EDGAR 10-K Filing

Company CIK: 1172706
Filing Year: 2021
Filename: 1172706_10-K_2021_0001214659-21-003817.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
On November 10, 2014, Uniroyal Global Engineered Products, Inc. (“Uniroyal Global”, the “Company”, “we”, “our”, or “us”) acquired all of the ownership interests in Uniroyal Engineered Products, LLC (“Uniroyal”), a U.S. manufacturer of textured coatings, and all of the ordinary common stock of Uniroyal Global (Europe) Limited (“UGEL”, formerly known as Engineered Products Acquisition Limited (“EPAL”)), the holding company for Uniroyal Global Limited (“UGL”, formerly known as Wardle Storeys (Earby) Limited (“Wardle Storeys”)), a European manufacturer of textured coatings and polymer films. Management of the acquired entities was not altered in the acquisitions.
Uniroyal Global made the acquisition of Uniroyal through a newly formed subsidiary, UEP Holdings, LLC (“UEPH”), to which it contributed certain of its assets and liabilities as part of the organization of that subsidiary. The aggregate purchase consideration paid for 100% of the outstanding equity of Uniroyal was preferred ownership interests issued by UEPH having an aggregate face value of $35 million. In a separate transaction, Uniroyal Global also purchased UGEL for aggregate consideration of 100 shares of Uniroyal Global’s Common Stock and Uniroyal Global’s guaranty of outstanding UGEL preferred stock retained by the seller having a face value of £12,518,240 (approximately $20 million at closing).
On January 27, 2020, the Company announced a one-for-five reverse stock split (“reverse stock split”) on its common stock that became effective on February 24, 2020. All share and per share amounts reflect the effect of the reverse stock split. The amounts in common stock and additional paid-in capital were adjusted as of the effective date of the reverse stock split.
We are a manufacturer and seller of vinyl coated fabric products that have excellent high performance characteristics and capabilities and derive our revenue principally through our subsidiaries Uniroyal and Uniroyal Global Limited. Our coated fabric products are durable, stain resistant, easily processed, cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment. In the automotive industry our products are used primarily in seating, door panels, head and arm rests, security shades and trim components, including instrument panels, door casings, seating, gear lever and steering column gaiters, headliners and load space covers. Non-automotive applications include outdoor seating for utility and sports vehicles, and sheeting used in medical and toxic hazard protection, personal protection, moisture barriers, stroller and nursery equipment, and decorative surface applications. Our primary brands names include Naugahyde®, BeautyGard®, Flame Blocker™, Spirit Millennium®, Ambla®, Amblon®, Velbex®, Cirroflex®, Plastolene® and Vynide®.
We are the successor to a long line of businesses that have manufactured vinyl coated fabrics. Our best known brand, Naugahyde, is the product of many improvements on an original rubber-coated fabric developed a century ago in Naugatuck, Connecticut. We design, manufacture and market a wide selection of vinyl coated fabric products under a portfolio of recognized brand names. We believe that our business has continued to be a leading supplier in its marketplace because of our ability to provide specialized materials with high performance characteristics often customized to the end-user specifications and complemented by comprehensive technical and customer support.
Our Principal Products and Their Markets
Our vinyl coated fabric products have undergone considerable evolution and today are distinguished by superior performance in a wide variety of applications as alternatives to leather, cloth and other synthetic fabric coverings. Our standard product lines consist of more than 525 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes and surface print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure and registered printing, which imparts five color character prints as well as non-registered prints, lamination and panel cutting.
Our vinyl coated fabric products have various high performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior trim components from floor to headliner which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene and foam laminated by either flame or hot melt adhesive for seating, fascia and door applications.
The automotive sector represented approximately 56.1% of our total sales in 2020. Our products are used primarily in the following automotive applications:
· seating
· door panels
· head and arm rests
· security shades
· components
The non-automotive transportation sector represented 22.9% of our 2020 sales and primarily consists of seating products for original equipment manufacturers of non-automotive and light truck vehicles in the following five categories:
· personal watercraft, ATV’s, snowmobiles, golf carts
· light and heavy industrial equipment and agricultural equipment (tractors, bulldozers)
· recreational vehicles, vans and motor homes
· heavy and medium trucks
· mass transit (trains, buses)
The distribution market sector represented approximately 11.1% of our 2020 sales and consists primarily of sales of the standard Naugahyde and Ambla product lines to local furniture shops, smaller furniture manufacturers and companies serving the hospitality and marine markets for refurbishing and replacement. The sales organization employed to service this market is a network of approximately 65 distributor locations.
The contract sector, which represented approximately 9.9% of our 2020 sales, includes contract furniture/upholstery, marine, healthcare, child care, and industrial equipment.
Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for durability and weatherability is used. We also manufacture a line of products called BeautyGard®, with water-based topcoats that contain agents to protect against bacterial and fungal microorganisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally friendlier than solvent-based topcoats. The line is widely used in hospitals and other healthcare facilities. Flame and smoke retardant vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and residential care centers and seats for school buses, trains and aircraft. We are also beginning to manufacture products without flame retardant chemical additives to meet additional customer requirements.
We produce vinyl coated fabrics and laminated composites through a continuous cast or spread coating manufacturing process. The continuous cast method yields a material with a soft finish, deep grain pattern, wide temperature tolerance range and high malleability factor for thermoforming. In addition, we possess plastisol-compounding capability, a variety of proprietary formulations and highly versatile finishing processes. We believe that our products are differentiated in the market by unique protective topcoat finishes and adhesive back coats, as well as five color register and rotogravure printing, which imparts multiple features, character prints and non-registered prints. We also have the in-house capability to perform transfer printing as well as micro-perforation, which provides product breathability.
We seek to ensure that every product fully meets customer requirements of specifications, reliability and performance.
We believe that we maintain our market leadership position through a strong research and development effort that provides strong product development capability. This yields enhanced product characteristics, lower cost of material combinations and new proprietary product formulations. We estimate that approximately 19.3% of our sales relate to products developed to customer specifications.
Our Stoughton, Wisconsin facility achieved ISO 9001:2008 status in 1999 and has renewed it annually since then. In addition, the facility achieved IATF 16949:2016 status in 2018. Our U.K. facility achieved ISO TS 16949 status in 2004 and is approved to the European Council Directive 96/98 EX on Marine Equipment as amended for Module D Production Quality.
We hold no patents but maintain certain of our process technologies as trade secrets.
Our Distribution Methods
Products are developed and marketed based upon the performance characteristics required by our end-users. We currently serve customers world-wide with 11 full-time sales persons in offices in Sarasota, Florida, Detroit, Michigan, and Earby, Lancashire, one exclusive agent in Italy, and an extensive distributor network in the U.S., the United Kingdom, Scandinavia, France, Germany and Hong Kong. 11.1% of our worldwide sales in 2020 were made through distributors. The industrial business is supported mainly from stock and via a catalogue and website.
We maintain a principal website at www.uniroyalglobal.com. We maintain websites for our U.S. non-automotive products at www.naugahyde.com and for our global/non-U.S. products at www.uniroyalglobal.co.uk and www.ambla.com.
Competition
We compete primarily on the basis of design, style, color, product breadth and quality, as well as price and customer service.
The global vinyl coated fabrics market is highly fragmented. The uses of vinyl coated fabrics include automotive, furniture, industrial, protective clothing, wall coverings, book coverings, non-automotive transportation and awnings and tents.
The following table sets forth product applications in the markets in which we actively compete domestically and our primary competitors in those markets.
Markets Key Uses Primary Competitors
Automotive
Interior components
Seating applications
Security shades
Canadian General-Tower Limited
Continental AG
Hornschuch Group GmbH
Vulcaflex S.p.A.
Haartz Corporation
Griffine SA
Morbern, Inc.
Transportation
and Contract
ATV/snowmobile/PWC/golf carts
Heavy/light equipment
RVs/motor homes
Canadian General-Tower Limited
Continental AG
Hornschuch Group GmbH
Vulcaflex S.p.A.
Morbern, Inc.
Spradling International Inc.
Distribution
Approximately 65 distributor and
reseller locations
OMNOVA Solutions Inc.
Spradling International Inc.
Hornschuch Group GmbH
Morbern, Inc.
Contract
Office/contract/institutional furniture
Restaurant booth
Health care
Marine
OMNOVA Solutions Inc.
Morbern, Inc.
Hornschuch Group GmbH
Alcor
Gislaved Folie AB
Griffine Enduction
Other Home furnishings/dinettes Spradling International Inc.
Raw Materials
The principal raw materials for our coated fabrics are casting paper, knit fabric, PVC plastic resins, pigments and plasticizers. We have multiple sources for most of these materials. We believe that in the few instances where we have a sole supplier we can re-engineer around the sole-sourced materials if necessary with minimal effort and cost.
Concentration of Customers
No one customer accounts for 10% or more of our consolidated revenues. Our top 25 customers account for approximately 64.1% of our total global sales. Our largest customer contributed 8.0% to our net sales in 2020.
Trademarks and Material Contracts
Under the standard Naugahyde and Ambla product lines, we own the following proprietary brands and trademarks among others:
· Naugahyde®
· All-American®
· BeautyGard®
· Chameá™
· Flame Blocker™
· Naugaform®
· NaugaSoft®
· NaugaSylk™
· Spirit Millennium®
· Ambla®
· Amblon®
· Cirroflex®
· Plastolene®
· Velbex®
· Vynide®
Human Capital Resources
We believe that we maintain a stable, experienced and productive workforce, currently employing approximately 302 employees.
Most of our employees who are involved in the production process are located at manufacturing facilities in Stoughton, Wisconsin and Earby, England. The production employees at the Stoughton, Wisconsin facility are represented by Local 1207 of the United Steel Workers (formerly P.A.C.E.). The term of the collective bargaining agreement for Stoughton represented employees extends to March 2023. Most of the employees at our Earby, England facility are represented by Unite. The collective bargaining agreement with Unite does not specify a termination date.
Twelve executive and corporate employees work in our executive office in Sarasota, Florida.
Effect of Existing or Probable Government Regulations on Our Business
Our manufacturing processes are subject to increasingly stringent regulation by environmental, health and safety authorities. It is difficult to predict future changes in environmental, health and safety regulations on our future financial results. Continued compliance could result in significant increases in capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities, arising out of a release of regulated material, discovery of previously unknown conditions, more aggressive enforcement actions or new requirements, could adversely affect our financial results.
Research and Development
We are actively engaged in research and development programs designed to develop new products, manufacturing processes, systems and technologies, while reducing costs to customers and enhancing existing product lines. We believe that investment in research and development has been an important factor in establishing and maintaining our competitive position in many of the specialized niche markets in which our products are sold. Product performance capabilities and characteristics are continually adjusted to meet customer needs.
In-house design and innovative product development are key features of our business. Our in-house design studio enables us to develop new designs, colors and patterns for customers and then deliver them in prototype sample form or by computer-aided design (CAD).
We have access to a vast range of leather and grain styles, prints and surface effects, which are constantly evolving and increasing. Further trends are captured and expressed in our own concept work and exclusive designs are developed from customer requests. Our CAD systems allow fast creation and display of design innovation. “Drape” software enables computer generated designs to be shown in situ in interiors of vehicles or other applications before the expense of production is incurred. A silicone cast surface-modeling system permits the transfer of material surface finishes, including leather and fabrics, onto vinyl foils for customer review before investment in tooling. Diverse production systems and equipment create an extensive automotive product range. Anti-stain and anti-squeak finish (ASF) are examples of product developments providing customers with cost reduction and material performance enhancements.
Compliance with Environmental Laws
We believe that we are in substantial compliance with applicable environmental laws and regulations. We have not needed to make any material expenditure to maintain such compliance during the past two fiscal years.
We aim to comply with all existing regulatory legislation at European, national and local levels and adopt a positive stance in anticipating future, more stringent regulatory requirements. We endeavor to minimize waste throughout the production facilities with better utilization of raw materials, energy and water and to prevent at the source the emission of pollutants into the environment. We are committed to continual improvements in environmental performance.
Coronavirus
During the first quarter of 2020, the World Health Organization declared the novel coronavirus (COVID-19) outbreak a public health emergency. There have been mandates from international, federal, state and local authorities requiring forced closures of various schools, businesses and other facilities and organizations. These forced closures have negatively impacted our business. Primarily due to the negative impact that COVID-19 is having on the global economy, we began to experience a decline in sales during the latter part of March 2020. In order to mitigate the effect of the decrease in revenue, we are managing our costs, which included initially reducing staff at our U.S. manufacturing facility and furloughing the entire production staff at the U.K. facility beginning in late March. During June 2020, we had some employees return to work as our U.K. facility started limited production of vinyl products based on orders it was receiving from its customers. We brought back additional production workers as incoming orders increased during the third quarter of 2020. All employees returned to work as demand for our products continued to improve in the fourth quarter and into the first quarter of 2021 although it was well below normalized levels.
Additionally, we have applied for loans under programs offered by the governmental agencies in the United States and in the United Kingdom and have found other supplementary cash flow opportunities to provide further liquidity.
While the closures and limitations on movement, domestically and internationally, are expected to be temporary due to the COVID-19 outbreak, the duration of the supply chain disruption and related financial impact cannot be estimated at this time. Should the closures continue for an extended period of time or should the effects of the coronavirus continue to spread, the impact could have a material adverse effect on our financial position, results of operations and cash flows which may require that we obtain additional financing.
Available Information
The address for the Company’s web site is www.uniroyalglobal.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC. In addition, these reports and documents may be accessed on the SEC’s web site at www.sec.gov.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Not applicable.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
We lease our production facility in Stoughton, Wisconsin (near Madison). The term of the lease extends to October 31, 2033 with an option to renew the lease for an additional five years. This facility consists of an approximately 230,000 square foot building with production, laboratory and administrative office space and a warehouse. Our lease includes several nearby buildings used for storage. Major equipment at the production facility includes two cast coating lines, five rotogravure printers, three paper reconditioning machines, three standard embossers, one GAP embosser, one micro-perforator, nine inspection stations including duplex with automatic data collection, bulk material handling systems and warehouse bar coding and locator systems. Laboratory facilities at the Stoughton facility replicate the production floor capabilities and enhance our research and development capability.
We also lease our production facility in West Craven Business Park, Earby, Barnoldswick, Lancashire, England. The term of the lease extends to March 3, 2039. This facility consists of approximately 250,000 square feet. Major equipment at the production facility includes various compound department mixers and holding tanks, three coating lines, four gravure printers, one water based printer, one embosser, two laminators, one airing-off/relaxer, one perforating process, two paneling machines, and four inspection frames.
Our executive and sales offices occupy approximately 9,010 square feet of premises in Sarasota, Florida under a lease that extends to May 31, 2023.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be a party to or be involved with legal proceedings, governmental investigations or inquiries, claims or litigation that are related to our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business or financial condition other than the following:
On October 1, 2020, the Health and Safety Executive (“HSE”), the government agency responsible for the enforcement of health and safety law in the U.K., charged our U.K. subsidiary, Uniroyal Global Limited, with an offense under the Health and Safety at Work etc. Act 1974 arising from an August 2019 incident in which an employee was injured in the course of his employment.
The Company fully cooperated with the HSE investigation and, at this time, intends to negotiate a plea based on the legal advice provided to it to date. Based on this legal advice, the Company believes that £150,000 ($193,000) is a reasonable estimate of the fine to be imposed and, accordingly, recorded an accrual for this charge. The related expense was recorded in general and administrative expenses in the accompanying Consolidated Statement of Operations for the year ended January 3, 2021.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock trades on the OTCQB Market under the symbol UNIR.
On January 27, 2020, the Company announced a one-for-five reverse stock split (“reverse stock split”) on its common stock that became effective on February 24, 2020. All share and per share amounts reflect the effect of the reverse stock split. The amounts in common stock and additional paid-in capital were adjusted as of the effective date of the reverse stock split.
As of March 1, 2021 there were 687 stockholders of record of our Common Stock.
We believe that there are presently approximately six market makers for our Common Stock. When stock is traded in the public market, characteristics of depth, liquidity and orderliness of the market may depend upon the existence of market makers as well as the presence of willing buyers and sellers. We do not know if these or other market makers will continue to make a market in our Common Stock. Further, the trading volume in our Common Stock has historically been both sporadic and light.
Currently, the payment by the Company of dividends on its Common Stock rests within the sole discretion of its Board of Directors. The payment of dividends will depend upon our earnings, our capital requirements and our financial condition, as well as other relevant factors. The Company has not been required to or declared any cash dividends since its inception, and has no present intention of paying any cash dividends on its Common Stock in the foreseeable future.
Transfer Agent
The Transfer Agent for the Common Stock of the Company is Continental Stock Transfer and Trust Company, 17 Battery Place, New York, NY 10004.
Recent Sales of Unregistered Securities
None.
There were no repurchases by the Company of its securities during the fourth quarter of fiscal 2020.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Description
We are a leading provider of manufactured vinyl coated fabrics. Our best known brand, Naugahyde, is the product of many improvements on rubber-coated fabrics developed a century ago in Naugatuck, Connecticut. We design, manufacture and market a wide selection of vinyl coated fabric products under a portfolio of recognized brand names. We believe that our business has continued to be a leading supplier in its marketplace because of our ability to provide specialized materials with performance characteristics customized to the end-user specifications, complemented by technical and customer support for the use of our products in manufacturing.
Our vinyl coated fabric products have undergone considerable evolution and today are distinguished by superior performance in a wide variety of applications as alternatives to leather, cloth and other synthetic fabric coverings. Our standard product lines consist of more than 525 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts five color character prints and non-registered prints, lamination and panel cutting.
Our vinyl coated fabric products have various high performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior soft trim components from floor to headliner, which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene foam laminated with either flame or hot melt adhesive for seating, fascia and door applications.
Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for water-based durability and weatherability is used. We also manufacture a line of products called BeautyGard®, with water-based topcoats that contain agents to protect against bacterial and fungal micro-organisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally friendlier than solvent-based topcoats. The line is widely used in hospitals and other healthcare facilities. Flame and smoke retardant vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and residential care centers and seats for school buses, trains and aircraft.
We currently conduct our operations in manufacturing facilities that are located in Stoughton, Wisconsin and Earby, England.
Overview
On November 10, 2014, we acquired through our subsidiary UEP Holdings LLC (“UEPH”) all of the ownership interests in Uniroyal Engineered Products, LLC (“Uniroyal”), and acquired directly all of the ordinary common stock of Uniroyal Global (Europe) Limited (“UGEL”, formerly known as Engineered Products Acquisition Limited (“EPAL”)), the holding company for Uniroyal Global Limited (formerly known as Wardle Storeys (Earby) Limited (“Wardle Storeys”)).
On January 27, 2020, we announced a one-for-five reverse stock split (“reverse stock split”) on our common stock that became effective on February 24, 2020. All share and per share amounts reflect the effect of the reverse stock split. The amounts in common stock and additional paid-in capital were adjusted as of the effective date of the reverse stock split.
We and our subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest to December 31. The year ended January 3, 2021 was a 53-week year whereas the year ended December 29, 2019 was a 52-week year. Our U.K. subsidiaries use the calendar year end of December 31. The activity of the U.K. subsidiaries that occurs on the days that do not coincide with our year-end is not material.
Our Earby, England operation’s functional currency is the British Pound Sterling (“Pound Sterling”) and has sales and purchases transactions that are denominated in currencies other than the Pound Sterling, principally the Euro. Approximately 27% of our global revenues and 32% of our global raw material purchases are derived from these Euro transactions.
The average year-to-date exchange rate for the Pound Sterling to the U.S. Dollar was approximately 0.7% higher and the average exchange rate for the Euro to the Pound Sterling was approximately 1.2% higher in 2020 compared to 2019. These exchange rate changes had the effect of increasing net sales by approximately $410,000 for the year ended January 3, 2021. The overall currency effect on our net loss allocable to common shareholders was a positive amount of approximately $51,000 for the year ended January 3, 2021.
The U.K. exit from the European Union on January 31, 2020, commonly referred to as Brexit, has caused, and may continue to cause, uncertainty in the global markets. Political and regulatory responses to the withdrawal are still developing, and we are in the process of assessing the impact that the withdrawal may have on our business as more information becomes available. Any impact from Brexit on our business and operations over the long term will depend, in part, on the outcome of tariff, tax treaties, trade, regulatory, and other negotiations the U.K. conducts.
During the first quarter of 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) outbreak a public health emergency. There have been mandates from international, federal, state and local authorities requiring forced closures of various schools, businesses and other facilities and organizations. These forced closures have negatively impacted our business. Primarily due to the negative impact that COVID-19 is having on the global economy, we began to experience a decline in sales during the latter part of March 2020. In order to mitigate the effect of the decrease in revenue, we are managing our costs, which included initially reducing staff at our U.S. manufacturing facility and furloughing the entire production staff at the U.K. facility beginning in late March. During June 2020, we had some employees return to work as our U.K. facility started limited production of vinyl products based on orders it was receiving from its customers. We brought back additional production workers as incoming orders increased during the third quarter of 2020. All employees returned to work as demand for our products continued to improve in the fourth quarter and into the first quarter of 2021 although it was well below normalized levels.
As described below, we have applied for loans under programs offered by the governmental agencies in the United States and in the United Kingdom and have found other supplementary cash flow opportunities to provide further liquidity.
For the U.S. operations, during the second quarter of 2020 we received $2,217,500 in funds from One Community Bank (formerly Oregon Community Bank) through the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”) under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”). The loan matures on April 13, 2022 and bears an interest rate of 1.0%. Monthly payments of principal and interest were required to begin on November 13, 2020 based on the amount that was outstanding on October 13, 2020 in order to fully amortize the loan by April 13, 2022. The loan may be prepaid by us at any time prior to maturity with no prepayment penalties. Loan payments have been deferred pending loan forgiveness from the SBA.
All or a portion of the loan may be forgiven by the SBA for costs we incurred for payroll, rent, utilities and all other allowable expenses during the 24-week period that began April 13, 2020. We used all proceeds from the loan to maintain payroll and make payments for lease, utility and other allowable expenses. As a result, management believes that we have met the PPP eligibility criteria for forgiveness and has concluded that the loan represents, in substance, a government grant that is expected to be forgiven. As such, in accordance with International Accounting Standards (“IAS”) 20, “Accounting for Government Grants and Disclosure of Government Assistance,” we have recognized the entire loan amount as grant income, which is included in net other income (expense) in the consolidated statement of operations for the year ended January 3, 2021. We submitted our application for loan forgiveness to One Community Bank in November 2020.
Also for the U.S. operations, in December 2020 we received $2,432,353 in funds from Wells Fargo Capital Finance, LLC through the Main Street Lending Program established by the Federal Reserve Board. The loan matures in November 2025 and bears an interest rate of 3.00% above LIBOR. We are required to make monthly interest payments beginning in December 2021 with any deferred interest from the first year of the loan added to principal. In addition, we are required to make annual principal payments in November 2023, 2024 and 2025 in increments of 15%, 15% and 70% of the principal, respectively. The loan may be prepaid by us at any time prior to maturity with no prepayment penalties.
Additionally for the U.S. operations, during the first quarter of 2021 we received a $2.0 million Second Draw PPP loan. This loan has the same general terms as our first PPP loan.
For the U.K. operations, during the year ended January 3, 2021 we recorded reimbursed costs of approximately $1,569,000 under the Coronavirus Job Retention Scheme (“CJRS”) set up by the U.K. government to help employers pay the wages of those employees who would otherwise have been laid off during the coronavirus outbreak but under the CJRS were furloughed instead. This program reimbursed us for up to 80% of the compensation expense plus national insurance and certain benefits paid to the furloughed employees, resulting in lower salary expense for us. While the employees were on furlough, the compensation paid to them was limited to the amount reimbursed by the CJRS. We recorded the reimbursed amounts as reductions to the associated expenses.
Additionally for the U.K. operations, during the second half of 2020 we received $1,225,911 in loans from our principal shareholder and $3,268,664 in loans from automotive lenders. These funds provided additional working capital to meet various short-term cash needs.
While the closures and limitations on movement, domestically and internationally, are expected to be temporary due to the COVID-19 outbreak, the duration of the supply chain disruption and related financial impact cannot be estimated at this time. Should the closures continue for a more extended period of time or should the effects of the coronavirus continue to spread, the impact could have a material adverse effect on our financial position, results of operations and cash flows which may require that we obtain additional financing.
Year Ended January 3, 2021 Compared to the Year Ended December 29, 2019
The following table sets forth, for the year ended January 3, 2021 (“year ended 2020”) and December 29, 2019 (“year ended 2019”), certain operational data including their respective percentage of net sales:
Year Ended
January 3, 2021 December 29, 2019 Change %
Change
Net Sales $ 60,218,355 100.0% $ 91,136,244 100.0% $ (30,917,889 ) -33.9%
Cost of Goods Sold 52,437,754 87.1% 76,174,406 83.6% (23,736,652 ) -31.2%
Gross Profit 7,780,601 12.9% 14,961,838 16.4% (7,181,237 ) -48.0%
Operating Expenses:
Selling 3,040,685 5.0% 4,300,730 4.7% (1,260,045 ) -29.3%
General and administrative 6,720,969 11.2% 6,047,734 6.6% 673,235 11.1%
Research and development 980,695 1.6% 1,634,385 1.8% (653,690 ) -40.0%
Other operating expenses - 0.0% 343,003 0.4% (343,003 ) -100.0%
Total Operating Expenses 10,742,349 17.8% 12,325,852 13.5% (1,583,503 ) -12.8%
Operating (Loss) Income (2,961,748 ) -4.9% 2,635,986 2.9% (5,597,734 ) <-100%
Interest expense (1,581,907 ) -2.6% (2,036,248 ) -2.2% 454,341 -22.3%
Funding from Paycheck
Protection Program 2,217,500 3.7% - 0.0% 2,217,500 -
Other (expense) income (173,214 ) -0.3% 258,486 0.3% (431,700 ) <-100%
(Loss) Income before Tax
Provision (2,499,369 ) -4.2% 858,224 0.9% (3,357,593 ) <-100%
Tax benefit (1,275,743 ) -2.1% (103,199 ) -0. 1% (1,172,544 ) >100%
Net (Loss) Income (1,223,626 ) -2.0% 961,423 1. 1% (2,185,049 ) <-100%
Preferred stock dividend (3,209,841 ) -5.3% (3,126,496 ) -3.4% (83,345 ) 2.7%
Net Loss Allocable to Common
Shareholders $ (4,433,467 ) -7.4% $ (2,165,073 ) -2.4% $ (2,268,394 ) >100%
Revenue
Total revenue for the year ended 2020 decreased $30,917,889 or 33.9% to $60,218,355 from $91,136,244 for the year ended 2019. There was a favorable currency effect of approximately $410,000 on total revenue.
For the year ended 2020 compared to the year ended 2019, U.S. automotive sales decreased 45.7% and European automotive sales decreased 37.1% (excluding the currency adjustment). This significant decrease was principally due to the COVID-19 pandemic, where most of the Company’s customers in this market and the OEMs that use the Company’s products in their automobiles, shut down production lines or their entire production facilities at the end of the first quarter 2020 and continued into the second quarter 2020 as the pandemic continued. The automotive market began to improve at the end of the second quarter as most of the customers and OEMs were restarting their production facilities. Due to the continuing improvement in the automotive market and the Company retaining all of its programs, the Company’s sales activity increased significantly in the third quarter of 2020 as compared to the second quarter of 2020. The increase in sales continued as revenues in the fourth quarter of 2020 were higher than in the third quarter of 2020. However, they have not yet reached the run-rate of the period prior to the onset of COVID-19.
Additionally, sales for the industrial sector decreased 23.9% (24.1% before the currency effect) primarily due to a decline in the U.S. contract market. The negative impact of COVID-19 on the global economy was a major factor in the overall decline in sales, particularly to our customers in the hospitality and healthcare sectors, which principally began during the latter part of March 2020.
Also impacting 2020 revenue to a lesser degree, the Company in August 2019, decommissioned and shut down equipment in the U.K. that manufactured calender product for both the automotive and industrial market. The Company had built sufficient inventory of this product to service its customers for several months after the shutdown. During the years ended 2020 and 2019, the Company sold $1,665,811 and $4,858,032, respectively, of calender product primarily to the automotive market.
Gross Profit
Total gross profit for the year ended 2020 decreased $7,181,237 or 48.0% to $7,780,601 from $14,961,838 for the year ended 2019. The gross profit percentage was 12.9% of sales for the year ended 2020 compared to 16.4% for the year ended 2019. Gross profit amount and percentage were negatively impacted by the effect of COVID-19. However, as with sales, gross profit increased significantly in the third quarter of 2020 as compared to the second quarter of 2020 and continued to increase in the fourth quarter of 2020 as compared to the third quarter of 2020. The gross profit percentage also increased significantly in the third quarter of 2020 as compared to the second quarter of 2020 but declined in the fourth quarter of 2020 as compared to the third quarter of 2020 primarily due to higher costs related to production inefficiencies. During the year ended 2020, manufacturing costs were reduced approximately $1,309,000 due to reimbursements through the CJRS for the salaries of furloughed employees. In addition, there was a favorable currency effect of approximately $103,000 on gross profit.
Operating Expenses
Selling expenses for the year ended 2020 decreased $1,260,045 or 29.3% to $3,040,685 from $4,300,730 for the year ended 2019. Due to lower sales activity primarily as a result of COVID-19, selling expenses such as commission, travel and entertainment were reduced in 2020. In addition, the Company was reimbursed approximately $99,000 through the CJRS for the wages of furloughed employees resulting in lower salary expense. Also contributing to the lower selling expenses in 2020 was the 2019 closure of the calender product line and the elimination of its applicable employment and commission costs. There was a $19,000 unfavorable currency effect that partially offset the decrease in selling expenses.
General and administrative expenses for the year ended 2020 increased $673,235 or 11.1% to $6,720,969 from $6,047,734 for the year ended 2019. This increase was primarily due to costs for cash management consulting services provided to the Company and a charge relating to a legal proceeding in the U.K., as previously discussed in Item 3. Partially offsetting the increase were wages of approximately $35,000 that were reimbursed through the CJRS. Included in the increase in general and administrative expenses was an unfavorable currency effect of $10,000.
Research and development expenses for the year ended 2020 decreased $653,690 or 40.0% to $980,695 from $1,634,385 for the year ended 2019. The decrease was principally due to a decline in activities attributable to the COVID-19 pandemic including lower development costs for new trials and wages of approximately $126,000 that were reimbursed through the CJRS. There was a $3,000 unfavorable currency effect that partially offset the decrease in research and development expenses.
There were no other operating expenses for the year ended 2020 and $343,003 for the year ended 2019. The amount for 2019 was cost incurred by the Company as part of a restructuring plan to reduce inefficiencies at its U.K. facility.
Operating Income (Loss)
Operating loss for the year ended 2020 was $2,961,748 compared to operating income of $2,635,986 for the year ended 2019, a decrease of $5,597,734. The decrease was due to the decline in gross profit partially offset by the decrease in operating expenses, which included the $343,003 non-recurring restructuring charge in 2019. The operating loss percentage was -4.9% of sales for the year ended 2020 compared to the operating income percentage of 2.9% for the year ended 2019.
Interest Expense
Interest expense for the year ended 2020 decreased $454,341 or 22.3% to $1,581,907 from $2,036,248 for the year ended 2019. The decrease was primarily due to lower interest rates on LIBOR and prime during the year ended 2020 compared to the year ended 2019.
Funding from Paycheck Protection Program:
For the year ended 2020, the $2,217,500 funding from the PPP is the amount of debt forgiveness that the Company expects to receive from the SBA under the CARES Act for eligible costs incurred by the Company, as previously discussed.
Other Income (Expense)
Other expense for the year ended 2020 was $173,214 compared to other income of $258,486 for the year ended 2019. Included in other income (expense) are the currency gains and losses recognized on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros as these currencies fluctuated during the year. Also included in other income (expense) are gains and losses from the change in fair values on the Company’s foreign currency exchange contracts.
Tax Benefit
For the year ended 2020, the tax benefit was $1,275,743 compared to $103,199 for the year ended 2019. The tax benefit for 2020 was principally attributable to the results of the U.S. operations, while the tax benefit for 2019 was principally attributable to the results of the U.K. operations partially offset by a tax provision for the U.S. operations.
Based on management’s review at January 3, 2021 and December 29, 2019, it was determined that a valuation allowance for the Company’s deferred tax assets was not required since it was more likely than not that the deferred tax assets would be realized.
Preferred Stock Dividend
The terms of the acquisitions in November 2014 resulted in the issuance of preferred ownership units/stock of UEPH and UGEL to the sellers. These preferred units carried quarterly dividend requirements on a total value of $55,000,000 at rates ranging from 5% to 8%. The dividend rate on the Series B UEP Holdings preferred units which started at 5.5% increases by 0.5% on the anniversary of the issuance up to a maximum of 8.0%. The payment of dividends for the year ended January 3, 2021 and the three months ended December 29, 2019 was deferred to preserve cash and provide additional liquidity. As of January 3, 2021 and December 29, 2019, accrued dividends of $4,019,905 and $788,599, respectively, were included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
Liquidity and Sources of Capital
Cash, as it is needed, is provided by using the Company’s lines of credit. These lines provide for a total borrowing commitment in excess of $44,000,000 subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of $17,760,583 at January 3, 2021, $14.6 million of the lines bears interest at LIBOR or the Eurodollar rate plus a range of 1.95% to 2.45%, depending on the underlying borrowing base, or, at our option, at the bank's prime or base lending rate and $3.2 million bears interest at the bank’s prime or base lending rate which was 3.25% at January 3, 2021. The lines provided additional availability of approximately $4.1 million and, combined with UEP's and UGL's total cash balances, liquidity was approximately $5.7 million at January 3, 2021. We plan to use this availability and cash provided by operating activities to finance our cash needs for fiscal 2021. The balances due under the lines of credit are recorded as current liabilities on the consolidated balance sheets.
As a result of the COVID-19 pandemic, sales of the Company's products are lower than expected. This has had a negative impact on the Company's working capital which could affect its ability to borrow using the Company's lines of credit. To increase its liquidity, as previously discussed, the Company has applied for loans under programs offered by the governmental agencies in the United States and in the United Kingdom.
For the U.S. operations, early in the second quarter of 2020 the Company received $2,217,500 in funds through the Paycheck Protection Program administered by the United States Small Business Administration. The Company believes that all of this debt will be forgiven; it submitted its application for loan forgiveness in November 2020. Also for the U.S. operations, in December 2020 the Company received $2,432,353 in funds from Wells Fargo Capital Finance, LLC through the Main Street Lending Program established by the Federal Reserve Board. Additionally for the U.S. operations, during the first quarter of 2021 the Company received a $2.0 million Second Draw PPP loan.
In the U.K., during the year ended 2020 the Company recorded £1,253,000 ($1,569,000) in funding available under the Coronavirus Job Retention Scheme which reimbursed the Company for the compensation expense paid to furloughed employees. Additionally for the U.K. operations, during the second half of 2020 the Company received $1,225,911 in loans from its principal shareholder and $3,268,664 in loans from automotive lenders. These funds provided more working capital to meet various short-term cash needs.
The Company continues to attempt to manage its operating costs to match the reduced sales volume. We believe that the increasing sales activities combined with the funding from nontraditional sources (U.S. and U.K. governments and automotive lenders) will be sufficient to provide for short-term cash needs. However, there can be no assurance that additional financing will be available on favorable terms, if at all.
The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 0.89 at both January 3, 2021 and December 29, 2019.
Cash balances increased $1,057,201, before the effects of currency translation of $86,093, to $1,656,882 at January 3, 2021 from $513,588 at December 29, 2019. Of the above noted amounts, $1,621,692 and $498,007 were held outside the U.S. by our foreign subsidiaries as of January 3, 2021 and December 29, 2019, respectively.
Cash used in operations was $992,158 for the year ended 2020 as compared to cash provided by operations of $4,659,527 for the year ended 2019. For 2020, cash used in operations was primarily due to the net loss of $1,223,626 and adjustments for non-cash items of $(1,069,834), offset by changes in working capital of $1,156,536 and changes in other assets and liabilities of $144,766. For 2019, cash provided by operations was primarily due to adjustments for non-cash items of $2,444,326, changes in working capital of $1,355,358, and net income of $961,423, offset by changes in other assets and liabilities of $(101,580).
Cash used in investing activities was $1,417,623 for the year ended 2020 as compared to $1,894,296 for the year ended 2019. During 2020 and 2019, cash used in investing activities was principally for purchases of machinery and equipment at our manufacturing locations and payments made for company-owned key man life insurance premiums. For the year ended 2020 and 2019, the payments made for the life insurance premiums were net of proceeds from policy loans of $130,000 and $249,051, respectively.
For the year ended 2020, cash provided by financing activities was $3,466,982 compared to cash used in financing activities of $3,298,592 for the year ended 2019. Impacting cash flows from financing activities were proceeds from issuance of long-term debt of $7,725,092 ($2,217,500 through the Paycheck Protection Program, $3,268,664, net of translation adjustment of $193,425, from automotive lenders, and $2,432,353 through the Main Street Lending Program) for the year ended 2020 and $604,935 for the year ended 2019. In addition, there were no preferred dividend payments during the year ended 2020 compared to $3,114,592 during the year ended 2019. As previously stated, the payment of dividends for the year ended January 3, 2021 and the three months ended December 29, 2019 was deferred to preserve cash and provide additional liquidity. Also impacting cash flows from financing activities for the year ended 2020 and 2019 were net payments on lines of credit of $3,074,286 and net advances on lines of credit of $891,022, respectively. The changes in the lines of credit reflect the funding of working capital. Additionally during the years ended 2020 and 2019, our majority shareholder provided $1,425,911 (net of translation adjustment of $72,544) and $1,350,000, respectively, in financing in the form of subordinated secured promissory notes. Payments on these notes were $875,000 and $675,000 during 2020 and 2019, respectively.
Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as of January 3, 2021 and through the date of filing of this report.
We currently have several on-going capital projects that are important to our long-term strategic goals. Machinery and equipment will also be added as needed to increase capacity or enhance operating efficiencies in our manufacturing plants. We will use a combination of financing arrangements to provide the necessary capital. We believe that our existing resources, including cash on hand and our credit facilities, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However, there can be no assurance that additional financing will be available on favorable terms, if at all.
We have no off balance sheet arrangements.
Critical Accounting Policies, Judgments and Estimates
The U.S. Securities and Exchange Commission ("SEC") requires companies to provide additional disclosure and commentary on their most critical accounting policies. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and requires management to make its most significant estimates and judgments in the preparation of its consolidated financial statements. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. Our critical accounting policies are described below.
Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied, which includes the control of products transferring to the customer. For Uniroyal, this generally occurs when products are shipped and, for UGL, this generally occurs when the customer accepts delivery either at the Company’s U.K. facility or at a mutually agreed upon location. Revenue is measured as the amount of consideration we expect to receive in exchange for products transferred to the customer. Based on historical results and analysis, we estimate and calculate provisions for customer rebates and sales returns and allowances and record these estimated amounts as an offset to revenue in the same period the related revenue is recognized.
Accounts Receivable
On an ongoing basis, we evaluate our accounts receivable based on individual customer circumstances, historical write-offs and collections, and current industry and customer credit conditions, and adjust the allowance for doubtful accounts accordingly. Our policy regarding write-offs and collection efforts varies based on individual customer circumstances. Past due accounts receivable are determined based on individual customer credit terms.
Inventories
We value inventory at the lower of cost using the first-in, first-out (FIFO) method, or market. To determine the cost of inventory, we allocate fixed expense to the costs of production based on the normal capacity, which refers to a range of production levels and is considered the production expected to be achieved over a number of periods under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Fixed overhead costs allocated to each unit of production should not increase due to abnormally low production. Those excess costs are recognized as a current period expense.
We assess the recoverability of inventory and record a provision for obsolescence based upon specifically identified, discontinued or obsolete items, or a percentage of quantities on hand compared with historical and forecasted usage and sales levels. These assessments, which require management’s judgments and estimates, reduce inventories to their estimated net realizable value.
Finite-Lived Long-Lived Assets
Finite-lived long-lived assets consist of property, equipment and other intangible assets, which excludes goodwill and trademarks since they are considered to have indefinite useful lives. Property, equipment and other intangible assets are amortized using the straight-line method over their estimated useful life. These finite-lived long-lived assets are reviewed for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset.
Goodwill and Intangible Indefinite-Lived Assets
Goodwill and trademarks are indefinite-lived assets and are not amortized unless, for trademarks, we determine that their useful lives are no longer indefinite. These indefinite-lived assets are reviewed for impairment at least annually or whenever events or changes in business circumstances (“triggering events”) indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset.
In considering whether the events caused by the COVID-19 pandemic should be considered a triggering event, we used a qualitative assessment methodology and determined that it was not more likely than not that the fair value of our assets was less than the carrying amount and, therefore, concluded that no impairment charge was necessary as of January 3, 2021.
Income Tax
We file income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. Our subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits pass through to its members. We made the acquisition of Uniroyal through UEPH, a limited liability company, which issued preferred ownership interests to the sellers that provide for quarterly dividends. Uniroyal’s taxable income is allocated entirely to UEPH as its sole member and since it is a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on our tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual tax returns.
We follow ASC 740 Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities (temporary differences) using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. We have federal net operating loss carryforwards of approximately $15.7 million as of January 3, 2021, of which $11.7 million expire in years beginning 2022 through 2034 and $4.0 million may be carried forward indefinitely. We have state net operating loss carryforwards of approximately $14.1 million as of January 3, 2021, which also expire beginning 2022 through 2034. Additionally, we have foreign net operating loss carryforwards of approximately $2.8 million as of January 3, 2021, which have no expiration date. As a result of the federal and state loss carryforwards, we have deferred tax assets of $4,900,595 net of a valuation allowance of $828,411 as of January 3, 2021.
We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making our valuation allowance determinations, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carryback and carryforward periods, and the implementation of tax planning strategies. Management has determined that there is uncertainty as to the realization of a portion of the state net operating loss carryforward and has established a valuation allowance against a portion of the state net operating loss carryforward.
Foreign Currency Translation
The financial position and results of operations of our foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date, while the capital accounts are translated at the historical rate for the date they were recognized. Revenues and expenses are translated at the weighted average exchange rates during the year. The resulting translation gains and losses on assets and liabilities are recorded in accumulated other comprehensive loss, and are excluded from net income until realized through a sale or liquidation of the investment. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operations are included in other income (expense) in the accompanying consolidated statements of operations.
Fair Value of Financial Instruments
Our short-term financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and lines of credit. We adjust the carrying value of financial instruments denominated in other currencies such as cash, accounts receivable, accounts payable and lines of credit using the appropriate exchange rates at the balance sheet date. We believe that the carrying values of these short-term financial instruments approximate their estimated fair values.
The fair value of our long-term debt is estimated based on current rates for similar instruments with the same remaining maturities. In determining the current interest rates for similar instruments, we take into account its risk of nonperformance. We believe that the carrying value of our long-term debt approximates its estimated fair value.
Postretirement and Postemployment Benefit Liabilities
We provide certain health care and life insurance benefits for substantially all employees (active or retired) who were employed prior to February 20, 1987. In calculating our plan obligations and related expense, we make various assumptions and estimates. These assumptions include discount rates, mortality rates, retirement rates, termination rates and other factors. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our obligations and future expense.
Recent Accounting Standards
See Note 1 to the consolidated financial statements for a discussion on accounting standards that we adopted during 2020 and on those recently issued but not yet required to be adopted.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Uniroyal Global Engineered Products, Inc. and subsidiaries
Sarasota, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Uniroyal Global Engineered Products, Inc. and subsidiaries (the "Company") as of January 3, 2021 and December 29, 2019, and the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 3, 2021 and December 29, 2019, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
/s/ Frazier & Deeter, LLC
We have served as the Company's auditor since 2010.
Tampa, Florida
April 1, 2021
Uniroyal Global Engineered Products, Inc.
Consolidated Balance Sheets
ASSETS January 3, 2021 (1) December 29, 2019
CURRENT ASSETS
Cash and cash equivalents $ 1,656,882 $ 513,588
Accounts receivable, net 10,114,819 11,662,325
Inventories, net 17,952,850 19,116,542
Other current assets 1,841,153 930,015
Related party receivable -
Total Current Assets 31,566,611 32,222,470
PROPERTY AND EQUIPMENT, NET 18,491,122 19,103,319
OPERATING LEASE RIGHT-OF-USE ASSETS 6,242,736 6,607,963
OTHER ASSETS
Intangible assets 3,388,357 3,263,781
Goodwill 1,079,175 1,079,175
Other long-term assets 4,679,990 3,489,313
Total Other Assets 9,147,522 7,832,269
TOTAL ASSETS $ 65,447,991 $ 65,766,021
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of bank balance $ 275,297 $ 332,141
Lines of credit 17,760,583 20,530,773
Current maturities of long-term debt 1,432,301 1,238,541
Current maturities of finance lease liabilities 257,298 364,872
Accounts payable 7,344,785 9,232,119
Accrued expenses and other liabilities 7,987,333 3,890,367
Related party obligation 149,366 608,517
Current portion of postretirement benefit liability - health and life 162,977 155,803
Total Current Liabilities 35,369,940 36,353,133
LONG-TERM LIABILITIES
Long-term debt, less current portion 7,338,762 2,892,242
Finance lease liabilities, less current portion 235,116 492,613
Operating lease liabilities, less current portion 5,893,268 6,106,568
Related party finance lease liabilities, less current portion 2,504,404 2,646,970
Long-term debt to related parties 4,216,566 3,190,655
Postretirement benefit liability - health and life, less current portion 2,713,585 2,592,023
Other long-term liabilities 807,190 715,308
Total Long-Term Liabilities 23,708,891 18,636,379
Total Liabilities 59,078,831 54,989,512
STOCKHOLDERS' EQUITY
Preferred units, Series A UEP Holdings, LLC, 200,000 units issued
and outstanding ($100 issue price) 617,571 617,571
Preferred units, Series B UEP Holdings, LLC, 150,000 units issued
and outstanding ($100 issue price) 463,179 463,179
Preferred stock, Uniroyal Global (Europe) Limited, 50 shares
issued and outstanding ($1.51 stated value)
Common stock, 95,000,000 shares authorized ($.001 par value)
3,736,006 shares issued and outstanding as of January 3, 2021
and December 29, 2019 3,736 18,680
Additional paid-in capital 35,290,590 35,275,646
Accumulated deficit (28,734,670 ) (24,301,203 )
Accumulated other comprehensive loss (1,271,321 ) (1,297,439 )
Total Stockholders' Equity 6,369,160 10,776,509
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,447,991 $ 65,766,021
(1) The amounts in common stock and additional paid-in capital were adjusted to reflect the one-for-five reverse stock split ("reverse stock split") as of February 24, 2020, the effective date of the reverse stock split. See Note 1 for additional information.
See accompanying notes to the consolidated financial statements.
Uniroyal Global Engineered Products, Inc.
Consolidated Statements of Operations
Years Ended
January 3, 2021 December 29, 2019
NET SALES $ 60,218,355 $ 91,136,244
COST OF GOODS SOLD 52,437,754 76,174,406
Gross Profit 7,780,601 14,961,838
OPERATING EXPENSES:
Selling 3,040,685 4,300,730
General and administrative 6,720,969 6,047,734
Research and development 980,695 1,634,385
Other operating expenses - 343,003
OPERATING EXPENSES 10,742,349 12,325,852
Operating (Loss) Income (2,961,748 ) 2,635,986
OTHER INCOME (EXPENSE):
Interest and other debt related expense (1,581,907 ) (2,036,248 )
Funding from Paycheck Protection Program 2,217,500 -
Other (expense) income (173,214 ) 258,486
Net Other Income (Expense) 462,379 (1,777,762 )
(LOSS) INCOME BEFORE TAX PROVISION (2,499,369 ) 858,224
TAX BENEFIT (1,275,743 ) (103,199 )
NET (LOSS) INCOME (1,223,626 ) 961,423
Preferred stock dividend (3,209,841 ) (3,126,496 )
NET LOSS ALLOCABLE TO COMMON
SHAREHOLDERS $ (4,433,467 ) $ (2,165,073 )
LOSS PER COMMON SHARE:
Basic and Diluted $ (1.19 ) $ (0.58 )
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 3,736,006 3,736,742
See accompanying notes to the consolidated financial statements.
Uniroyal Global Engineered Products, Inc.
Consolidated Statements of Comprehensive Loss
Years Ended
January 3, 2021 December 29, 2019
NET (LOSS) INCOME $ (1,223,626 ) $ 961,423
OTHER COMPREHENSIVE INCOME (LOSS):
Minimum benefit liability adjustment (160,356 ) (830,899 )
Foreign currency translation adjustment 186,474 236,105
OTHER COMPREHENSIVE INCOME (LOSS) 26,118 (594,794 )
COMPREHENSIVE (LOSS) INCOME (1,197,508 ) 366,629
Preferred stock dividend (3,209,841 ) (3,126,496 )
COMPREHENSIVE LOSS TO COMMON
SHAREHOLDERS $ (4,407,349 ) $ (2,759,867 )
See accompanying notes to the consolidated financial statements.
Uniroyal Global Engineered Products, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended January 3, 2021 and December 29,
UEPH Series A UEPH Series B UGEL Preferred Common Stock Additional
Paid In Accumulated Accumulated Other
Comprehensive Total
Stockholders'
Units Amount Units Amount Shares Amount Shares Amount Capital Deficit Loss Equity
Balance December 30, 2018 200,000 $ 617,571 150,000 $ 463,179 $ 75 3,738,006 $ 18,690 $ 35,244,770 $ (22,136,130 ) $ (702,645 ) $ 13,505,510
Net income - - - - - - - - - 961,423 - 961,423
Other comprehensive loss - - - - - - - - - - (594,794 ) (594,794 )
Stock-based compensation
expense - - - - - - - - 44,166 - - 44,166
Treasury shares purchased at
cost and retired - - - - - - (2,000 ) (10 ) (13,290 ) - - (13,300 )
Preferred stock dividend - - - - - - - - - (3,126,496 ) - (3,126,496 )
Balance December 29, 2019 200,000 $ 617,571 150,000 $ 463,179 $ 75 3,736,006 $ 18,680 $ 35,275,646 $ (24,301,203 ) $ (1,297,439 ) $ 10,776,509
Net loss - - - - - - - - - (1,223,626 ) - (1,223,626 )
Other comprehensive income - - - - - - - - - - 26,118 26,118
Preferred stock dividend - - - - - - - - - (3,209,841 ) - (3,209,841 )
Adjustment for a 1-for-5 reverse
stock split (1) - - - - - - - (14,944 ) 14,944 - - -
Balance January 3, 2021 200,000 $ 617,571 150,000 $ 463,179 $ 75 3,736,006 $ 3,736 $ 35,290,590 $ (28,734,670 ) $ (1,271,321 ) $ 6,369,160
(1) The amounts in common stock and additional paid-in capital were adjusted to reflect the one-for-five reverse stock split ("reverse stock split") as of February 24, 2020, the effective date of the reverse stock split. See Note 1 for additional information.
See accompanying notes to the consolidated financial statements.
Uniroyal Global Engineered Products, Inc.
Consolidated Statements of Cash Flows
Years Ended
CASH FLOWS FROM OPERATING ACTIVITIES January 3, 2021 December 29, 2019
Net (loss) income $ (1,223,626 ) $ 961,423
Adjustments to reconcile net (loss) income to net cash flows from operating activities:
Depreciation 2,358,001 2,354,650
Stock-based compensation expense - 44,166
Deferred tax (benefit) expense (1,319,778 ) 252,690
Amortization of intangible assets 15,948 16,667
Loss on disposal of property and equipment 3,871 74,681
Noncash postretirement benefit - health and life - (294,468 )
Funding from Paycheck Protection Program recognized as income (2,217,500 ) -
Noncash lease adjustment 89,624 (4,060 )
Changes in assets and liabilities:
Accounts receivable 1,882,167 990,417
Inventories 1,414,782 588,802
Other current assets (834,868 ) 58,309
Related party receivable (907 ) 20,118
Other long-term assets 175,693 141,166
Accounts payable (2,064,395 ) (300,897 )
Accrued expenses and other liabilities 759,757 (1,391 )
Postretirement benefit liability - health and life (31,620 ) (29,592 )
Other long-term liabilities (213,154 )
Cash (used in) provided by operating activities (992,158 ) 4,659,527
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,368,852 ) (1,966,200 )
Payments on life insurance policies, net of proceeds from policy loans (48,771 ) 71,904
Cash used in investing activities (1,417,623 ) (1,894,296 )
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in checks issued in excess of bank balance (56,844 ) (523,069 )
Net (payments) advances on lines of credit (3,074,286 ) 891,022
Payments on long-term debt (1,115,425 ) (1,069,904 )
Proceeds from issuance of long-term debt - Paycheck Protection Program 2,217,500 -
Proceeds from issuance of long-term debt - automotive lenders 3,075,239 -
Proceeds from issuance of long-term debt - Main Street Lending Program 2,432,353 -
Proceeds from issuance of long-term debt - other - 604,935
Payments on finance lease liabilities (363,205 ) (641,300 )
Proceeds from related party obligations 1,353,367 1,350,000
Payments on related party obligations (1,001,717 ) (782,384 )
Payment of related party preferred stock dividends - (3,114,592 )
Purchase and retirement of treasury stock - (13,300 )
Cash provided by (used in) financing activities 3,466,982 (3,298,592 )
Net change in cash and cash equivalents 1,057,201 (533,361 )
Cash and cash equivalents - beginning of period 513,588 1,028,841
Effects of currency translation on cash and cash equivalents 86,093 18,108
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,656,882 $ 513,588
See Note 2 for noncash transactions and supplemental disclosure of cash flow information.
See accompanying notes to the consolidated financial statements.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
NOTE 1 - Basis of Presentation and Summary of Significant Accounting Policies
Description of the Business
Uniroyal Global Engineered Products, Inc. (the “Company”) is primarily engaged in the development, manufacturing and distribution of vinyl coated fabrics mainly for use in transportation, residential, hospitality, health care, office furniture and automotive applications. The Company’s customers are located primarily throughout North America and Europe.
On April 29, 2015, the Board of Directors adopted an amendment to the Articles of Incorporation to change the Company’s name from Invisa, Inc. to Uniroyal Global Engineered Products, Inc. On June 25, 2015, the stockholders approved the amendment. The amended and restated Articles of Incorporation were filed with the Nevada Secretary of State and became effective on July 15, 2015.
On November 10, 2014, the Company acquired all of the ownership interests in Uniroyal Engineered Products, LLC (“Uniroyal”), a U.S. manufacturer of textured coatings, and all of the ordinary common stock of Engineered Products Acquisition Limited (“EPAL”), the holding company for Wardle Storeys (Earby) Limited (“Wardle Storeys”), a European manufacturer of textured coatings and polymer films.
The Company made the acquisition of Uniroyal through its newly formed subsidiary, UEP Holdings, LLC (“UEPH”). The aggregate purchase consideration paid for 100% of the outstanding equity of Uniroyal was preferred ownership interests issued by UEPH having a liquidation preference of $35 million. See Note 13 for a description of the preferred units issued.
In a separate transaction, the Company purchased EPAL for 100 shares of the Company’s Common Stock and the Company’s guaranty of outstanding EPAL preferred stock retained by the seller, having a liquidation preference of £12,518,240 (approximately $20 million at closing). These preferred shares were entitled to a fixed cumulative preferential dividend of £625,912 per annum payable quarterly (approximately $1,000,000 at the date of the transaction). On November 24, 2015, the liquidation preference was changed from £12,518,240 to €17,699,314 (approximately $18,851,539) and the payment of the quarterly dividend from £156,478 to €221,241 (approximately $235,644). These conversions were based on the exchange rates on November 24, 2015.
As a result of beneficial ownership between the principal owner of the Company and the seller of Uniroyal and EPAL, the seller controls in excess of 80% of the Company’s voting rights in all matters to come before the Company’s shareholders. As a result of this common ownership, the November 10, 2014 transaction was treated as a combination between entities under common control and was accounted for in a manner similar to the pooling-of-interest method. The recognized assets and liabilities were transferred at their carrying amounts at the date of the transaction. Further, the companies were also combined retrospectively for prior year comparative information to the extent permitted.
In December 2016, the Company changed the name of EPAL to Uniroyal Global (Europe) Limited (“UGEL”) and the name of Wardle Storeys to Uniroyal Global Limited (“UGL”).
The Company and its subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest to December 31. The year ended January 3, 2021 was a 53-week year whereas the year ended December 29, 2019 was a 52-week year. The Company’s U.K. subsidiaries use the calendar year end of December 31. The activity of the U.K. subsidiaries that occurs on the days that do not coincide with the Company’s year-end is not material.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries and are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). All intercompany transactions have been eliminated. The Company manages its operations on a consolidated, integrated basis in order to optimize its equipment and facilities and to effectively service its global customer base, and concludes that it operates in a single business segment.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
For purposes of comparability, certain reclassifications have been made to amounts previously reported to conform with the current period presentation.
One-for-Five Reverse Stock Split
On January 27, 2020, the Company announced a one-for-five reverse stock split (“reverse stock split”) on its common stock that became effective on February 24, 2020. All share and per share amounts reflect the effect of the reverse stock split. The amounts in common stock and additional paid-in capital were adjusted as of the effective date of the reverse stock split.
Coronavirus (COVID-19)
During the first quarter of 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) outbreak a public health emergency. There have been mandates from international, federal, state and local authorities requiring forced closures of various schools, businesses and other facilities and organizations. These forced closures have negatively impacted the Company’s business. Primarily due to the negative impact that COVID-19 is having on the global economy, the Company began to experience a decline in sales during the latter part of March 2020. In order to mitigate the effect of the decrease in revenue, the Company is managing its costs, which included initially reducing staff at its U.S. manufacturing facility and furloughing the entire production staff at the U.K. facility beginning in late March. During June 2020, the Company had some employees return to work as its U.K. facility started limited production of vinyl products based on orders it was receiving from its customers. The Company brought back additional production workers as incoming orders increased during the third quarter of 2020. All employees returned to work as demand for the Company’s products continued to improve in the fourth quarter although it was well below normalized levels.
As described below, the Company has applied for loans under programs offered by the governmental agencies in the United States and in the United Kingdom and has found other supplementary cash flow opportunities to provide further liquidity.
For the U.S. operations, during the second quarter of 2020 the Company received $2,217,500 in funds from One Community Bank (formerly Oregon Community Bank) through the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”) under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”). The loan matures on April 13, 2022 and bears an interest rate of 1.0%. Monthly payments of principal and interest were required to begin on November 13, 2020 based on the amount that was outstanding on October 13, 2020 in order to fully amortize the loan by April 13, 2022. The loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Loan payments have been deferred pending loan forgiveness from the SBA.
All or a portion of the loan may be forgiven by the SBA for costs the Company incurred for payroll, rent, utilities and all other allowable expenses during the 24-week period that began April 13, 2020. The Company used all proceeds from the loan to maintain payroll and make payments for lease, utility and other allowable expenses. As a result, management believes that the Company has met the PPP eligibility criteria for forgiveness and has concluded that the loan represents, in substance, a government grant that is expected to be forgiven. As such, in accordance with International Accounting Standards (“IAS”) 20, “Accounting for Government Grants and Disclosure of Government Assistance,” the Company has recognized the entire loan amount as grant income, which is included in net other income (expense) in the consolidated statement of operations for the year ended January 3, 2021. The Company submitted its application for loan forgiveness to One Community Bank in November 2020.
Also for the U.S. operations, in December 2020 the Company received $2,432,353 in funds from Wells Fargo Capital Finance, LLC through the Main Street Lending Program established by the Federal Reserve Board. The loan matures in November 2025 and bears an interest rate of 3.00% above LIBOR. The Company is required to make monthly interest payments beginning in December 2021 with any deferred interest from the first year of the loan added to principal. In addition, the Company is required to make annual principal payments in November 2023, 2024 and 2025 in increments of 15%, 15% and 70% of the principal, respectively. The loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties.
Additionally for the U.S. operations, during the first quarter of 2021 the Company received a $2.0 million Second Draw PPP loan. This loan has the same general terms as the Company’s first PPP loan.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
For the U.K. operations, during the year ended January 3, 2021 the Company recorded reimbursed costs of approximately $1,569,000 under the Coronavirus Job Retention Scheme (“CJRS”) set up by the U.K. government to help employers pay the wages of those employees who would otherwise have been laid off during the coronavirus outbreak but under the CJRS were furloughed instead. This program reimbursed the Company for up to 80% of the compensation expense plus national insurance and certain benefits paid to the furloughed employees, resulting in lower salary expense for the Company. While the employees were on furlough, the compensation paid to them was limited to the amount reimbursed by the CJRS. The Company recorded the reimbursed amounts as reductions to the associated expenses.
Additionally for the U.K. operations, during the second half of 2020 the Company received $1,225,911 in loans from its principal shareholder and $3,268,664 in loans from automotive lenders. These funds provided additional working capital to meet various short-term cash needs.
While the closures and limitations on movement, domestically and internationally, are expected to be temporary due to the COVID-19 outbreak, the duration of the supply chain disruption and related financial impact cannot be estimated at this time. Should the closures continue for a more extended period of time or should the effects of the coronavirus continue to spread, the impact could have a material adverse effect on the Company’s financial position, results of operations and cash flows which may require that the Company obtain additional financing.
The payment of dividends for the year ended January 3, 2021 and the three months ended December 29, 2019 was deferred to preserve cash and provide additional liquidity. As of January 3, 2021 and December 29, 2019, accrued dividends of $4,019,905 and $788,599, respectively, were included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
Legal Proceedings
From time to time, the Company may be a party to claims, proceedings, and lawsuits related to products, services, contracts, employment, environmental, safety, intellectual property, and other matters. The ultimate resolution of such claims, proceedings, and lawsuits is inherently unpredictable and, as a result, the Company’s estimates of liability, if any, are subject to change. Actual results could differ materially from the Company’s estimates, and an unfavorable resolution of any matter could have a material adverse effect on the financial condition, results of operations and/or cash flows of the Company. The Company does not believe, based on the information currently available to it, that the ultimate resolution of any currently pending matters will have a material effect on the consolidated financial condition, results of operations, or cash flows of the Company other than the following:
On October 1, 2020, the Health and Safety Executive (“HSE”), the government agency responsible for the enforcement of health and safety law in the U.K., charged our U.K. subsidiary, Uniroyal Global Limited, with an offense under the Health and Safety at Work etc. Act 1974 arising from an August 2019 incident in which an employee was injured in the course of his employment.
The Company fully cooperated with the HSE investigation and, at this time, intends to negotiate a plea based on the legal advice provided to it to date. Based on this legal advice, the Company believes that £150,000 ($193,000) is a reasonable estimate of the fine to be imposed and, accordingly, recorded an accrual for this charge. The related expense was recorded in general and administrative expenses in the accompanying Consolidated Statement of Operations for the year ended January 3, 2021.
Cash and Cash Equivalents
The Company defines cash and cash equivalents as highly liquid, short-term investments with a maturity at the date of acquisition of three months or less.
The Company maintains cash in bank accounts which, at times, exceeds federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Accounts Receivable
Accounts receivable are recorded net of an allowance for doubtful accounts, returns and discounts of $940,474 and $693,265 as of January 3, 2021 and December 29, 2019, respectively. Accounts receivable are recorded when obligations under the terms of a contract with a customer are satisfied, which includes the control of products transferring to the customer. See Note 22 for further discussion.
On an ongoing basis, the Company evaluates its accounts receivable based on individual customer circumstances, historical write-offs and collections, and current industry and customer credit conditions, and adjusts its allowance for doubtful accounts accordingly. The Company’s policy regarding write-offs and collection efforts varies based on individual customer circumstances. Past due accounts receivable are determined based on individual customer credit terms.
Customer Rebates
The Company records customer rebates as a reduction of net sales. Accounts receivable are recorded net of an allowance for customer rebates of $131,868 and $77,337 as of January 3, 2021 and December 29, 2019, respectively.
Inventories
Inventories are valued at the lower of cost using the first-in, first-out (FIFO) method, or market. To determine the cost of inventory, the Company allocates fixed expense to the costs of production based on the normal capacity, which refers to a range of production levels and is considered the production expected to be achieved over a number of periods under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Fixed overhead costs allocated to each unit of production should not increase due to abnormally low production. Those excess costs are recognized as a current period expense.
The Company and its subsidiaries have policies which are consistently applied to maintain reserves for obsolescence based on specific identification, discontinued or obsolete items, or a percentage of the amount on hand based on inventory aging compared with historical and forecasted usage and sales levels. These inventory recoverability assessments reduce inventories to their estimated net realizable value.
Property and Equipment
Property and equipment are stated at cost. Major expenditures for property and equipment are capitalized. Maintenance, repairs, and minor refurbishments are expensed as incurred. When assets are disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income.
Property and equipment are depreciated using the straight-line method over their estimated useful lives. For income tax reporting purposes, depreciation is calculated using both applicable straight-line methods and accelerated methods or capital allowances based on the various taxing jurisdictions’ approved methods.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, accrued expenses and other liabilities, and operating lease liabilities in the accompanying consolidated balance sheets. Finance leases are included in property and equipment, current maturities of finance lease liabilities, and finance lease liabilities, less current portion in the accompanying consolidated balance sheets while related party finance leases are included in property and equipment, related party obligation, and related party finance lease liabilities in the accompanying consolidated balance sheets.
Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, lease right-of-use assets and liabilities are recognized at the beginning date of a lease based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on information that is available at the beginning date of a lease to determine the present value of lease payments, since its leases generally do not provide an implicit rate. The implicit rate is used when readily determinable. The Company excludes leases with terms of 12 months or less. The terms of the Company’s leases may include options to extend or terminate a lease when it is reasonably certain that the Company will exercise that option. The Company’s lease agreements with lease and non-lease components are generally accounted for on a combined basis. See Notes 10 and 16 for further discussion.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Cash Surrender Value of Insurance Policies
Cash surrender value of insurance policies is valued at the cash surrender value of the contract as determined by the life insurance company. The cash value of the insurance policies totaled $776,323 and $597,551 as of January 3, 2021 and December 29, 2019, respectively. The Company has obtained loans against the cash value of certain of these insurance policies. At January 3, 2021 and December 29, 2019, these insurance policy loans totaled $590,841 and $460,841, respectively, and had a weighted average interest rate of 3.63%. The increase in the amount of insurance policy loans was due to $130,000 in loans obtained by the Company during the third quarter of 2020. Interest is accrued quarterly. Each loan (and applicable accrued interest) can be repaid at any time. Any loan (or interest) outstanding at the time of settlement will reduce the proceeds payable under the policies. The cash value of the insurance policies, net of policy loans, is included in other long-term assets in the accompanying consolidated balance sheets.
Impairment of Finite-Lived Long-Lived Assets
The Company reviews long-lived assets, including property, equipment, and intangible assets, for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset. There were no impairment losses recognized in the years ended January 3, 2021 or December 29, 2019.
Goodwill and Intangible Indefinite-Lived Assets
Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired. Trademarks are recorded at estimated fair value at the date they were acquired in certain business acquisitions. To the extent it has been determined that the carrying value of the assets associated with goodwill or trademarks is not recoverable and is in excess of its fair value, an impairment loss is recognized. Impairment is reviewed at least annually. No impairment loss was deemed necessary as of January 3, 2021 or December 29, 2019.
Income Taxes
The Company follows ASC 740 Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax bases of assets and liabilities (temporary differences) using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. The Company reduces its deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making its valuation allowance determinations, the Company considers all available positive and negative evidence affecting specific deferred tax assets, including past and anticipated future performance, the reversal of deferred tax liabilities, the length of carryback and carryforward periods, and the implementation of tax planning strategies.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
The tax effects from an uncertain tax position are recognized in the financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company does not believe there is any uncertainty with respect to its tax positions which would result in a material change to the financial statements.
The Company files income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. The Company’s U.S. operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits pass through to its members. Uniroyal’s taxable income is allocated entirely to UEPH, a limited liability corporation, as its sole member. As the sole member of UEPH, the Company then receives this income allocation less the dividends paid on the preferred ownership interests held by the former owners of Uniroyal.
The Company does not have a history of repatriating a significant portion of its foreign cash. However, if it decided to repatriate these foreign amounts to fund U.S. operations, the Company would not be required to pay any additional U.S. tax related to these amounts since the Company previously recorded a one-time transition tax on deemed repatriation of deferred foreign income.
The Company's tax returns for tax years 2017 and thereafter are subject to examination by taxing authorities. The Company records interest and penalties associated with uncertain tax positions related to these tax filings as interest expense. No such expense was recorded for the years ended January 3, 2021 and December 29, 2019, since the Company does not believe it has any uncertain tax positions.
Fair Value of Financial Instruments
The Company’s short-term financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and lines of credit. The Company adjusts the carrying value of financial instruments denominated in other currencies such as cash, accounts receivable, accounts payable and lines of credit using the appropriate exchange rates at the balance sheet date. The Company believes that the carrying values of these short-term financial instruments approximate their estimated fair values.
The fair value of the Company’s long-term debt is estimated based on current rates for similar instruments with the same remaining maturities. In determining the current interest rates for similar instruments, the Company takes into account its risk of nonperformance. The Company believes that the carrying value of its long-term debt approximates its estimated fair value.
The Company uses foreign currency exchange contracts which are recorded at their estimated fair values in the accompanying consolidated balance sheets. The fair values of the currency exchange contracts are based upon observable market transactions of spot and forward rates.
For the fiscal year ended January 3, 2021, there have been no changes in the application of valuation methods applied to similar assets and liabilities.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
The Company follows accounting principles generally accepted in the United States of America for measuring, reporting, and disclosing fair value. These standards apply to all assets and liabilities that are measured, reported, and/or disclosed on a fair value basis.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Assets and liabilities measured, reported and/or disclosed at fair value will be classified and disclosed in one of the following three categories:
Level 1 - Inputs to the valuation methodology are unadjusted quoted market prices for identical assets in active markets that the Company has the ability to access.
Level 2 - Observable market based inputs or unobservable inputs that are corroborated by market data. Inputs to the valuation methodology include:
> quoted prices for similar assets or liabilities in active markets;
> quoted prices for identical or similar assets or liabilities in inactive markets;
> inputs other than quoted prices that are observable for the asset or liability;
> inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Unobservable inputs that are unobservable and not corroborated by market data.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques applied need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Foreign Currency Translation
The financial position and results of operations of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date, while the capital accounts are translated at the historical rate for the date they were recognized. Revenues and expenses are translated at the weighted average exchange rates during the year. The resulting translation gains and losses on assets and liabilities are recorded in accumulated other comprehensive loss and are excluded from net income until realized through a sale or liquidation of the investment. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of the Company’s foreign operations are included in other expense in the accompanying consolidated statements of operations.
Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that the estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Revenue Recognition
We derive our revenues primarily from the manufacture and sale of vinyl coated fabrics. Revenues are recognized when control of these products is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products.
The Company has identified customer purchase orders as contracts. The contract specifies the transaction price which is based on the amount of consideration the Company expects to receive in exchange for transferring control of a product to the customer. The Company does not have multiple performance obligations requiring it to allocate a transaction price. The performance obligation under the contract is the delivery of products. The performance obligation is satisfied and revenue is recognized when the Company transfers control of the products to its customers. For Uniroyal, this generally occurs when products are shipped and, for UGL, this generally occurs when the customer accepts delivery either at the Company’s U.K. facility or at a mutually agreed upon location.
However, if the Company has an enforceable right to payment when the customer is contractually required to accept delivery of any remaining product at the end of a contract, but collectability of the revenue is uncertain, revenue recognition would occur upon agreement even if the product is not delivered to the customer.
See Note 22 for further discussion.
Variable Consideration
The nature of our business gives rise to variable consideration, including rebates, allowances and returns that generally decrease the transaction price, which reduces revenue. These various amounts are generally credited to the customer, based on achieving certain levels of sales activity and product returns.
Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal will not occur or when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends and recorded in the same period in which the related revenue is recognized.
Customer Claims and Implied Warranties
The Company does not have any formal warranty programs. We generally will provide product warranties related to manufacturing defects and specific performance standards for our products. We estimate the potential returns based upon historical experience and record an allowance for potential returns as contra revenue and within accounts receivable. The allowance for potential customer returns was $774,674 and $401,808 as of January 3, 2021 and December 29, 2019, respectively.
Shipping and Handling Costs
Shipping and handling costs charged to customers and the costs incurred by the Company are netted. Shipping and handling costs incurred by the Company for purchases are included in cost of goods sold.
Advertising
Advertising costs, other than promotional materials, are charged to expense as incurred. Promotional materials are expensed as they are distributed. Advertising expense was $80,523 and $136,161 for the years ended January 3, 2021 and December 29, 2019, respectively. As of January 3, 2021 and December 29, 2019, $92,820 and $87,707, respectively, of promotional materials were included in other long-term assets in the accompanying consolidated financial statements.
Research and Development
Research and development costs are charged to expense as incurred. Research and development expense was $980,695 and $1,634,385 for the years ended January 3, 2021 and December 29, 2019, respectively.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Earnings Per Share
The Company calculates basic net income per common share by dividing net income after the deduction of preferred stock or preference dividends by the weighted average number of common shares outstanding. The calculation of diluted net income per share is consistent with that of basic net income per common share but gives effect to all potential common shares (that is, securities underlying options, warrants or convertible securities) that were outstanding during the period, unless the effect is anti-dilutive.
Environmental Matters
The Company’s policy is to conduct its businesses with due regard for the preservation and protection of the environment. Management is not aware of any environmental matters relating to its operations that could materially affect liquidity, capital resources, or the financial condition of the Company.
Recent Accounting Standards
On August 28, 2018, the Financial Accounting Standards Board issued a new standard, ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The new standard modifies the disclosure requirements on fair value measurements in Topic 820, “Fair Value Measurement.” Certain requirements were removed such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, certain requirements were modified and certain disclosures were added such as the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. The Company adopted this standard on December 30, 2019. Since this standard only revises disclosure requirements, the adoption of this standard for the year ending January 3, 2021 did not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.
On December 18, 2019, the Financial Accounting Standards Board issued a new standard, ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This new guidance simplifies the accounting for income taxes by removing certain exceptions such as the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income/gain from other items; and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The new guidance also simplifies the accounting for income taxes under certain circumstances such as requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of a business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted this standard on January 4, 2021. Management believes that the adoption of this standard for the year ending January 2, 2022 will not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.
In June 2020, the American Institute of Certified Public Accountants in conjunction with the Financial Accounting Standards Board developed Technical Question and Answer (“TQA”) 3200.18, “Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program”, which is intended to provide clarification on how to account for loans received from the PPP. TQA 3200.18 states that an entity may account for PPP loans under ASC 470, “Debt” or, if the entity is expected to meet PPP eligibility criteria and the PPP loan is expected to be forgiven, the entity may account for the loans under IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance”. The Company has elected to account for PPP loan proceeds under IAS 20 as allowed by TQA 3200.18. Although the Company anticipates forgiveness of the entire amount of the PPP loan, no assurances can be provided that the Company will obtain forgiveness of the PPP loan in whole or in part.
Subsequent Events
The Company has evaluated subsequent events occurring through the date that the financial statements were available to be issued, for events requiring recording or disclosure in the January 3, 2021 consolidated financial statements. There were no material events or transactions occurring during this period requiring recognition or disclosure other than the following:
As previously stated, during the first quarter of 2021 the Company received a $2.0 million Second Draw PPP loan. This loan has the same general terms as the Company’s first PPP loan.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
NOTE 2 - Noncash Transactions and Supplemental Disclosure of Cash Flow Information
During the year ended January 3, 2021, the Company recorded funding from the Paycheck Protection Program of $2,217,500, which is the amount of debt forgiveness that it expects to receive for the loan it made through the Paycheck Protection Program. Although the Company has not been legally released from this amount of the loan, management concluded that there was reasonable assurance that the Company had substantially met the terms for forgiveness, including using all proceeds from the loan for eligible costs (as defined under the Paycheck Protection Program). The Company submitted its application for loan forgiveness in November 2020.
During the year ended December 29, 2019, the Company entered into several equipment financing obligations with an aggregate fair value of $379,126, which are accounted for as capital assets. The fair value was added to property and equipment and a corresponding amount to related party finance lease liabilities or long-term debt.
The Company adopted ASU No. 2016-02, “Leases” on December 31, 2018. Under this new standard, the Company was required to record on its balance sheet previously unrecorded operating leases based on the present value of remaining lease payments. Per this new standard, the Company recorded operating lease right-of-use (“ROU”) assets and operating lease liabilities of $6,799,271 on its consolidated balance sheet as of December 31, 2018.
During the third quarter of 2020 and 2019, the Company obtained $130,000 and $249,051, respectively, in loans against the cash value of its company owned life insurance policies and are shown net of payments of $178,771 and $177,147, respectively, on the life insurance policies in the consolidated statements of cash flows. These loans have a weighted average interest rate of 3.65% and 3.66%, respectively, and can be repaid at any time.
The following is supplemental disclosure of cash paid for the years ended:
January 3, 2021 December 29, 2019
Interest $ 1,595,346 $ 1,987,522
NOTE 3 - Inventories
Inventories consist of the following:
January 3, 2021 December 29, 2019
Raw materials $ 5,193,919 $ 5,430,125
Work-in-process 4,281,035 4,677,987
Finished goods 10,594,088 10,922,947
20,069,042 21,031,059
Less: Allowance for inventory obsolescence (2,116,192 ) (1,914,517 )
Total Inventories, net $ 17,952,850 $ 19,116,542
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
NOTE 4 - Property and Equipment
The major categories of property and equipment are summarized as follows:
Depreciable
Lives January 3, 2021 December 29, 2019
Building and building improvements 8 - 25 yrs. $ 1,441,432 $ 1,419,495
Machinery and equipment 8 - 10 yrs. 31,633,706 30,396,418
Computer equipment 3 - 10 yrs. 1,569,881 1,498,668
Furniture and fixtures 7 - 10 yrs. 203,362 199,508
Real estate under lease 20 yrs. 2,565,914 2,565,914
Construction-in-progress - 241,195 9,109
Total Property and Equipment
37,655,490 36,089,112
Less: Accumulated depreciation
(19,164,368 ) (16,985,793 )
Property and Equipment, net
$ 18,491,122 $ 19,103,319
NOTE 5 - Intangible Assets
Intangible assets are summarized as follows:
Amortizable
Lives January 3, 2021 December 29, 2019
Trademarks and trade names Indefinite $ 3,294,158 $ 3,211,281
Other 5 years 94,199 52,500
Total Intangible Assets
$ 3,388,357 $ 3,263,781
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
NOTE 6 - Other Long-term Assets
Other long-term assets consist of the following:
January 3, 2021 December 29, 2019
Deferred tax asset, net $ 4,072,184 $ 2,694,550
Other 607,806 794,763
Total Other Long-term Assets $ 4,679,990 $ 3,489,313
NOTE 7 - Other Long-term Liabilities
Other long-term liabilities consist of the following:
January 3, 2021 December 29, 2019
Deferred tax liability $ 801,136 $ 709,945
Other 6,054 5,363
Total Other Long-term Liabilities $ 807,190 $ 715,308
NOTE 8 - Lines of Credit
The Company’s Uniroyal subsidiary has available a $30,000,000 revolving line of credit financing agreement with Wells Fargo Capital Finance, LLC (“Uniroyal Line of Credit”), which matures on June 15, 2023. Interest is payable monthly at the Eurodollar rate plus 2.25% or Wells Fargo Capital Finance, LLC's prime rate at the Company's election on outstanding balances up to $6,000,000 and prime rate on amounts in excess of $6,000,000. The line of credit weighted average interest rate including unused facility fees was approximately 3.85% as of January 3, 2021. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable, inventories and equipment. The line of credit is secured by substantially all of Uniroyal's assets and includes certain financial and restrictive covenants. The Company was in compliance with these covenants as of January 3, 2021.
The outstanding balance on the Uniroyal Line of Credit was $9,204,572 and $10,328,913 as of January 3, 2021 and December 29, 2019, respectively. The Company has classified the outstanding balance on this line of credit within current liabilities in the accompanying consolidated balance sheets. Based upon eligible accounts receivable, inventories and equipment at January 3, 2021, the Uniroyal Line of Credit provided additional availability of approximately $2,691,000 as of January 3, 2021.
The Company’s UGL subsidiary has available a £10,500,000 (approximately $14.3 million) revolving line of credit financing agreement with Lloyds Bank Commercial Finance Limited (“UGL Line of Credit”), which is subject to a six-month notice by either party. The line has several tranches based on currency or underlying security. Interest is payable monthly at the base rate (U.K. LIBOR or Lloyds Bank Base Rate as published) plus 1.95% to 2.45% depending on the tranche. The line of credit weighted average interest rate was approximately 2.32% as of January 3, 2021. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable and inventories. The line of credit is secured by substantially all of the subsidiary's assets and includes certain financial and restrictive covenants. The Company was in compliance with these covenants as of January 3, 2021.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
The outstanding balance on the UGL Line of Credit was £6,268,526 and £7,787,002 ($8,556,011 and $10,201,860) as of January 3, 2021 and December 29, 2019, respectively. The Company has classified the outstanding balance on this line of credit within current liabilities in the accompanying consolidated balance sheets. Based upon eligible accounts receivable and inventories at January 3, 2021, the UGL Line of Credit provided additional availability of approximately $1.4 million and, combined with its total cash balance of $1,621,692, UGL had liquidity of approximately $3.0 million as of January 3, 2021.
NOTE 9 - Long-term Debt
Long-term debt consists of the following:
January 3, 2021 December 29, 2019
Notes Payable
Uniroyal term loans with Wells Fargo Capital Finance, LLC,
monthly interest only payments at the Eurodollar rate plus 2.25%
or Wells Fargo Bank, National Association’s prime rate. The
term loans' weighted average interest rate was approximately
3.85% as of January 3, 2021. Monthly principal balances are
reduced by $26,183 each month resulting in a conversion, or
increase, of the same amount in the line of credit each month.
Term loans mature in June 2023 and are secured by substantially
all of the Company's assets and include certain financial and
restrictive covenants. $ 785,501 $ 1,099,700
Note payable to Lloyds Bank Commercial Finance Limited
payable in monthly installments of £1,148 ($1,474) including
interest and principal at a rate of 4.43% with the remaining
principal due August 2023. The loan is secured by certain
equipment. 51,905 60,971
Notes payable to Lloyds Bank Commercial Finance Limited
payable in monthly installments of £1,756-£3,932 ($2,255-
$5,049) including interest and principal at a rate of 4.87%
with the remaining principal due April 2022-October 2022.
The loans are secured by certain equipment. 156,422 217,211
Notes payable to automotive lenders at 0% payable in increasing
quarterly installments beginning September 2021 with the
remaining principal due March 2023. The loans are secured by
substantially all of the Company’s assets subject to the notes’
subordination to the line of credit and term loans with
Lloyds Bank Commercial Finance Limited. 3,268,664 -
Note payable to Wells Fargo Capital Finance, LLC at a rate of
3.00% above LIBOR with monthly interest payments beginning in
December 2021and annual principal payments in November 2023,
2024 and 2025 in increments of 15%, 15% and 70% of principal,
respectively. 2,432,353 -
6,694,845 1,377,882
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Equipment Financing Obligations
Financing obligation to Kennet Equipment Leasing payable
in monthly installments of £16,636 ($21,363) including
interest and principal at a rate of 10.9%. The loan matures
in May 2021 and is secured by certain equipment. 23,960 238,514
Financing obligation to Regents Capital Corporation payable
in monthly installments of $3,256-$6,669 including interest
and principal at rates of 6.20%-7.24% with the remaining
principal due February 2022-February 2024. The loans are
secured by certain equipment. 678,329 994,830
Financing obligation to Lloyds Bank Commercial Finance Limited
payable in monthly installments of £21,878 $(28,094) including
interest and principal at a rate of 3.95%. The loan matures in
February 2025 and is secured by certain equipment. 1,373,929 1,519,557
2,076,218 2,752,901
Total 8,771,063 4,130,783
Less: Current portion (1,432,301 ) (1,238,541 )
Long-term portion $ 7,338,762 $ 2,892,242
Principal requirements on long-term debt for years ending after January 3, 2021 are as follows:
Totals
$ 1,432,301
3,334,322
1,513,521
724,384
1,766,535
Total $ 8,771,063
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
NOTE 10 - Related Party Obligations
Long-term debt to related parties consists of the following:
January 3, 2021 December 29, 2019
Senior subordinated promissory notes issued to the
Company’s majority shareholder; monthly interest
only payments at 9.25%; principal payment of
$2,000,000 due on January 15, 2022. The senior
subordinated promissory notes are secured by
substantially all of the Company’s assets subject to the
notes' subordination to the line of credit and term
loans with Wells Fargo Capital Finance, LLC. $ 2,000,000 $ 2,000,000
Senior secured promissory note issued to the
Company’s majority shareholder; quarterly interest
payments at 10%; principal payment of $765,655 due
on January 15, 2022. The note is secured by substantially
all of the Company’s assets subject to the note’s
subordination to the line of credit and term loans with
Wells Fargo Capital Finance, LLC. 765,655 765,655
Subordinated secured promissory note issued to the
Company’s majority shareholder; quarterly interest
payments at 8%; principal payment of $225,000 due
on January 15, 2022. The note is secured by substantially
all of the Company’s assets subject to the note’s
subordination to the line of credit and term loans with
Wells Fargo Capital Finance, LLC. 225,000 225,000
Subordinated secured promissory note issued to the
Company’s majority shareholder; quarterly interest
payments at 8%; principal payment of $200,000 due
on January 15, 2021. The note was secured by substantially
all of the Company’s assets subject to the note’s
subordination to the line of credit and term loans with
Wells Fargo Capital Finance, LLC. - 200,000
Subordinated secured promissory notes issued to the
Company’s majority shareholder at 0%; principal payment
of $1,225,911 due on April 5, 2023. The notes are secured by
substantially all of the Company’s assets subject to the notes’
subordination to the line of credit and term loans with
Lloyds Bank Commercial Finance Limited. 1,225,911 -
Total 4,216,566 3,190,655
Less: Current portion - -
Total Long-term Debt to Related Parties $ 4,216,566 $ 3,190,655
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Principal requirements on long-term debt to related parties for years ending after January 3, 2021 are as follows:
Totals
$ -
2,990,655
1,225,911
Total $ 4,216,566
The Company has finance leases under which it leases its main U.S. manufacturing facility and certain other property from a related party lessor entity, owned by the Company’s majority shareholder. These related party finance leases expire at various dates from October 2023 through October 2033. The Company has security deposits aggregating $267,500 held by the lessor entity.
The components of lease expense for the related party finance leases for the years ended January 3, 2021 and December 29, 2019 are as follows:
Years Ended
January 3, 2021 December 29, 2019
Finance lease expense:
Amortization of right-of-use assets $ 167,177 $ 165,594
Interest on lease liabilities 420,008 427,680
Total finance lease expense $ 587,185 $ 593,274
Cash paid for amounts included in the measurement of related party finance lease liabilities for the years ended January 3, 2021 and December 29, 2019 are as follows:
Years Ended
January 3, 2021 December 29, 2019
Operating cash flows from finance leases $ 420,008 $ 427,680
Financing cash flows from finance leases $ 126,717 $ 107,383
Right-of-use assets obtained in exchange for related party finance lease obligations for the years ended January 3, 2021 and December 29, 2019 are as follows:
Years Ended
January 3, 2021 December 29, 2019
Finance leases $ - $ 190,000
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Supplemental balance sheet and other information regarding related party finance leases are as follows:
January 3, 2021 December 29, 2019
Finance leases:
Property and equipment, net $ 2,040,681 $ 2,207,858
Current maturities of finance lease liabilities $ 149,366 $ 133,517
Finance lease liabilities, less current portion 2,504,404 2,646,970
Total finance lease liabilities $ 2,653,770 $ 2,780,487
Weighted average remaining lease term 11.2 years 12.0 years
Weighted average discount rate 16.77 % 16.62 %
Maturities of related party finance lease liabilities as of January 3, 2021 are as follows:
Totals
$ 558,873
554,794
546,476
468,098
472,275
Thereafter 3,591,508
Total lease payments 6,192,024
Less: Interest (3,538,254 )
Total related party finance lease liabilities $ 2,653,770
The current portion of the related party finance lease liabilities and related party short-term subordinated secured promissory notes are combined and are shown in current liabilities as related party obligation which consists of the following:
January 3, 2021 December 29, 2019
Current portion of related party finance lease liabilities $ 149,366 $ 133,517
Related party subordinated secured promissory note, interest at 10% - 350,000
Related party subordinated secured promissory note, interest at 10% - 125,000
Related Party Obligation $ 149,366 $ 608,517
In January 2020, the Company’s majority shareholder advanced $200,000 to the Company. This advance was repaid in February 2020. During 2019, the Company issued $1,150,000 of short-term subordinated secured promissory notes to the Company’s majority shareholder of which $675,000 was repaid in 2019 and the remainder of $475,000 in 2020. The notes were at a rate of 10%.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
NOTE 11 - Income Taxes
The Company files income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. The Company’s U.S. operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits pass through to its members. The Company made the acquisition of Uniroyal through UEPH, a limited liability corporation, which issued preferred ownership interests to the sellers that provide for quarterly dividends. Uniroyal’s taxable income is allocated entirely to UEPH as its sole member and since it is a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on the Company’s tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual tax returns.
Under the CARES Act, the Internal Revenue Code was amended to provide relief and supportive measures for taxpayers impacted by COVID-19. The key components of these amendments are as follows: eliminating taxable income limitation for certain net operating losses and permitting carryback net operating losses arising in 2018, 2019 and 2020 to five prior tax years; accelerating refunds of previously generated Alternative Minimum Tax credit; increasing business interest limitation from 30% to 50% of adjusted taxable income; and amending depreciation for qualified improvement property (“QIP”) to 15-year property for QIP placed in service after December 31, 2017. The Company considered the various potential income tax provisions and deemed that there were no material impacts to the income tax provisions for the year ended January 3, 2021.
Additionally, in December 2020, Congress passed the Consolidated Appropriations Act which provides that loans received and subsequently forgiven under the PPP would not be taxable and that PPP-funded expenses are also deductible. Some states have not conformed to the Federal treatment. Since the Company expects that the $2,217,500 million loan it received under the PPP to be forgiven, it recorded the funds as grant income under IAS 20, and excluded this income for tax purposes for the year ended January 3, 2021.
The following is information on the benefit for income taxes for the years ended January 3, 2021 and December 29, 2019:
January 3, 2021 December 29, 2019
Current
Federal $ - $ -
State, net 220,544 3,570
Foreign (176,509 ) (359,459 )
Total current income tax provision (benefit) 44,035 (355,889 )
Deferred
Federal (1,346,818 ) 201,756
State (30,813 ) 3,328
Foreign 57,853 47,606
Total deferred income tax (benefit) provision (1,319,778 ) 252,690
Total income tax benefit $ (1,275,743 ) $ (103,199 )
The state provisions of $199,978 and $51,012 for the years ended January 3, 2021 and December 29, 2019, respectively, were reduced by a change in the valuation allowance in the amounts of $10,248 and $44,114, respectively. The benefit for income taxes differs from the amount computed by applying the federal statutory income tax rate to income before income taxes. The Company’s effective income tax rate, computed as the total of federal, state and foreign taxes as a percentage of income before taxes, was negative 51.0% and negative 12.0% for the years ended January 3, 2021 and December 29, 2019, respectively.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
The following is a reconciliation of the income tax at the U.S. federal statutory tax rate with the income tax at the effective tax rate for the years ended January 3, 2021 and December 29, 2019:
January 3, 2021 December 29, 2019
Income tax (benefit) provision at statutory rates $ (524,867 ) $ 180,227
Foreign tax rate differential 18,417 22,122
Funding from Paycheck Protection Program not taxable (465,675 ) -
UEPH preference dividend - (210,753 )
U.K. Research and development credit (130,777 ) (171,130 )
Effect of change in U.K. tax rate on deferred items 137,631 7,514
Prior year true-up (324,994 ) 61,923
State tax (benefits) provisions (37,772 ) 51,012
Valuation allowance 10,248 (44,114 )
Other 42,046 -
Income tax benefit $ (1,275,743 ) $ (103,199 )
Effective income tax rate (51.0 )% (12.0 )%
The following table summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities:
January 3, 2021 December 29, 2019
Deferred tax assets:
Net operating loss carryforward $ 5,597,550 $ 3,872,437
Valuation allowance (828,411 ) (740,818 )
Total deferred tax assets, net 4,769,139 3,131,619
Deferred tax liabilities:
Trademarks (382,510 ) (336,817 )
Deferred gain (183,801 ) (157,850 )
Capital allowances (931,780 ) (652,347 )
Total deferred tax liabilities (1,498,091 ) (1,147,014 )
Net deferred tax assets $ 3,271,048 $ 1,984,605
Deferred tax assets as of January 3, 2021 and December 29, 2019 include $4,900,595 and $3,435,368, respectively, of carryforwards related to U.S. net operating losses and $696,955 and $437,069, respectively, of carryforwards resulting from U.K. losses. The $4,900,595 and $3,435,368 of deferred tax assets for U.S. losses, net of valuation allowances of $828,411 and $740,818 as of January 3, 2021 and December 29, 2019, respectively, are included in other long-term assets. The $696,955 and $437,069 of deferred tax assets for U.K. losses are netted with deferred tax liabilities, which are all related to U.K. tax. Total net deferred tax liabilities of $801,136 and $709,945 are included in other long-term liabilities in the accompanying consolidated balance sheets as of January 3, 2021 and December 29, 2019, respectively.
The Company has federal net operating loss carryforwards of approximately $15.7 million as of January 3, 2021, of which $11.7 million expire in years beginning 2022 through 2034 and $4.0 million may be carried forward indefinitely. The Company has state net operating loss carryforwards of approximately $14.1 million as of January 3, 2021, which also expire in years beginning 2022 through 2034. Additionally, the Company has foreign net operating loss carryforwards of approximately $2.8 million as of January 3, 2021, which have no expiration date.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
The Company reduces its deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making its valuation allowance determinations, the Company considers all available positive and negative evidence affecting specific deferred tax assets, including past and anticipated future performance, the reversal of deferred tax liabilities, the length of carryback and carryforward periods, and the implementation of tax planning strategies. Management has determined that there is uncertainty as to the realization of a portion of the state net operating loss carryforward and has established a valuation allowance against a portion of the state net operating loss carryforward.
NOTE 12 - Postretirement and Postemployment Benefit Liabilities
Postretirement Benefit Liability - Health and Life
The Company provides certain health care and life insurance benefits for substantially all employees (active or retired) who were employed prior to February 20, 1987. Accounting standards for postretirement benefits require an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity.
The accumulated postretirement benefit obligation, plan assets and accrued postretirement liability as of the plan's measurement date are as follows:
January 3, 2021 December 29, 2019
Postretirement Benefit Liability - Health and Life $ 2,721,900 $ 2,753,520
Less: Plan assets - -
Accrued postretirement benefit cost 2,721,900 2,753,520
Unrecognized net loss (gain) 154,662 (5,694 )
Accumulated postretirement benefit obligation 2,876,562 2,747,826
Less: Current portion (162,977 ) (155,803 )
Long-term Portion $ 2,713,585 $ 2,592,023
Net postretirement benefit income for the plan is comprised of the following:
January 3, 2021 December 29, 2019
Interest cost on projected benefit obligation $ 74,758 $ 82,949
Amortization of net gain - (294,468 )
Net postretirement expense (benefit) $ 74,758 $ (211,519 )
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Reconciliation of losses in other comprehensive loss is as follows:
January 3, 2021 December 29, 2019
Net actuarial loss $ (160,356 ) $ (536,431 )
Amortization of actuarial gain - (294,468 )
Postretirement benefit liability adjustment in other comprehensive
loss $ (160,356 ) $ (830,899 )
At January 3, 2021, there is $154,662 of unrecognized net actuarial losses in accumulated other comprehensive loss that has not yet been recognized as a component of net periodic benefit costs. At January 3, 2021, there is no amount of net actuarial losses in accumulated other comprehensive loss that is expected to be recognized as a component of net periodic benefit costs during 2021.
The significant assumptions used in determining the accumulated postretirement benefit obligation and net periodic benefit cost are as follows:
January 3, 2021 December 29, 2019
Health Care Cost Trend Rates:
4.00% 4.00%
Thereafter 4.00% 4.00%
Discount rate 1.95% 2.80%
Measurement Date January 3, 2021 December 29, 2019
In addition to the significant assumptions listed above, other assumptions used in determining the accumulated postretirement benefit obligation and net periodic benefit cost are retirement and termination probabilities and mortality estimates. The Company assumes that employees participating in the plan will continue to participate during retirement. The Company also assumes that employees not participating in the plan will not participate in the plan prior to or during retirement.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Employer and employee contributions to the plan were $106,377 and $7,777, respectively, during the year ended January 3, 2021 and $116,928 and $10,071, respectively, during the year ended December 29, 2019. Contributions to the plan are made each year based on estimated benefit payments to be paid out of the plan. Estimated benefit payments from the plan for each of the next five years, and in the aggregate for the five years thereafter, are as follows:
$ 162,977
167,182
167,701
165,910
166,477
2026 - 2030 812,992
Total $ 1,643,239
Postemployment Benefit Liability - Severance
The Company provides certain severance benefits for substantially all union employees who began their employment prior to 1986. Accounting standards for postemployment benefits require the Company to accrue the estimated cost of future severance payments during the years the employees provide services. The accrued postemployment benefit liability as of January 3, 2021 and December 29, 2019 was $6,054 and $5,363, respectively, and is included in other long-term liabilities in the accompanying consolidated balance sheets. The accrued postemployment benefit liability was determined using discount rates of 1.95% and 2.80% as of January 3, 2021 and December 29, 2019, respectively.
NOTE 13 - Equity
The following table summarizes the Company’s common stock outstanding by class.
January 3, 2021 December 29, 2019
Ordinary Common Stock 3,412,186 3,412,186
Class B Common Stock 323,820 323,820
Total 3,736,006 3,736,006
The Company’s Class B Common Stock (“Class B”) has the same entitlement to dividends as they may be declared for the ordinary common stock. The holder of Class B was the holder of UGEP preferred stock that was converted to Class B on December 30, 2015. The Class B does not have any preference with respect to holders of other equity interests in the Company in the event of any liquidation, dissolution or winding up of the Company. Each share of Class B has the right to 22 votes on matters that come before the shareholders. Each share of Class B is convertible into one share of ordinary common stock at any time. The shares of Class B are not registered and do not trade in the open market.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Acquisition
On November 10, 2014, the Company acquired Uniroyal and UGEL, the holding company for UGL. Pursuant to the acquisition of Uniroyal, 200,000 units of Series A preferred units and 150,000 units of Series B preferred units of UEP Holdings LLC, a wholly-owned subsidiary of the Company, were issued to the former owners of Uniroyal. Each of the UEP Holdings Series A and Series B preferred units have an issue price of $100 per unit or a total face value of $20,000,000 and $15,000,000, respectively. The UEPH Series A preferred units are entitled to a preferred return of an amount per annum equal to five percent (5.00%) of the issue price of such UEPH Series A preferred unit. The UEPH Series B preferred units are entitled to a preferred return of an amount per annum equal to five and one half percent (5.50%) of the issue price of such UEPH Series B preferred unit, increasing by one half percent (0.50%) on the first anniversary of the effective date and by an additional one half percent (0.50%) on each successive anniversary of the effective date thereafter, up to a maximum of eight percent (8.00%) on the fifth anniversary of the effective date. As of January 3, 2021, the preferred return percentage of the UEPH Series B preferred units is 8.0%. The UEPH Series A and B preferred units are primarily owned by the Company’s majority shareholder.
In a separate transaction, the Company also purchased all of the outstanding 50 common shares of UGEL, a U.K. limited company, for 100 shares of its common stock and its guaranty of outstanding UGEL preferred stock retained by the seller, having a liquidation preference of €17,699,314 (approximately $21,718,828). As part of the transaction, 50 shares of the UGEL common stock held by the seller had been converted and reclassified as preferred shares. These preferred shares are entitled to a quarterly dividend payment of €221,241 (approximately $271,485). These preferred shares are primarily owned by the Company’s majority shareholder.
The payment of dividends for the year ended January 3, 2021 and the three months ended December 29, 2019 was deferred to preserve cash and provide additional liquidity. As of January 3, 2021 and December 29, 2019, accrued dividends of $4,019,905 and $788,599, respectively, were included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
NOTE 14 - Stock-Based Compensation
On June 25, 2015, the Company’s stockholders approved the adoption of the 2015 Stock Option Plan. This plan provides for the granting of options to purchase the Company’s common stock to employees and directors. The options granted are subject to a vesting schedule as set forth in each individual option agreement. Each option expires on the tenth anniversary of its date of grant unless an earlier termination date is provided in the grant agreement. The maximum aggregate number of shares of common stock that may be optioned and sold under the plan shall be 6% of the shares outstanding on the date of grant. The shares that may be optioned under the plan may be authorized but unissued or may be treasury shares. Compensation expense is recognized on a straight-line basis over a three-year vesting period from date of grant.
On a quarterly basis, the Company assesses changes to its estimate of expected option award forfeitures based on its review of recent forfeiture activity and expected future employee turnover. The Company recognizes the effect of adjustments made to the forfeiture rates, if any, in the period that it changes the forfeiture estimate. For the year ended January 3, 2021, there were no forfeiture rate adjustments and future adjustments are not expected to be significant.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
The following table presents stock option activity for the years ended January 3, 2021 and December 29, 2019.
Stock Options
Total Weighted
Average
Exercise
Price Exercisable Weighted
Average
Exercise
Price Non-
Vested Weighted
Average
Exercise
Price
Outstanding at December 30, 2018 189,300 $ 13.98 166,867 $ 13.46 22,433 $ 17.85
Granted - - - - - -
Vested - - 22,433 $ 17.85 (22,433 ) $ 17.85
Exercised - - - - - -
Forfeited or cancelled (37,500 ) $ 13.85 (37,500 ) $ 13.85 - -
Outstanding at December 29, 2019 151,800 $ 14.02 151,800 $ 14.02 - -
Granted - - - - - -
Vested - - - - - -
Exercised - - - - - -
Forfeited or cancelled (12,500 ) $ 14.01 (12,500 ) $ 14.01 - -
Outstanding at January 3, 2021 139,300 $ 14.02 139,300 $ 14.02 - -
As of January 3, 2021 and December 29, 2019, there was no aggregate intrinsic value of the options outstanding because the options’ weighted average exercise price of $14.02 per share was greater than the average market prices of the common shares.
Option expense recognized was $0 and $44,166 for the years ended January 3, 2021 and December 29, 2019, respectively. As of January 3, 2021, there was no unrecognized compensation cost related to the options granted under the 2015 Stock Option Plan.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
NOTE 15 - Loss Per Common Share
The following table sets forth the computation of loss per common share - basic and loss per common share - diluted for the years ended January 3, 2021 and December 29, 2019.
January 3, 2021 December 29, 2019
Numerator
Net loss allocable to common shareholders $ (4,433,467 ) $ (2,165,073 )
Denominator
Denominator for basic and diluted
earnings per share - weighted average
shares outstanding 3,736,006 3,736,742
Basic and Diluted Net Loss Per Share
Net loss allocable to common shareholders $ (1.19 ) $ (0.58 )
Effect of dilutive securities (0.00 ) (0.00 )
Net loss allocable to common shareholders $ (1.19 ) $ (0.58 )
Due to the net loss allocable to common shareholders for each of the years ended January 3, 2021 and December 29, 2019, the calculations of basic and diluted loss per share were the same since including options to purchase shares of the Company’s common stock in the calculations of diluted loss per share would have been anti-dilutive. However, if diluted earnings per share had been reported for the years ended January 3, 2021 and December 29, 2019, the calculations would have excluded options to purchase 139,300 and 151,800 shares of common stock, respectively, because the options’ weighted average exercise price of $14.02 per share was greater than the average market prices of the common shares.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
NOTE 16 - Leases
The Company has operating leases for equipment and office facilities and finance leases for equipment. These leases expire at various dates from January 2021 through March 2039.
The components of lease expense for the years ended January 3, 2021 and December 29, 2019 are as follows:
Years Ended
January 3, 2021 December 29, 2019
Operating lease expense $ 993,636 $ 1,028,719
Finance lease expense:
Amortization of right-of-use assets $ 208,859 $ 227,593
Interest on lease liabilities 30,635 55,725
Total finance lease expense $ 239,494 $ 283,318
Cash paid for amounts included in the measurement of lease liabilities for the years ended January 3, 2021 and December 29, 2019 are as follows:
Years Ended
January 3, 2021 December 29, 2019
Operating cash flows from operating leases $ 882,709 $ 971,329
Operating cash flows from finance leases $ 30,635 $ 55,725
Financing cash flows from finance leases $ 363,205 $ 641,300
Right-of-use assets obtained in exchange for lease obligations for the years ended January 3, 2021 and December 29, 2019 are as follows:
Years Ended
January 3, 2021 December 29, 2019
Operating leases $ - $ 287,828
Finance leases $ - $ 13,197
Supplemental balance sheet and other information related to operating leases are as follows:
January 3, 2021 December 29, 2019
Operating leases:
Operating lease right-of-use assets $ 6,242,736 $ 6,607,963
Accrued expenses and other liabilities $ 440,386 $ 497,225
Operating lease liabilities 5,893,268 6,106,568
Total operating lease liabilities $ 6,333,654 $ 6,603,793
Weighted average remaining lease term 15.70 years 15.75 years
Weighted average discount rate 7.26% 7.16%
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
Supplemental balance sheet and other information related to finance leases are as follows:
January 3, 2021 December 29, 2019
Finance leases:
Property and equipment, net $ 1,084,394 $ 2,458,155
Current maturities of finance lease liabilities $ 257,298 $ 364,872
Finance lease liabilities, less current portion 235,116 492,613
Total finance lease liabilities $ 492,414 $ 857,485
Weighted average remaining lease term 1.8 years 2.5 years
Weighted average discount rate 4.56% 4.73%
Maturities of operating and finance lease liabilities as of January 3, 2021 are as follows:
Operating Leases Finance Leases
$ 882,617 $ 274,158
849,338 213,869
671,284 26,577
546,004 1,042
532,110 -
Thereafter 7,815,638 -
Total lease payments 11,296,991 515,646
Less: Interest (4,963,337 ) (23,232 )
Total lease liabilities $ 6,333,654 $ 492,414
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
NOTE 17 - Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss were as follows:
Minimum
Benefit Liability
Adjustments Foreign Currency
Translation
Adjustment Total
Balance at December 30, 2018 $ 836,593 $ (1,539,238 ) $ (702,645 )
Other comprehensive (losses) gains
before reclassifications (536,431 ) 236,105 (300,326 )
Reclassification adjustment for
gains included in net income (294,468 ) - (294,468 )
Balance at December 29, 2019 5,694 (1,303,133 ) (1,297,439 )
Other comprehensive (losses) gains
before reclassifications (160,356 ) 186,474 26,118
Balance at January 3, 2021 $ (154,662 ) $ (1,116,659 ) $ (1,271,321 )
The gains reclassified from accumulated other comprehensive loss are recorded to the following line items in the consolidated statements of operations:
Other Comprehensive Loss Component Consolidated Statements of Operations Line Item
Minimum Benefit Liability Adjustments General and administrative expense
NOTE 18 - Retirement Plans
The Company has a 401(k) plan which covers substantially all non-union U.S. employees. The Company contributions to this plan included in expense were $0 and $85,000 for the years ended January 3, 2021 and December 29, 2019, respectively.
The U.K. employees are covered by a separate plan which meets the statutory minimum requirements and provides that the Company will contribute a percentage of the employee’s compensation based on the percentage contributed to the plan by the employee. These statutory minimum requirements for both the employees and the Company are being phased in over time. Employees may opt out of the plan if they do not want to contribute the minimum required amount. Generally, for salaried employees hired prior to July 2015, the schedule of minimum required contributions is as follows:
Phase in Period Employee Company
Prior to April 2018 2% 6%
April 2018 to April 2019 3%/4% 7%/7 ½%
After April 2019 5% 8%
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
For all salaried employees hired after June 2015 and all wage employees, the schedule of minimum required contributions is as follows:
Phase in Period Employee Company
Prior to April 2018 1% 1%
April 2018 to April 2019 3% 2%
After April 2019 5% 3%
The Company made contributions of £175,134 ($224,898) and £295,603 ($377,117) to the U.K. plan for the years ended January 3, 2021 and December 29, 2019, respectively.
NOTE 19 - Concentrations
Labor Union
The United Steel Workers International Union AFL-CIO, CLC Local #1207 represents the Company’s manufacturing employees in the U.S. The current union contract expires on March 12, 2023. The contract will continue from year-to-year thereafter, unless notice terminating the agreement is given by either party sixty days prior to March 12th in any year after March 12, 2023. Employees at the U.K. facility can be represented by Unite although participation is not required. The collective bargaining agreement with Unite does not specify a termination date.
Major Customers
Sales to ten industry suppliers accounted for 46.3% and 46.2% of total Company sales during the years ended January 3, 2021 and December 29, 2019, respectively. Accounts receivables from these customers totaled 56.6% and 52.8% of receivables as of January 3, 2021 and December 29, 2019, respectively.
Major Suppliers
The Company purchases a significant quantity of its raw materials from certain major suppliers. Management believes this concentration does not pose a significant risk to the Company's operations as other suppliers are readily available. See Note 1 for further discussion.
NOTE 20 - Related Party Transactions
The Company has debt and finance leases to a related party. See Note 10 for further discussion.
The related party receivable is short-term advances to employees. The related party receivable was $907 at January 3, 2021 and was repaid after that date. There was no related party receivable at December 29, 2019.
The Company’s chief financial officer, who is also on the Company’s Board of Directors, does not have a written employment agreement and works on a part-time basis for the Company. The Company expensed $24,000 as a consulting fee to a company controlled by him in each of the years ended January 3, 2021 and December 29, 2019. There was $14,000 in accrued expenses relating to this fee at January 3, 2021 and $10,000 in prepaid expenses relating to this fee at December 29, 2019.
NOTE 21 - Employment Agreements
The Company has employment agreements with three management employees as of January 3, 2021. The initial term of the employment agreements is three years. The term can be renewed or extended as provided for in the employment agreements. The agreements include various benefits to be provided to the employees including salary, bonus, life insurance and severance benefits.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 3, 2021 and December 29, 2019
NOTE 22 - Revenue
The Company recognizes revenue and related accounts receivable when obligations under the terms of a contract with a customer are satisfied, which includes the control of products transferring to the customer. For Uniroyal, this generally occurs when products are shipped and, for UGL, this generally occurs when the customer accepts delivery either at the Company’s U.K. facility or at a mutually agreed upon location. Revenue is measured as the amount of consideration the Company expects to receive in exchange for products transferred to the customer.
The following table sets forth revenue disaggregated by the Company’s automotive and industrial sectors for the years ended January 3, 2021 and December 29, 2019:
Years Ended
January 3, 2021 December 29, 2019
Revenue by sector:
Automotive $ 35,906,304 $ 59,177,764
Industrial 24,312,051 31,958,480
Total Revenue $ 60,218,355 $ 91,136,244
The following table sets forth revenue disaggregated by the geographic locations of the Company’s customers for the years ended January 3, 2021 and December 29, 2019:
Years Ended
January 3, 2021 December 29, 2019
Revenue by customer location:
North America $ 30,604,611 $ 44,492,947
Europe 25,733,859 41,209,589
Asia 3,311,849 5,128,851
Other 568,036 304,857
Total Revenue $ 60,218,355 $ 91,136,244
NOTE 23 - Restructuring Expenses
In order to increase operating efficiencies and decrease costs, the Company developed a plan to restructure the operations and the management team of its foreign operations located in Earby, England. As part of the restructuring, during the quarter ended March 31, 2019, the Company entered into settlement agreements with certain members of that facility’s management team which terminated their continuing service. The Company recorded a charge of $343,003 for the cost of these agreements which is included in other operating expenses in the accompanying consolidated statements of operations for the year ended December 29, 2019.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of January 3, 2021 and concluded that our disclosure controls and procedures were effective as of January 3, 2021.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The 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 United States generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States 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 (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of January 3, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework published in 2013. Based on this assessment, and on those criteria, management concluded that the Company’s internal control over financial reporting was effective as of January 3, 2021.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Controls over Financial Reporting
During the year ended January 3, 2021, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers of the Company
Information required by this Item concerning the Company’s directors and all persons nominated for election as directors at the Company’s Annual Meeting of Stockholders (the “2021 Annual Meeting”) will be included in the section of the Company’s Definitive Proxy Statement in connection with our 2021 Annual Meeting (the “2021 Proxy Statement”) , which will be filed with the SEC within 120 days after our fiscal year end of January 3, 2021, entitled “Election of Directors” and is incorporated herein by reference. Information required by this Item concerning the Company’s executive officers will be set forth in the section of our 2021 Proxy Statement entitled “Executive Officers and Significant Employees” and is incorporated herein by reference.
Corporate Governance
Information required by this Item concerning the Audit Committee and the Audit Committee’s financial expert will be included in the section of our 2021 Proxy Statement entitled “Committees of the Board of Directors” and is incorporated herein by reference.
Section 16(a) Compliance
Information required by this Item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, will be included in the section of our 2021 Proxy Statement entitled “Compliance with Section 16(a) of the Exchange Act” and is incorporated herein by reference.
Code of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics and Compliance Program, which is applicable to the Company and to all our directors, officers and employees, including our principal executive officer and principal financial officer, principal accounting officer or controller, or other persons performing similar functions.
A copy of the Company’s Code of Ethics may be obtained free of charge by making the request to the Company in writing or on the Company’s website at http://uniroyalglobal.com/company-profile/business-conduct-and-ethics-policy/.
Compensation Committee Interlocks and Insider Participation
Not applicable.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item will be included in the sections of our 2021 Proxy Statement entitled “Director Compensation,” “Compensation Discussion and Analysis” and “Executive Compensation” and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning the security ownership of certain beneficial owners and management will be included in the section of our 2021 Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this Item concerning certain relationships and related transactions and director independence will be included in the section of our 2021 Proxy Statement entitled “Certain Relationships and Related Transactions” and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item concerning principal accounting fees and services will be included in the section of our 2021 Proxy Statement entitled “Fees Paid to Independent Registered Public Accounting Firm” and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
Exhibits
The exhibits filed or furnished with this annual report are shown on the Exhibit Index that follows the signatures to this annual report, which index is incorporated herein by reference.
Financial Statement Schedules
None.