LAKELAND INDUSTRIES INC 10-Q

Item 1. Financial Statements LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ($000’s except for share and per share information) Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Net sales $ 31,678 $ 28,387 $ 93,449 $ 83,849 Cost of goods sold 18,317 16,083 53,461 48,862 Gross profit 13,361 12,304 39,988 34,987 Operating expenses 9,740 10,082 30,699 29,522 Operating profit 3,621 2,222 9,289 5,465 Other income (expense), net ( 53 ) ( 72 ) ( 187 ) ( 140 ) Interest expense ( 13 ) ( 4 ) ( 22 ) ( 25 ) Income before taxes 3,555 2,146 9,080 5,300 Income tax expense 937 715 2,677 3,610 Net income (loss) $ 2,618 $ 1,431 $ 6,402 $ 1,690 Net income (loss) per common share: Basic $ 0.35 $ 0.19 $ 0.87 $ 0.22 Diluted $ 0.34 $ 0.19 $ 0.85 $ 0.22 Weighted average common shares outstanding: Basic 7,428,557 7,514,725 7,344,559 7,600,272 Diluted 7,614,404 7,704,695 7,528,723 7,787,662 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) ($000’s) Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Net income (loss) $ 2,618 $ 1,431 $ 6,402 $ 1,690 Other comprehensive income (loss): Foreign currency translation adjustments ( 483 ) ( 1,744 ) ( 2,110 ) ( 2,916 ) Comprehensive income (loss) $ 2,135 $ ( 313 ) $ 4,292 $ ( 1,226 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (000’s except for share information) ASSETS October 31, January 31, 2023 2023 Current assets Cash and cash equivalents $ 26,425 $ 24,639 Accounts receivable, net of allowance for doubtful accounts of $ 769 and $ 800 at October 31, 2023 and January 31, 2023, respectively 18,227 17,296 Inventories 54,350 58,176 Prepaid VAT and other taxes 2,633 1,963 Income tax receivable and other current assets 2,385 2,908 Total current assets 104,020 104,982 Property and equipment, net 9,158 9,140 Operating leases right-of-use assets 10,495 5,472 Deferred tax assets 3,790 2,764 Other assets 134 100 Goodwill 8,473 8,473 Intangible assets, net 5,736 6,042 Investments 6,509 5,354 Total assets $ 148,315 $ 142,327 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 6,803 $ 6,558 Accrued compensation and benefits 3,670 2,522 Other accrued expenses 1,951 4,068 Income tax payable 1,057 - Short-term borrowings - 405 Accrued earnout agreement 492 3,182 Current portion of operating lease liabilities 1,538 1,253 Total current liabilities 15,511 17,988 Deferred income taxes 12 769 Long-term portion of operating lease liabilities 9,203 3,580 Total liabilities 24,726 22,337 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 8,722,965 and 8,655,699 ; outstanding 7,364,757 and 7,325,005 at October 31, 2023 and January 31, 2023, respectively 87 87 Treasury stock, at cost; 1,358,208 and 1,330,694 shares at October 31, 2023 and January 31, 2023, respectively ( 19,979 ) ( 19,646 ) Additional paid-in capital 78,802 78,475 Retained earnings 70,480 64,765 Accumulated other comprehensive loss ( 5,801 ) ( 3,691 ) Total stockholders' equity 123,589 119,990 Total liabilities and stockholders' equity $ 148,315 $ 142,327 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents 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, 2022 8,555,672 $ 86 ( 939,705 ) $ ( 14,206 ) $ 77,826 $ 62,892 $ ( 1,498 ) $ 125,100 Net income — — — — — 1,690 — 1,690 Other comprehensive loss — — — — — — ( 2,916 ) ( 2,916 ) Stock-based compensation: Restricted stock issued 94,908 1 — — — — — 1 Restricted Stock Plan — — — — 1,141 — — 1,141 Return of shares in lieu of payroll withholding — — — — ( 805 ) — — ( 805 ) Treasury stock purchased — — ( 390,989 ) ( 5,440 ) - — — ( 5,440 ) Balance, October 31, 2022 8,650,580 $ 87 ( 1,330,694 ) $ ( 19,646 ) $ 78,162 $ 64,582 $ ( 4,414 ) $ 118,771 Balance, July 31, 2022 8,650,580 $ 87 ( 1,135,855 ) $ ( 17,332 ) $ 77,811 $ 63,151 $ ( 2,670 ) $ 121,047 Net income — — — — — 1,431 — 1,431 Other comprehensive loss — — — — — — ( 1,744 ) ( 1,744 ) Stock-based compensation: Restricted stock issued — — — — — — — Restricted stock plan — — — — 351 — — 351 Return of shares in lieu of payroll withholding — — — — - — — — Treasury stock purchased — — ( 194,839 ) ( 2,314 ) - — — ( 2,314 ) Balance, October 31, 2022 8,650,580 $ 87 ( 1,330,694 ) $ ( 19,646 ) $ 78,162 $ 64,582 $ ( 4,414 ) $ 118,771 Balance, January 31, 2023 8,655,699 $ 87 ( 1,330,694 ) $ ( 19,646 ) $ 78,475 $ 64,765 $ ( 3,691 ) $ 119,990 Net income — — — — — 6,402 — 6,402 Other comprehensive loss — — — — — — ( 2,110 ) ( 2,110 ) Dividends — — — — — ( 687 ) ( 687 ) Stock-based compensation: Restricted stock issued 67,266 — — — — — — — Restricted stock plan — — — — 747 — — 747 Return of shares in lieu of payroll withholding — — — — ( 420 ) — — ( 420 ) Treasury stock purchased — — ( 27,514 ) ( 333 ) — - — ( 333 ) Balance, October 31, 2023 8,722,965 $ 87 ( 1,358,208 ) $ ( 19,979 ) $ 78,802 $ 70,480 $ ( 5,801 ) $ 123,589 Balance, July 31, 2023 8,721,232 $ 87 ( 1,358,208 ) $ ( 19,979 ) $ 78,511 $ 68,084 $ ( 5,318 ) $ 121,385 Net income — — — — — 2,618 — 2,618 Other comprehensive loss — — — — — — ( 483 ) ( 483 ) Dividends — — — — — ( 222 ) — ( 222 ) Stock-based compensation: Restricted stock issued 1,733 — — — — — — Restricted stock plan — — — — 302 — — 302 Return of shares in lieu of payroll withholding — — — — ( 11 ) — — ( 11 ) Treasury stock purchased — — — — — Balance, October 31, 2023 8,722,965 $ 87 ( 1,358,208 ) $ ( 19,979 ) $ 78,802 $ 70,480 $ ( 5,801 ) $ 123,589 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ($000’s) Nine Months Ended October 31, 2023 2022 Cash flows from operating activities: Net income $ 6,402 $ 1,690 Adjustments to reconcile net income to net cash (used in) provided by operating activities Provision for (recovery of) doubtful accounts ( 31 ) 92 Deferred income taxes ( 1,783 ) 1,788 Depreciation and amortization 1,609 1,370 Stock based and restricted stock compensation 747 1,141 (Gain) loss on disposal of property and equipment ( 1 ) ( 4 ) Loss on equity investment 354 252 Revaluation of earnout consideration ( 2,689 ) - (Increase) decrease in operating assets Accounts receivable ( 963 ) ( 2,197 ) Inventories 3,211 ( 10,257 ) Prepaid VAT and other taxes ( 670 ) ( 106 ) Other assets 285 ( 22 ) Increase (decrease) in operating liabilities Accounts payable 141 613 Accrued expenses and other liabilities 235 499 Operating lease liabilities 886 ( 89 ) Net cash provided by (used in) operating activities 7,733 ( 5,230 ) Cash flows from investing activities: Purchases of property and equipment ( 1,505 ) ( 1,273 ) Investments ( 1,510 ) ( 3,061 ) Net cash (used in) investing activities: ( 3,015 ) ( 4,334 ) Cash flows from financing activities: Short-term borrowings (repayments) ( 405 ) - Purchase of treasury stock under stock repurchase program ( 333 ) ( 5,440 ) Dividends paid ( 687 ) - Shares returned to pay employee taxes under restricted stock program ( 420 ) ( 805 ) Net cash (used in) financing activities ( 1,845 ) ( 6,245 ) Effect of exchange rate changes on cash and cash equivalents ( 1,087 ) ( 1,961 ) Net increase (decrease) in cash and cash equivalents 1,786 ( 17,770 ) Cash and cash equivalents at beginning of period 24,639 52,719 Cash and cash equivalents at end of period $ 26,425 $ 34,949 Supplemental disclosure of cash flow information: Cash paid for interest $ 22 $ 25 Cash paid for taxes $ 1,745 $ 2,614 Noncash investing and financing activities Leased assets obtained in exchange for operating lease liabilities $ 4,099 $ 34 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED 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 in-house sales teams, our customer service group, and authorized independent sales representatives to a network of over 2,000 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 directly to a mixture of end users and 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, Middle East and countries within Southeast Asia. 2. Basis of Presentation The condensed consolidated financial statements of the Company are unaudited. These condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary by management to fairly state the Company's results. Intercompany accounts and transactions have been eliminated. The results reported in these condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire fiscal year ending January 31, 2024, or for any future period. The January 31, 2023, Condensed Consolidated Balance Sheet data was derived from the audited Consolidated Balance Sheet, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto as of January 31, 2023 and 2022, and for each of the two years in the period ended January 31, 2023, included in our most recent annual report on Form 10-K filed on April 18, 2023 . In this Form 10-Q, (a) “FY” means fiscal year; thus for example, FY24 refers to the fiscal year ending January 31, 2024, (b) “Q” refers to quarter; thus, for example, Q3 FY24 refers to the third quarter of the fiscal year ending January 31, 2024, (c) “Balance Sheet” refers to the unaudited condensed consolidated balance sheet, and (d) “Statement of Operations” refers to the unaudited condensed consolidated statement of operations. 3. Investments and Acquisitions Bodytrak 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. The Series A Shares issued to the Company at the closing represented approximately 11.43 % of Bodytrak’s total share capital. On April 28, 2022, the Company, under the terms of the Investment Agreement, acquired an additional 381,679 Series A1 Shares of Bodytrak for £1,500,000 ($ 1.9 million). On October 26, 2022, the Company acquired an additional 254,452 Series A Shares of Bodytrak for £1,000,000 ($ 1.2 million). After completion of these additional investments, the Company owned 22.5 % of Bodytrak’s total share capital. The investment in Bodytrak is accounted for under the equity method, given our board representation and the resulting ability to exercise significant influence. 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 of Bodytrak, including internally developed intellectual property. 8 Table of Contents On May 19, 2023, the Company entered into an agreement with Bodytrak to provide an additional investment up to an aggregate of £1,500,000 ($ 1.9 million on the date of initial investment) in the form of a secured convertible loan. An initial investment funding of £500,000 ($ 0.6 million on the date of investment) was made on May 19, 2023. An additional investment funding of £700,000 ($ 0.9 million on the date of investment) was made on September 8, 2023. The loaned amounts are due twenty-four months from the issue date, which can be extended upon mutual agreement. The convertible note bears interest at either an annual rate of 12% for cash interest or 15% for payment in kind interest on the outstanding amount under the note, such rate being selected by Bodytrak. The notes can be converted into equity shares of Bodytrak under a number of conditions, including a qualified equity financing as defined in the agreement, a change of control, an IPO, default or conversion at the discretion of the Company and upon the occurrence of the specified event. The convertible note is secured by Bodytrak’s intellectual property. 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, cloud-based analytics, and hardware that includes a patented earpiece for physiological monitoring and audio communications. The Company recognized losses of $ 0.1 and $ 0.1 million for the three months ended October 31, 2023 and 2022, respectively, and recognized losses of $ 0.4 million and $ 0.3 million for the nine months ended October 31, 2023 and 2022, respectively, as the Company’s share of Bodytrak’s net loss. The loss is reflected in other income (expense), net in the consolidated statements of operations. Acquisition of Eagle On December 2, 2022, the Company acquired 100 % of Eagle Technical Products Limited’s (Eagle) common stock in an all-cash transaction valued at $ 10.5 million, net of net working capital acquired. Headquartered in Manchester, UK, Eagle is a leading designer and provider of protective apparel to the fire and industrial sectors. Eagle provides differentiated product offerings through its innovative and technical solutions. Eagle’s operating results are included in our consolidated financial statements from the acquisition date. The acquisition qualified as a business combination and was accounted for using the acquisition method of accounting. As part of the Eagle acquisition agreement, the Company agreed to pay an earnout payment equal to the amount by which Eagle’s revenue exceeds 6 million GBP for the period May 1, 2022 through April 30, 2023. The Company also agreed to pay an earnout payment equal to the amount by which Eagle’s revenue exceeds 6.3 million GBP for the period May 1, 2023 through April 30, 2024. The estimated amount of the earnout payment developed using a Monte Carlo simulation included in the preliminary valuation was $3.2 million . Eagle did not reach the revenue threshold for the period May 1, 2022 through April 30, 2023 and received no payment for that period. Based on the revised forecast for the period May 1, 2023 through April 30, 2024, the estimated amount of the earnout payment developed using a Monte Carlo simulation is $0.5 million . The adjustment to the accrued earnout payment of $ 1.5 million was recorded in the quarter ended October 31, 2023 and an adjustment of $ 2.7 million was recorded in the nine months ended October 31, 2023, and reflected as a reduction in operating expenses. The following unaudited pro forma information presents our combined results as if the Eagle acquisition had occurred at the beginning of FY22. The unaudited pro forma financial information was prepared to give effect to events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) expected to have a continuing impact on the combined company's results. There were no material transactions between the Company and Eagle during the periods presented that are required to be eliminated. The unaudited pro forma combined financial information does not reflect cost savings, operating synergies or revenue enhancements that the combined companies may achieve or the costs to integrate the operations or the costs necessary to achieve cost savings, operating synergies or revenue enhancements. 9 Table of Contents Pro forma combined financial information (Unaudited) (in millions, except per share amounts) Three Months Ended October 31, 2022 Nine Months Ended October 31, 2022 Net sales $ 29.8 $ 86.4 Net income (loss) $ 1.6 $ 1.8 Basic earnings per share $ 0.21 $ 0.24 Diluted earnings per share $ 0.21 $ 0.24 The unaudited pro forma combined financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations or financial position that we would have reported had the acquisition been completed as of the date and for the periods presented and should not be taken as representative of our consolidated results of operations or financial condition following the acquisition. In addition, the unaudited pro forma combined financial information is not intended to project the future results of the combined company. The unaudited pro forma combined financial information was prepared using the acquisition method of accounting under existing U.S. GAAP. The Company has been treated as the acquirer. 4. Inventories Inventories consist of the following (in $000s): October 31, 2023 January 31, 2023 Raw materials $ 26,798 $ 29,036 Work-in-process 760 952 Finished goods 31,088 32,855 Excess and obsolete adjustments ( 4,296 ) ( 4,668 ) $ 54,350 $ 58,176 10 Table of Contents 5. Goodwill and Intangible Assets, Net Changes in intangible assets, net, during the three and nine months ended October 31, 2023, were as follows (in $000s): Balance at February 1, 2023 $ 6,042 Amortization expense ( 102 ) Balance at April 30, 2023 $ 5,940 Amortization expense ( 102 ) Balance at July 31, 2023 $ 5,838 Amortization expense ( 102 ) Balance at October 31, 2023 $ 5,736 There were no material changes to goodwill during the three and nine month periods ended October 31, 2023. 6. Contract Advances The Company receives advances under certain of its contracts for products sold by Eagle. Those advances are considered contract liabilities with revenues recorded upon delivery of promised goods to customers. These advances are included in Other Accrued Expenses on the Company’s consolidated balance sheet. The following is a roll-forward of the advances from January 31, 2023 through October 31, 2023 (in $000s): Contract liability – January 31, 2023 $ 1,627 Increases to contract liability 326 Decreases to contract liability ( 1,752 ) Contract liability – October 31, 2023 $ 201 7. Long-Term Debt Revolving Credit Facility On June 25, 2020, the Company entered into a Loan Agreement with Bank of America (“Lender”). The Loan Agreement, as amended to date (the “Loan Agreement”), provides the Company with a secured $25.0 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 $30.0 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 Loan Agreement permits, without the prior consent of the Lender, acquisitions of a business or its assets by the Company or its subsidiaries 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. On March 3, 2023, the Company changed the benchmark interest rate in the credit facility from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The credit facility will mature on June 25, 2025 . As of October 31, 2023, the Company had no borrowings outstanding on the letter of credit sub-facility and no borrowings outstanding under the revolving credit facility. On November 30, 2023, the Company entered into Amendment No. 3 to the Loan Agreement. See Note 14, Subsequent Events, for additional information. Borrowings in UK There were $ 0 and $ 0.4 million in borrowings outstanding under the Company’s credit facility with HSBC Bank at October 31, 2023 and January 31, 2023. 11 Table of Contents 8. 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 $ 6.3 million total included in the U.S. bank accounts and approximately $ 20.1 million total in foreign bank accounts as of October 31, 2023, of which $ 25.6 million was uninsured. Major Customer No customer accounted for more than 10 % of net sales during the three and nine-month periods ended October 31, 2023 and 2022. Major Supplier No vendor accounted for more than 10 % of purchases during the three and nine-month periods ended October 31, 2023 and 2022. 9. 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, of the Company reserved for issuance under the 2017 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, as amended, 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. 12 Table of Contents The Company recognized total stock-based compensation costs, which are reflected in operating expenses (in $000’s): Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 2017 Plan: Total restricted stock and stock option programs $ 302 $ 351 $ 747 $ 1,141 Total income tax expense recognized for stock-based compensation arrangements $ 63 $ 74 $ 157 $ 240 Restricted Stock and Restricted Stock Units 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 nine months ended October 31, 2023 and 2022. This table reflects the amount of awards granted and the number of shares that would be vested if the Company were to achieve the maximum performance level under the June 2021, April 2022, June 2022 and March 2023 grants. Performance- Based Service-Based Total Weighted Average Grant Date Fair Value Outstanding at January 31, 2023 127,480 40,665 168,145 $ 22.95 Awarded 64,953 124,384 189,337 $ 14.02 Vested ( 71,202 ) ( 26,336 ) ( 97,538 ) Forfeited ( 38,901 ) ( 31,829 ) ( 70,730 ) Outstanding at October 31, 2023 82,330 106,884 189,214 $ 14.68 Performance- Based Service-Based Total Weighted Average Grant Date Fair Value Outstanding at January 31, 2022 232,838 14,970 247,808 $ 20.89 Awarded 33,492 53,082 86,574 $ 18.17 Vested ( 119,164 ) ( 22,669 ) ( 141,833 ) Forfeited - - - Outstanding at October 31, 2022 147,166 45,383 192,549 $ 19.66 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 in part on measures that include Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”) margin, revenue growth, and free cash flow for the June 2021 grants and revenue growth and EBITDA margin for the April 2022 and June 2022 grants and revenue growth, EBITDA margin and return on invested capital for the March 2023 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, recognized over the requisite performance/service period using the straight-line method, and periodically adjusted for the probable number of shares to be awarded. As of October 31, 2023, unrecognized stock-based compensation expense totaled $ 1.9 million pursuant to the 2017 Plan based on outstanding awards under the 2017 Plan. This expense is expected to be recognized over approximately two years. 13 Table of Contents 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 stock repurchase program of up to an additional $ 5 million of its outstanding common stock. 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, which became effective upon the completion of the prior share repurchase program. On December 1, 2022, the Board of Directors authorized an increase in the Company’s stock repurchase program, under which the Company may repurchase up to an additional $ 5 million of its outstanding common stock. As of October 31, 2023, there was $ 5.0 million remaining under the share repurchase program. The share repurchase program has no expiration date but may be terminated by the Board of Directors at any time. 10. Income Taxes The Company’s provision for income taxes for the three and nine months ended October 31, 2023 and 2022 is based on the estimated annual effective tax rate, in addition to discrete items. The Company’s effective tax rate for the third quarter of FY24 was 26.4 %, which differs from the U.S. federal statutory rate of 21 % primarily due to rate differentials in foreign tax jurisdictions and Global Intangible Low-Taxed Income (“GILTI”). The Company's effective tax rate for the third quarter of FY23 was 33.3 % which differs from the U.S. federal statutory rate of 21 %, primarily due to rate differentials in foreign tax jurisdictions and state income taxes. The Company's effective tax rate for the nine months ended October 31, 2023 was 29.5 %, which differs from the U.S. federal statutory rate of 21 %, primarily due to rate differentials in foreign tax jurisdictions and GILTI. The Company’s effective tax rate for the nine months ended October 31, 2022 was 68.1 %. The Company recorded $ 2 million in withholding taxes for a planned repatriation of cash from our China operations. In addition to the $ 2 million discrete item, in Q1 FY23, the Company recorded deferred tax benefits of $ 0.2 million related to accruals for China social taxes based on our evaluation of the deductibility of these items. Excluding these discrete items, the effective rate was 33.8 %, which differs from the U.S. federal statutory rate of 21 %, primarily due to rate differentials in foreign tax jurisdictions and GILTI . 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 $ 4.0 million and $ 3.6 million at October 31, 2023 and January 31, 2023, respectively. 14 Table of Contents 11. Net Income (Loss) Per Share The following table sets forth the computation of basic and diluted net income (loss) per share as follows (in $000s except per share amounts): Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Numerator: Net income (loss) $ 2,618 $ 1,431 $ 6,402 $ 1,690 Denominator: Denominator for basic net income (loss) per share (weighted-average shares which exclude shares in the treasury, 1,358,208 and 1,330,694 at October 31, 2023 and 2022, respectively 7,428,557 7,514,725 7,344,559 7,600,272 Effect of dilutive securities from restricted stock plan 185,847 189,970 184,164 187,390 Denominator for diluted net income (loss) per share (adjusted weighted average shares) 7,614,404 7,704,695 7,528,723 7,787,662 Basic net income (loss) per share $ 0.35 $ 0.19 $ 0.87 $ 0.22 Diluted net income (loss) per share $ 0.34 $ 0.19 $ 0.85 $ 0.22 For the current and prior year periods presented, there were no securities excluded from the calculation of diluted earnigs per share because they were anti-dilutive. 12. Contingencies Certain conditions may exist as of the date the condensed 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 management and legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been or is probable of being incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s condensed 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. During the third quarter, the Company sent a letter to the landlord outlining certain structural defects on the newly constructed facility in Monterrey, Mexico that would inhibit the Company from effectively utilizing the facility for its intended purpose. The Company has initiated discussions with the landlord as to potential remedies which may inform our decision-making process with respect to this property. Changes in our long-term intended use for the building may impact the carrying value of the currently recorded right of use asset. 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 October 31, 2023, to the best of the Company’s knowledge, there were no significant outstanding claims or litigation. 15 Table of Contents 13. 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). The Company also maintains one manufacturing company in China (primarily disposable and chemical suit production), a manufacturing facility in Mexico (primarily disposable, reflective, fire service 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 three and nine month periods noted therein: Three Months Ended October 31, Nine Months Ended October 31, (in millions of dollars) (in millions of dollars) 2023 2022 2023 2022 Net Sales: USA Operations (including Corporate) $ 16.2 $ 15.3 $ 46.3 $ 41.0 Other foreign 3.9 2.3 10.2 7.0 Europe (UK) 3.2 1.5 12.7 5.3 Mexico 1.6 1.4 5.2 4.1 Asia 12.1 16.8 34.1 50.8 Canada 2.7 2.4 7.2 6.9 Latin America 4.2 2.6 12.0 7.0 Less intersegment sales ( 12.2 ) ( 13.9 ) ( 34.3 ) ( 38.3 ) Consolidated sales $ 31.7 $ 28.4 $ 93.4 $ 83.8 External Sales: USA Operations (including Corporate) $ 15.1 $ 14.0 $ 42.6 $ 37.1 Other foreign 2.4 1.7 6.6 5.4 Europe (UK) 3.2 1.5 12.6 5.3 Mexico 1.0 1.0 2.9 2.9 Asia 3.1 5.2 9.7 19.2 Canada 2.7 2.4 7.2 6.9 Latin America 4.2 2.6 11.8 7.0 Consolidated external sales $ 31.7 $ 28.4 $ 93.4 $ 83.8 16 Table of Contents Intersegment Sales: USA Operations (including Corporate) $ 1.1 $ 1.3 $ 3.7 $ 3.9 Other foreign 1.5 0.6 3.6 1.6 Europe (UK) - - 0.1 - Mexico 0.6 0.4 2.3 1.2 Asia 9.0 11.6 24.4 31.6 Canada - - - - Latin America - - 0.2 0.0 Consolidated intersegment sales $ 12.2 $ 13.9 $ 34.3 $ 38.3 Three Months Ended October 31, Nine Months Ended October 31, (in millions of dollars) (in millions of dollars) 2023 2022 2023 2022 Operating Profit (Loss): USA Operations (including Corporate) $ 1.9 $ ( 0.1 ) $ 1.6 $ ( 3.4 ) Other foreign 0.6 0.3 1.8 0.4 Europe (UK) ( 0.4 ) ( 0.5 ) - ( 1.1 ) Mexico ( 0.4 ) ( 0.3 ) ( 1.3 ) ( 0.9 ) Asia 1.3 2.4 3.1 8.4 Canada 0.5 0.3 1.1 1.3 Latin America 0.8 0.4 2.9 1.2 Intersegment profit (loss) ( 0.7 ) ( 0.3 ) 0.1 ( 0.4 ) Consolidated operating profit $ 3.6 $ 2.2 $ 9.3 $ 5.5 October 31, 2023 January 31, 2023 (in millions of dollars) Total Assets Less Intersegment: USA Operations (including Corporate) $ 57.2 $ 64.5 Other foreign 10.4 9.2 Europe (UK) 24.3 12.5 Mexico 10.5 5.3 Asia 27.4 35.6 Canada 7.1 5.8 Latin America 11.4 9.3 Consolidated assets $ 148.3 $ 142.2 17 Table of Contents 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) 2023 2022 2023 2022 External Sales by product lines: Disposables $ 11.9 $ 14.1 $ 36.7 $ 41.3 Chemical 4.7 5.2 15.4 17.5 Fire service 5.6 3.6 20.0 9.2 Gloves 0.5 0.6 1.7 1.7 High Visibility 2.6 1.7 5.4 4.6 High Performance Wear 2.4 1.3 5.2 3.8 Wovens 4.0 1.9 9.0 5.7 Consolidated external sales $ 31.7 $ 28.4 $ 93.4 $ 83.8 14. Subsequent Events On November 1, 2023, the Company’s Board of Directors declared a quarterly cash dividend. The quarterly dividend of $ 0.03 per share or approximately $ 0.2 million, was paid on November 22, 2023, to stockholders of record as of November 15, 2023. On November 27, 2023, the Company sold its office and warehouse facility in Brantford, Ontario to an unrelated party for $ 4.9 million. The sale will result in a pre-tax gain, after selling expenses, of approximately $ 3.8 million. Going forward, the Company will utilize third party logistics providers for customer fulfillment in Canada. On November 30, 2023 the Company acquired New Zealand-based Pacific Helmets NZ Limited (“Pacific”) in an all-cash transaction valued at approximately NZ$14.000,000 ($ 8.6 million), including assumption of debt, subject to post-closing adjustments and customary holdback provisions. The acquisition enhances Lakeland’s product portfolio, particularly within fire service protective helmets. Headquartered in Whanganui, New Zealand, Pacific is a leading designer and provider of structural firefighting, wildland firefighting, and technical rescue helmets. The transaction was funded through the revolving credit facility and cash balances. On November 30, 2023, the Company entered into Amendment No. 3 to Loan Agreement by and between Bank of America, N.A. (the “Lender”) and the Company (the “Third Amendment”). Pursuant to the Third Amendment, the Lender consented to the Company’s acquisition of one hundred percent (100%) of the equity interests of Pacific. The Third Amendment further provided for certain amendments to the Loan Agreement to permit additional indebtedness to be made available to Pacific, to exempt Pacific from certain requirements of the Loan Agreement pertaining to subsidiary guaranty and asset pledges that would otherwise be required under the Loan Agreement and to waive the Company’s borrowing base limitations through January 31, 2024. The Third Amendment also provided for the reaffirmation of representations, warranties and covenants under the Loan Agreement as are customary in connection with similar amendments of credit documents. 18 Table of Contents