Good afternoon, and welcome to Lakeland Industries, Inc. First Quarter Fiscal Year 2014 earnings call. [Operator Instructions] Before we begin, parties are reminded that statements made during this call contain forward-looking information within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are all statements, other than the statements of historical facts, which reflect management's expectations regarding future events and operating performance and speak only as of today, June 13, 2013. Forward-looking statements are based on current assumptions and analysis made by the company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate under circumstances. These statements are subject to a number of assumptions, risks and uncertainties and factored in the company's filings with the Securities and Exchange Commission. General economic and business conditions, business opportunities that may be presented to you and pursued by the company, changes in law or regulations and other factors, many of which are beyond the control of the company. Listeners are cautioned that these statements are not guarantees of future performance, and the actual results or developments may differ materially from those projected in any forward-looking statements. All subsequent forward-looking statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. And this time, I would like introduce your host for this call, Lakeland Industries' President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Okay. Good afternoon to you all, and thank you for joining our fiscal 2014 First Quarter Financial Results Conference Call. We are going to have a very brief opening statement and then open the floor for questions. Since we last just spoke to you 3 weeks ago on the year-end call, let me try to give you some historical perspective that we didn't give you then. We lost our DuPont business in the summer of 2011, some $20 million of business sales. We said then that we would replace the lost gross margin within 2 years, and we did. Last May, a judgment was lodged against us in Brazil for $12.5 million, which caused us to be in default with our loan covenants, and this event also made it difficult on a number of fronts to obtain sales in Brazil from that point on. We did negotiate this judgment number down and have paid a large part of the judgment with internal cash flow. Today, the amount outstanding is $5.7 million, payable over 5.75 years at 0 interest or $250,000 a quarter, down from the original $12.5 million. We also had to replace our bank, which under the new Dodd Frank atmosphere was challenging, but we hope to have this resolved in the next weeks. So one, we resolved the DuPont problem; two, we made the judgment amount manageable and three, we have a new banking relationship shortly. Now, we need to fix four, which is Brazil and I believe you will see there are real beginnings of a turnaround by fiscal year-end. As you can see from our press release, our only real problem is Brazil. We are working diligently on rightsizing the Brazil operations. We're looking into potentially selling this operation while at the same time working on…

Thank you, Chris. The company has earned operating income in the U.S. of $291,000 in Q1 this year compared with an operating loss in the U.S. of $1.465 million in Q1 last year. This is after absorbing small corporate charges. It represents the first time in 8 quarters we have a positive operating earnings in the U.S., which reflects the recovery from the loss of the DuPont license. Sales of Lakeland worldwide, excluding Brazil, increased 6.3% year-over-year. Gross margin for Lakeland worldwide again, excluding Brazil, increased from 26.7% last year to 29.0% this year. Operating expenses for Lakeland worldwide excluding Brazil decreased by $281,000, even as sales increased by $1.163 million. SG&A as percent of sales, again including Brazil, decreased from 28.7% to 25.5%. Adjusted EBITDA for Lakeland worldwide again, excluding Brazil, increased from $144,000 last year to $1.430 million this year. There is a chart in the press release that shows the detailed computation of the adjusted EBITDA. Most of this performance was generated in the United States. The company believes it has largely recovered from the loss of the DuPont license in July of 2011. Net sales in the U.S. of $11.9 million in Q1 this year compared with $9.8 million last year. Operating loss of $237,000 this year versus an operating profit of $25,000 last year, but this year includes an accrual for $320,000 plant relocation cost for its factory in Tsingtao, China, which is being sold. The net loss of $844,000 or $0.16 a share this year versus $10.121 million last year, $1.94 last year. The operating and net losses in the more recent period primarily reflect the poor results generated from Brazilian operations.

Thank you, Gary. I will now turn the call over to the operator for Q&A session.

[Operator Instructions] Our first question comes from Quinton Mathews at QKM.

A couple of questions. The Raymond James, is that still kind of -- has some of the costs associated with them wind down as we kind of get to the financing? And it seems like that the sale or possible sale or at least right now is off the table? Or is that kind of a monthly retainer that you guys have continued?

It's been a monthly retainer and there'll be a success fee when we close. And that should end the engagement.

At the end of the -- if and when the financing comes?

Correct.

Okay. And what we're operating -- I don't know if you have operating cash flows from the first quarter? And x if you have a number of ex-Brazil?

I have the adjusted EBITDA. The CapEx or the only adjustment to that, it was $300,000 for the whole quarter and very little of that was in Brazil.

Okay. All right. And is there any reason I mean, kind of two questions. Is there any reason to think that you're -- the ex-Brazil business that your margin or anything coming up that your higher margins would take a step back, kind of bounce around where they were? Or is there further cost-cutting and more leverage as you guys have in the income statement to improve margins?

The margins come from 2 areas, cost cutting and the fact that we have our sales mix now in the U.S.. The U.S. margin increase is a big chunk, a big driver of the major increase in the margin. Outside of Brazil when that is largely due to the sales mix now selling Lakeland branded products, which we said consistently carries a higher-margin. We said that right from the start. And it just took us the several quarters to get traction on that. There's been a price increase and the sales mix. So I do believe it's attainable, yes.

Okay. Any further cost-cutting? Or is most of that behind us?

There is a little bit more. There'll be a bit more cost-cutting.

Nothing --

Nothing huge, but we're not quite finished yet.

Okay. And can you give -- so, on and we have kind of talked about this outside of the call. So for the loan that's outstanding, is there one part of the covenant? Is there one issue that is hanging out there more than closing it? More specifically, is it the $3.5 million junior debt, it needs to be raised? Or have all those issues really been covered? It's just a matter of like attorneys getting everything drafted?

I'm losing count as to how many different sets of attorneys we're working with. I think, the last I counted it was 5. It's a complicated deal. And it just takes time to work through. We are not aware of any major red flags at this point. But that doesn't mean it's something will come up as we're speaking.

Okay. But can you -- since it's kind of -- unless I'm looking at it wrong, so that's kind of 2 debt race is, couch is 1, because you got to have that junior debt. Can you give us -- you've given us, on the major piece, you've said okay, we've got a commitment letter and we're working to the final mark. Is there a commitment letter on the junior debt? Has that been secured? Can you give us any color on that?

Yes. We've got indications of interest for the entire amount of Junior debt that we need to raise. That's in the stage more like a public offering. But the indications or interests are in there. They've asked for exclusive and we give it to them. So the people putting up the funds, putting up the money is solid fund. They have the money. We don't see any problems other than just negotiating through. I guess the biggest problem will be them and then an inter-credit agreement with the senior lender. That always takes some time. And that's the problem, that's what's taking all the time here. It's a complex agreement and the lawyers are driving -- really driving, driving, driving a lot the stuff that's going on.

Okay. last question on the debt...

The parties themselves, the business people are all on agreement.

Okay. Last question on the debt. The amount -- without getting specific, is it basically there to replace what you've got? Or can we imagine having some further cushion to help grow some areas where I know you're capital constrained?

A little of each. We should have more flexibility with some availability going forward that we don't currently have. Yes.

Okay. And then last question. On the VAT tax issue, would you -- I mean, in my mind, that's kind of -- once we get past the financing, like I've mentioned before, unfortunately, when it rains, it pours and it's kind of pour big time in Brazil for you guys. So, is that -- can you handicap that at all? As far as your issues of running into the legislation period as opposed to the amnesty? And then there's also mention in another conversation about the ability that you believe that is really imploded down there that you guys will be able to walk away because it's subsidiary company that's a parent company is not guaranteeing any of the -- walk away from [indiscernible].

I'm not sure that's a question or statement. But let me try and tackle that. First of all, the VAT tax is an issue, but we have opinion of Brazilian tax cuts so it does not extend outside of Brazil. So that's one major issue. We're trying to wall off Brazil basically and make sure it has enough to function on its own. Right now, we believe that as long as we can generate -- we've done some major cost cutting in Brazil, there's still more to come. The biggest issue right now was just generating enough sales. If we can generate enough sales and we should -- it should be able to be self-sufficient on a cash flow basis going forward. As far as the VAT tax goes, there are options without -- if the amnesty comes, we're not required to do anything, we can ignore it. There is a provision in the Brazilian VAT tax code, I guess, or regulations, that at any point in time, any company under a claim could just simply sign-up and say, "okay, I accept the claim." And you will then have 60 months in which to pay it. So from a cash flow viewpoint, that is also an option. It would mean we'd have to take an accounting charge for the penalties and interest. But from a cash flow viewpoint, I am not required to lay out that the entire $3 million if the amnesty came tomorrow. I could ignore that.

But it would -- if it's closer to $6 million if the amnesty did not come before the judicial period? Correct?

Yes. With but the $6 million will be paid over a 60-month period. So from a cash flow viewpoint, I'm saying it would be a manageable amount although I'd have to take a significant hit to earnings, but again, the key point here is no wall off the parent company and the rest of Lakeland from cash requirements in Brazil. And that's one way of doing it.

And has the Brazilian counsel has have kind of told you that you've been walled off, the same Brazilian counsel who thought we would win the arbitration?

No. Very good question, though. No. This is a tax specialist who has nothing whatsoever to do with the arbitration proceedings. It's totally different law firm.

Our next question comes from Doug Ruth, Lenox Financial Services.

Congratulations on getting the U.S. operation profitable. How are things looking in the second quarter? Could you maybe give us a little color as what you're working on in the U.S.?

Okay. In the U.S., we're looking to cut our expenses a little bit more as we can. May looks pretty good. We're maintaining margins in the U.S., maintaining sales in the U.S.. We know we can cut some more expenses in the U.S.. And so, we just look to really grow the sales more. And I think you'll be seeing our SG&A coming down simply because we've whacked a lot of SG&A out of Brazil. I mean, they have half the people they had there 4 months ago. And so now that we've cut the heads down by 50%. We're looking at the expenses that are non-payroll expenses will also cut in half. So it's a matter of -- obviously, the whole company's SG&A will come down as a result of that. But in the U.S., no, we're just moving along, steadily. And it should improve a little bit quarter-to-quarter-to-quarter.

And you had shown once before that you had prepared a sales book for the sales for each of the representatives that allowed them to compare your product to the DuPont product. And that seems -- is that continuing to work well for the company?

That continues to work. Just block and tackle. And there are other people out there like Kimberly Clark, other competitors and so we're just basically taking business away slowly, but surely. But more importantly, we're taking it away at a nice gross margin now. So -- and I think we can improve that gross margin as be better brand our product.

Okay. Is there any commentary, any updates as far as Ansell? Do we think they still own their stock?

I don't know. But there've been no SEC filings, though, that's the only thing we have to go on. We only know what we learn from SEC filings on something like that.

And in your -- in the 10-K, you had talked about that you thought that -- there were the elections in Brazil, so you had indicated that the sales would be soft there for the first half of the year and is there any reason for optimism that there could be an increase in sales in the second half of the fiscal year?

Generally, a lot of the business that was historically gotten in Brazil was public tender bits. In other words, you had state-owned or partially state-owned entities going into the market for our product. Being state owned, they have to do it by bid. And what generally happens is people don't get their budgets until June or July anyway. And then -- so most of the bids or public tender bids tend to come toward the end of the year. So we haven't seen very much in the beginning of the year, but that's generally the case. And then, since you're dealing with a country that is sort of a manana country, they all rush to use it or lose it. And they're all rushing out in October, November, December to get their bids out and execute. So that's sort of how it works down there. So we are beginning to see some of the bids come out now, by some of the people are a little bit more prepared and do their homework. But it's the beginning of the season and we hope you get some of them, which will greatly help us get to a breakeven point in Brazil. Because now that we've really just -- we're determined to cut the SG&A by 50% or half. And we really need to get sales, enough sales to breakeven. Otherwise, we're just going to have to cut more. I mean it's very simple. In rightsizing, you bring the expenses down to the level of sales. And try to get the damn thing to breakeven. And at the same time, explore the sale of assets or anybody else who would probably do a better job than us on this.

And is the sales organization, Mr. Vasquez, I'm not sure if I'm saying his name right. Mengal, is he -- is that sales organization still representing Lakeland?

I guess -- technically, yes. But then we haven't seen much activity from that. So I wouldn't place too much stock on that going forward, unfortunately. We had more hope for it than it seems to be working out.

And what about the -- could you talk a little bit about Argentina? You talked about the -- it sounded like if you just put some more working capital in it, it would do better.

They're cash constrained right now. When the arbitration judgment hit a year ago, I was in the process of working an additional recapitalization to add some more working capital into Argentina. And that put the kibosh on it . They've been cash constrained for quite a while. They have incoming goods sitting in a bonded warehouse. And they don't have enough cash to buy -- to pay the customs to get it out of the bonded warehouse. And if they did, they could sell it right away. And we hope that soon as the financing is done, that's one of the first items on my to-do list is to fix that and get a few. It's not a huge amount, to get a few hundred thousand of cash into Argentina and once we do that, we believe they will be on strong footing.

Okay. And how are the operations in Mexico working now?

They're doing pretty well. We are building it up so to speak. I think what we said about China is slowly coming true. It's getting more and more expensive to produce goods in China. And therefore, 2 years ago, we expanded the Mexican operation. This quarter, we expanded a number the people working there and started shipping some of the Chinese business to the Mexican operation. This sort of balances it out. We sort of suspect that over the next coming -- incoming years, Mexico will have equal cost to China. And therefore, Mexico will be sort of the place to go simply because you can turn product around much quicker. And as you turn your inventories quicker, it affects all the other financial ratios very positively, I mean everything goes up. Return on equity, return on investment, as you can flip those inventories faster and faster. So, yes, we are -- we've expanded Mexico both physically and we've hired new people. We should have them fully busy within the next month or so, making products that were here before made in China. And as I said, we can get American fabrics down there in 1 week to 2 weeks. We can flip it in 2 weeks and have it back. So the turn time down there is around maximum 6 weeks where it can be as long as 100 days in China. So that will really affect our inventory turns.

That's wonderful. I think you've made tremendous progress since the last conference call. I commend both of you.

[Operator Instructions] Our next question comes from Ben [indiscernible] Cavalier [ph].

What is the annual maintenance CapEx?

Not a huge amount. It's under, which is what we played. $700,000 is at least the number. It maybe $1 million in that range. That's all.

Okay. And then regarding the junior debt. Can you confirm that it will be just that debt and that there won't be any equity or warrants associated with it?

Nobody ever said anything. We have not discussed the specific terms at this point. We're still negotiating. I can't say anymore.

Okay. I think the market would obviously like some confirmation that no equity would be involved.

I never said that and we never hinted that. When the terms come out, we'll disclose it. At this point, we're still negotiating.

Okay. And then who is the senior debt with?

We will disclose that when we close. At this point, we'd not disclose it.

We have confidentiality agreements surrounding this financing.

It's a recognized bank, and that's all I can say.

Our next question comes from Ethan Star [ph], private Investor.

I'm been very pleased with the quarterly results. But -- and perhaps I missed this, but I'm wondering, the fact that you negotiated the Brazil arbitration amount down and have an agreement to pay it out over 5 years, does that mean you've thrown out -- thrown in the towel and appealing the ruling?

Right. Yes, absolutely. When we got that ruling, an arbitration ruling in Brazil, we feel very strongly it did not fit the fact, it did not interpret the contract properly nor did it even apply the Brazilian law properly. But we've had a second opinion and actually a third opinion from major law firms on this. When you have an arbitration, you're very limited as to what your rights if you don't like the decision. You cannot appeal on the merits. You can only appeal on -- if they've been in fact they have not interpreted the contract right, not interpret the law right or if there are irregularities. And if there were irregularities, try and prove that. We were told that if we were to file an appeal, we had a -- we had a case. But it would be no more than 25% probability winning in the Brazilian courts. And furthermore, if you do file an appeal and you lose, there's a very severe penalty in Brazil. You have to pay 20% of the amount claimed to the opposing counsel. We just made business decision that as much as we didn't like the opinion, and we thought it was unfair and unfounded, we decided it wasn't worth our time to keep fighting it. And it was best to just take our lumps and move, which is what we did.

Now hearing all that, I agree with you. It makes perfect sense. That said, how has the whole experience in Brazil affected your outlook on the expanding the company overseas?

Brazil is not the only country where there's corruption, obviously. But we have not had anything like the problems we've had Brazil in other countries. We've been pretty successful, pretty much everywhere we've been, except for Brazil. And even in Brazil, just a year ago, we had record sales in the first quarter the year ago. We had I think $5.5 million of sales in Brazil in that one quarter. And we reported an operating profit. So that decision knocked us for a loop. It affected everything after that.

Sure. Is there any chance you can continue to increase sales and focus on increasing sales in the U.S., in North America?

Oh, yes. That's what we plan on doing. In North America, though, you have markets that are mature. So -- and that's why we moved into some of these foreign markets because they were growing much faster and because margins were much higher than they are in the U.S. market. But we still can grow in the U.S. market. It's a matter of -- but it's block and tackle. You got to take existing business for somebody else. The only other way is to introduce new products. And we have -- we will -- we introduced this one new product into the utility industry and we like the utility industry because they're big companies, they have money, they're not receivable problems. They really order what they want and they're willing to pay for it. And that's a lot different than say, the disposable business where it's more of a price or a commodity business. And so, we're moving into -- in the North American market, we want to move into product lines that have 40% and 50% gross margins.

[Operator Instructions] At this time, we show no further questions. Would you like to make any closing remarks?

Okay. Well, we appreciate your participation on Lakeland's fiscal 2014.

Operator, we see there's one other question that came in a bit late. We will be happy to take it, if you like to just revert back.

Certainly. We have Dan Willis, DKW Capital.

I was just curious if you're expecting any kind of headwinds or difficulties from the sales generated from federal agencies with sequestration and kind of the budget constraints that governments are facing in the U.S.?

Yes. It will probably slow down some domestic sales, but they're not high margin sales and we've already seen that for the last 3 or 4 months. Sequestration sort of dropped right in, almost immediately. So we're still doing very well in May. We would probably be doing better if there was no sequestration. But it's not really killing us. I mean, a great majority of our business is with private business, not the government.

I show no further questions at this time.

Okay. Now, we appreciate your participation on Lakeland's fiscal 2014 first quarter financial results conference call. As we are committed to delivering value for our shareholders, we believe Lakeland will continue to effectively manage the balance sheet, control expenses and execute its strategy for long-term growth. This is a turnaround situation and Gary and I are committed to turning it around. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.