 4,920 56 Table of Contents 12. SEGMENT REPORTING Domestic and international sales from continuing operations are as follows in millions of dollars: 2022 2021 Domestic $ 47.61 $ 70.59 International 70.78 88.41 Total $ 118.39 $ 159.00 We manage our operations by evaluating each of our geographic locations. Our US operations include a facility in Alabama (primarily the distribution to customers of the bulk of our products and the light manufacturing of our chemical, wovens, reflective, and fire products). The Company also maintains one manufacturing company in China (primarily disposable and chemical suit production), a manufacturing facility in Mexico (primarily disposable, reflective, fire and chemical suit production), a manufacturing facility in Vietnam (primarily disposable production) and a small manufacturing facility in India. Our China facilities produce the majority of the Company’s products and China generates a significant portion of the Company’s international revenues. We evaluate the performance of these entities based on operating profit, which is defined as income before income taxes, interest expense and other income and expenses. We have sales forces in the USA, Canada, Mexico, Europe, Latin America, India, Russia, Kazakhstan and China, which sell and distribute products shipped from the United States, Mexico, India or China. The table below represents information about reported segments for the years noted therein: Year Ended January 31, 2022 2021 (in millions of dollars) Net Sales USA Operations (including Corporate) $ 51.44 $ 73.91 Other foreign 9.73 11.89 Europe (UK) 10.31 16.80 Mexico 5.23 6.80 Asia 75.82 91.03 Canada 8.20 13.61 Latin America 11.80 12.40 Less intersegment sales ( 54.14 ) ( 67.44 ) Consolidated sales $ 118.39 $ 159.00 External Sales USA Operations (including Corporate) $ 47.61 $ 70.59 Other foreign 7.07 9.03 Europe (UK) 10.31 16.80 Mexico 4.06 5.70 Asia 29.80 31.22 Canada 8.20 13.61 Latin America 11.34 12.05 Consolidated external sales $ 118.39 $ 159.00 Intersegment Sales USA Operations (including Corporate) $ 3.83 $ 3.32 Other foreign 2.66 2.87 Mexico 1.17 1.10 Asia 46.02 59.80 Canada — — Latin America 0.46 0.35 Consolidated intersegment sales $ 54.14 $ 67.44 57 Table of Contents Year Ended January 31, 2022 2021 (in millions of dollars) Operating Profit (Loss): USA Operations (including Corporate) $ ( 4.09 ) $ 8.38 Other foreign 1.84 4.68 Europe (UK) 1.18 4.83 Mexico ( 1.01 ) — Asia 13.89 21.95 Canada 1.07 2.28 Latin America 2.35 3.59 Less intersegment (profit) loss 0.82 ( 1.82 ) Consolidated operating profit $ 16.05 $ 43.89 Depreciation and Amortization Expense: USA Operations (including Corporate) $ 0.88 $ 0.87 Other foreign 0.07 0.05 Europe (UK) - 0.01 Mexico 0.20 0.18 Asia 0.58 0.73 Canada 0.11 0.09 Latin America 0.03 0.04 Less intersegment ---- ( 0.01 ) Consolidated depreciation and amortization expense $ 1.87 $ 1.96 58 Table of Contents Year Ended January 31, 2022 2021 (in millions of dollars) Total Assets: USA Operations (including Corporate) $ 77.76 $ 76.22 Other foreign 9.32 8.74 Europe (UK) 8.79 11.33 Mexico 5.24 5.68 Asia 66.97 64.39 Canada 4.99 8.03 Latin America 7.46 7.07 Less intersegment ( 39.74 ) ( 41.91 ) Consolidated assets $ 140.79 $ 139.55 Total Assets Less Intersegment: USA Operations (including Corporate) $ 53.36 $ 51.74 Other foreign 8.92 8.37 Europe (UK) 8.79 11.33 Mexico 5.06 5.62 Asia 52.26 47.49 Canada 4.99 8.03 Latin America 7.41 6.97 Consolidated assets $ 140.79 $ 139.55 Property and Equipment: USA Operations (including Corporate) $ 2.78 $ 3.05 Other foreign 0.25 0.25 Europe (UK) — — Mexico 2.15 2.34 Asia 2.42 2.94 Canada 0.95 1.06 Latin America 0.07 0.08 Less intersegment 0.09 0.09 Consolidated long-lived assets $ 8.71 $ 9.81 Capital Expenditures: USA Operations (including Corporate) $ 0.64 $ 0.59 Other foreign 0.04 0.15 Europe (UK) ---- - Mexico 0.03 0.35 Asia 0.06 0.49 Canada 0.03 — Latin America ---- 0.08 Consolidated capital expenditure $ 0.80 $ 1.66 59 Table of Contents 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The unaudited quarterly financial information reflects all normal and recurring accruals and adjustments necessary for a fair presentation of net income for interim periods including, the result of the correction of immaterial errors discussed in Note 1. “Business and Summary of Significant Accounting Policies.” These corrections decreased cost of goods sold by $ 0.1 million for the quarters ended October 31, 2021 and July 31, 2021 and $ 0.4 million for the quarter ended April 30, 2021. These corrections increased income tax expense by $ 0.03 million for the quarter ended October 31, 2021, decreased income tax expense by $ 0.3 million for the quarter ended July 31, 2021 and increased income tax expense by $ 0.03 million for the quarter ended April 30, 2021. These corrections increased net income by $ 0.1 million for the quarter ended October, 31, 2021 and increased net income by $ 0.4 million for the quarters ended July 31, 2021 and April 30, 2021. Basic EPS increased $ 0.01 for the quarter ended October 31, 2021,by $ 0.05 for the quarters ended July 31, 2021 and April 30, 2021. Diluted EPS increased $ 0.01 for quarter ended October 31, 2021, increased $ 0.05 for the quarter ended July 31, 2021 and increased $ 0.04 for the quarter April 30, 2021. These corrections decreased cost of goods sold by $ 0.1 million for the quarters ended October 31, 2020, July 31, 2020 and April 30, 2020. These corrections increased cost of goods sold by $ 0.2 million for the quarter ended January 31, 2021. These corrections decreased income tax expense by $ 0.05 million for the quarters ended January 31, 2021, October, 31, 2020, July 31, 2020 and April 30, 2020. These corrections decreased net income by $ 0.1 million for the quarter ended January 31, 2021. These corrections increased net income by $ 0.1 million for the quarters ended October, 31, 2020, July 31, 2020 and April 30, 2020. Basic EPS decreased $ 0.02 for the quarter ended January 31, 2021. Basic EPS increased $ 0.02 for the quarters ended October 31, 2020, July 31, 2020 and April 30, 2020. Diluted EPS decreased $ 0.02 for the quarter ended January 31, 2021. Diluted EPS increased $ 0.02 for the quarters ended October 31, 2020 and April 30, 2020 and increased $ 0.01 for the quarter ended July 31, 2020. Quarterly results are not necessarily indicative of a full year’s operations because of various factors. The following tables present unaudited quarterly financial information for the periods presented: Fiscal Year 2022 In thousands except EPS Fourth Quarter Ended January 31, 2022 Third Quarter Ended October 31, 2021 Second Quarter Ended July 31, 2021 First Quarter Ended April 30, 2021 Net sales $ 26,796 $ 30,032 $ 27,466 $ 34,092 Cost of goods sold 16,289 17,262 14,609 19,313 Operating profit 1,124 4,226 4,066 6,631 Income tax expense 744 1,328 1,094 1,615 Net income 507 2,895 2,968 5,002 Weighted average shares used in computing basic EPS 7,832,621 7,849,591 7,982,995 7,989,215 Weighted average shares used in computing diluted EPS 7,992,499 7,998,965 8,141,107 8,143,805 Basic EPS $ 0.06 $ 0.37 $ 0.37 $ 0.63 Diluted EPS $ 0.06 $ 0.36 $ 0.36 $ 0.61 Fiscal Year 2021 In thousands except EPS Fourth Quarter Ended January 31, 2021 Third Quarter Ended October 31, 2020 Second Quarter Ended July 31, 2020 First Quarter Ended April 30, 2020 Net sales $ 36,946 $ 41,451 $ 35,021 $ 45,582 Cost of goods sold 19,060 19,688 17,606 23,363 Operating profit 9,064 12,568 9,809 12,445 Income tax expense 1,340 3,189 377 3,677 Net income 7,725 9,387 9,461 8,757 Weighted average shares used in computing basic EPS 7,982,018 7,979,902 7,976,275 7,972,423 Weighted average shares used in computing diluted EPS 8,182,337 8,123,848 8,079,744 8,044,849 Basic EPS $ 0.97 $ 1.18 $ 1.19 $ 1.10 Diluted EPS $ 0.94 $ 1.16 $ 1.17 $ 1.09 60 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.