15.

Brazil Transactions

On March 9, 2015, Lakeland Brazil changed its legal form to a Limitada and changed its name to Lake Brasil Industria E Comercio de Roupas E Equipamentos de Protecao Individual LTDA.

Settlement Agreement – Arbitration Debt

On June 18, 2015, Lakeland Industries, Inc. (“Lakeland”) and its then wholly-owned subsidiary, Lake Brasil Indústria e Comércio de Roupas e Equipamentos de Proteção Individual Ltda. (“Lakeland Brazil” and together with Lakeland, the “Brazil Co”), entered into an Amendment (the “Amendment”) to a Settlement Agreement, dated as of September 11, 2012 (the “Settlement Agreement”), with two former officers (the “former officers”) of Lakeland Brazil. As part of the original Settlement Agreement, the parties resolved all alleged outstanding claims against the Brazil Co arising from an arbitration proceeding in Brazil involving the Brazil Co and the former officers for an aggregate amount of approximately US $8.5 million payable by the Brazil Co to the former officers over a period of six (6) years. As of the June 18, 2015 settlement date, there was a balance of US $3.750 million (the “Outstanding Amount”) owed under the Settlement Agreement, which Outstanding Amount was to be paid by the Company in quarterly installments of US $250,000 through December 31, 2018.

Pursuant to the Amendment, the former officers agreed to fully and finally settle the Outstanding Amount owed by the Company for an aggregate lump-sum payment of US $3.413 million, resulting in a gain of US $224,000 after allowing for imputed interest on the original Settlement Agreement. Within five days of receipt of such payment, the former officers provided to Lakeland Brazil the documents needed to have their lien securing payment of the Outstanding Amount removed on certain real estate owned by Lakeland Brazil and such lien was removed. The Amendment also contains a general release of claims by the former officers in favor of the Company and its past or present officers, directors, and other affiliates. Lakeland’s senior lender, Alostar Bank of Commerce, has consented to the transactions contemplated by the Amendment.

Share Transfer Agreement

On July 31, 2015, (the “Closing Date”), Lakeland and Lakeland Brazil, completed a conditional closing of a Shares Transfer Agreement (the “Shares Transfer Agreement”) with Zap Comércio de Brindes Corporativos Ltda (“Transferee”), a company owned by an existing Lakeland Brazil manager, entered into on June 19, 2015. Pursuant to the Shares Transfer Agreement, the Transferee has acquired all of the shares of Lakeland Brazil owned by the Company.

Pursuant to the Shares Transfer Agreement, Transferee paid R$1.00 to the Company and assumed all liabilities and obligations of Lakeland Brazil, whether arising prior to, on or after the Closing Date, including, without limitation (i) liabilities, such as severance obligations, in respect of the current and former employees of Lakeland Brazil, (ii) liabilities arising from any labor claims already existing or which may thereafter be filed against Lakeland Brazil and its current or former affiliates, officers and shareholders, (iii) liabilities with respect to taxes imposed on the Brazilian business, including Value Added Tax (“VAT”) tax liabilities, (iv) liabilities arising under leases, contracts, licenses or governmental permits pursuant to which Lakeland Brazil is a party or otherwise bound, (v) product warranty liabilities, product return obligations pursuant to any stock balancing program and rebates pursuant to any marketing program, to the extent such liabilities arose from sales of products made in the course of the Brazilian business, (vi) accounts payable of Lakeland Brazil, whether or not invoiced, and (vii) all other obligations and liabilities with respect to the Brazilian business of Lakeland Brazil (collectively, the “Brazilian Liabilities”).

In order to help enable Lakeland Brazil to have sufficient funds to continue to operate for a period of at least two years following the Closing Date, the Company provided funding to Lakeland Brazil in the aggregate amount of US $1,130,000, in cash, in the form of a capital raise, and has agreed to provide an additional R$320,000 (approximately US $95,000) (the “Additional Amount”), in the form of a capital raise, to be utilized by Lakeland Brazil to pay off the Brazilian Liabilities and other potential contingent liabilities. Pursuant to the Shares Transfer Agreement, the Company paid R$992,000 (approximately US $320,000) of the Additional Amount, in cash, on July 1, 2015 and issued a non-interest bearing promissory note for the balance (R$582,000) (approximately US $188,000) on the Closing Date which shall be due and payable to Lakeland Brazil in two (2) installments of (i) R$288,300 (approximately US $93,000) which was paid on August 1, 2015, and (ii) R$294,500 (approximately US $86,000) on September 1, 2015; provided, however, that the Company shall not be required to make any of the aforementioned payments if, as of the date any of such payments are to be made, Lakeland Brazil and/or any of its affiliates files for bankruptcy, files for court protected restructuring or abandons the business of Lakeland Brazil in Brazil, or in the event that the certain Business Consulting Agreement Renew 2015, dated May 1, 2015, between Lakeland Brazil and Multiplica Soluções Empresariais Ltda., a Brazilian company (“Multiplica”), is no longer in force and operational (the “Non-Payment Triggers”). In addition, so long as Lakeland Brazil does not trigger any of the Non-Payment Triggers on or before either the twelve (12) month anniversary or the twenty-four (24) month anniversary of the Closing Date, the Company shall pay US $150,000 and US $100,000, respectively, to Lakeland Brazil. The Shares Transfer Agreement also provides that the Company shall fully fund any amounts owed by Lakeland Brazil in connection with certain existing labor claims by Lana dos Santos, as previously disclosed, and, in addition, all amounts potentially owed for future labor claims up to an aggregate amount of $375,000 (the “Cap”) and 60% of such amounts in excess of the Cap until the earlier of (i) the date all labor claims against Lakeland Brazil deriving from events which occurred prior to the Closing Date are settled, (ii) by mutual agreement of the Company and Lakeland Brazil or (iii) on the two (2) year anniversary of the Closing Date. All funding provided by the Company pursuant to the Shares Transfer Agreement is to be deposited into a joint bank account opened by Lakeland Brazil and Multiplica which requires the signature of legal representatives of both Lakeland Brazil and Multiplica to make any payment and/or withdraw funds.

The Company believes that these amounts contributed to Lakeland Brazil will be more than offset by a benefit for USA taxes of approximately US $9.5 million net of a US $2.9 million valuation allowance generated by a worthless stock deduction for Brazil that the Company will claim on its corporate tax returns. Although the Company’s tax advisors believe that the worthless stock deduction is valid, there can be no assurance that the IRS will not challenge it and, if challenged, that the Company will prevail.

The closing of this agreement is subject to Brazilian government approval of the share transfer, which is expected in approximately 30 days from July 31, 2015 (The “Final Closing Date”). The share transfer is irrevocable and the only issues expected are minor procedural corrections.

Even after the Final Closing Date for transactions contemplated by the Shares Transfer Agreement, Lakeland may be exposed to certain liabilities arising in connection with the prior operations of Lakeland Brazil, including, without limitation, from lawsuits pending in the labor courts in Brazil and VAT taxes, as more fully described in the Company’s annual report on Form 10-K for the fiscal year ended January 31, 2015. The Company understands that under the laws of Brazil, a concept of fraudulent bankruptcy exists, which may hold a parent company liable for the liabilities of its Brazilian subsidiary in the event some level of fraud or misconduct is shown during the period that the parent company owned the subsidiary. While the Company believes that there has been no such fraud or misconduct relating to the proposed sale of Lakeland Brazil and the transactions contemplated by the Shares Transfer Agreement, as evidenced by the Company’s funding support for continuing operations of Lakeland Brazil, there can be no assurance that the courts of Brazil will not make such a finding nonetheless. The risk of exposure to the Company continues to diminish as the Transferee continues to operate Lakeland Brazil, as the risk of a finding of fraudulent bankruptcy lessens and pre-sale liabilities are paid off. Should the Transferee operate Lakeland Brazil for a period of two years, the Company believes the risk of a finding of fraudulent bankruptcy is eliminated.

The Shares Transfer Agreement, which is governed by United States law, contains customary representations, warranties and covenants of the parties for a transaction of this type. The Company has agreed, among other things and subject to certain exceptions, to cause Lakeland Brazil to conduct its business in the ordinary course of business between the date of execution of the Shares Transfer Agreement and the Closing Date and also the Final Closing Date. In addition, the Company and Transferee have agreed to indemnify each other from and against certain liabilities, subject to certain exceptions. Under the Shares Transfer Agreement, the Company will be subject to certain non-solicitation provisions for a period of two years following the Closing Date.

The Company also executed a guaranty in favor of the Transferee in the amount of $64,000 to assist the Transferee in continuing purchases from the Company’s Chinese subsidiary, subject to the transferee maintaining a current payable. Such continuing sales to the Transferee are not considered material.

The Company estimated that the transactions involved with the completion of its exit from Brazil will result in a loss of approximately $1.2 million (net of tax benefit of $0.7) reflected on its statement of operations and a decrease of approximately $0.5 million to stockholders equity as a result of recording the exit transactions. This included a reclassification of approximately $1.3 million from Accumulated Other Comprehensive Loss to the Statement of Operations and Retained Earnings which did not impact net stockholders equity.

The following tables summarize the results of the Brazil business included in the statement of operations for the three-months ended July 31, 2015 and 2014, and balance sheets as of July 31, 2015 and January 31, 2015 as discontinued operations.

Balance Sheet

	(000's)		(000's)
	July 31, 2015		January 31, 2015
Assets of discontinued operations:
Cash	$	—	$	53
Accounts receivable		—		888
Inventory		—		3,216
Other current assets		—		634
Property/Equipment held for sale		—		1,544
Total assets of discontinued operations	$	—	$	6,335
Liabilities of discontinued operations:
Accounts payable	$	—	$	651
Accrued compensation and benefits		—		1,739
Other accrued expenses		—		1,163
Short term borrowings		—		688
Other liabilities		—		2,333
Total liabilities of discontinued operations	$	—	$	6,574

Statement of Operations

	(000’s)				(000’s)
	Three-Months Ended July 31,				Six-Months Ended July 31,
	2015		2014 *		2015		2014 *
Net Sales from discontinuing operations	$	425	$	1,798	$	869	$	3,547
Gross Profit from discontinuing operations		132		625		164		1,220
Operating expenses from discontinuing operations		279		956		763		1,827
Operating loss from discontinuing operations		(147)		(331)		(599)		(607)
Interest expense from discontinuing operations		75		166		256		320
Other (income) expense from discontinuing operations		100		451		398		375
Loss from operation of discontinuing operations (includes a $0.1 million tax benefit from Q1)		(322)		(948)		(1,253)		(1,302)
Non-cash reclassification of Other Comprehensive Income to Statement of Operations (no impact on stockholder’s equity)		(1,286)		—		(1,286)		—
Loss from disposal of discontinued operations		(515)		—		(515)		—
Loss before taxes for discontinued operations		(2,123)		(948)		(3,054)		(1,302)
Income tax benefit from discontinued operations		(569)		—		(569)		—
Net loss from discontinued operations	$	(1,554)	$	(948)	$	(2,485)	$	1,302)

*Restated for discontinued operations

Summary Cash Flow Statement
	(000's)		(000's)
	July 31, 2015		July 31, 2014
Net cash used in operating activities	$	328	$	255
Net cash used in operating activities – disposal of Brazil		(927)		—
Total Net cash used in operating activities		(599)		255
Net cash used in investing activities		—		(2)
Net cash provided by financing activities		552		(253)
Net effect on cash of FX variations		(6)		—
Net increase in cash and cash equivalents		(53)		—
Cash and cash equivalents at beginning of year		53		—
Cash and cash equivalents at end of year	$	—	$	—

Brazil Loans and Interest Expense

Brazil short-term borrowings as of July 31, 2015 consisted of R$1,885,028 (US $629,686) and accrued interest of R$15,863 (US $5,299) which were included in the liabilities assumed by the Transferee pursuant to the Shares Transfer Agreement. Interest expenses included as discontinued operations are directly related to loans in Brazil. No allocation of corporate interest expense has been made for the historic statements.

Assets held for sale – Brazil Real Estate

Prior to the closing of the Share Transfer Agreement, Lakeland Brazil sold its real estate to the Company in full satisfaction of certain intercompany debt. The amounts have been stated at the net historic cost of US $881,000. Any net proceeds in excess of this amount will be applied to additional balances of intercompany accounts due from Brazil to the US parent. Based on recent appraisals completed in February and March 2015, the Company expects to realize no less than this amount. Due to the state of the Brazilian economy and its effect on the demand for commercial real estate, the Company has decided to reflect this asset as a non-current asset. At the USD value of $881,000 the asset is valued at the lesser of cost or market.

VAT Tax Issues in Brazil

All liabilities relating to VAT taxes in Brazil have been assumed by the Transferee pursuant to the Shares Transfer Agreement. The Bahia State Tax Department has just commenced an audit of VAT taxes for the period from 2011-2014. Management does not expect to have any significant exposure resulting from this audit.