EDGAR 10-K Filing

Company CIK: 1172706
Filing Year: 2022
Filename: 1172706_10-K_2022_0001214659-22-004642.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. 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).
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, health care 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, steering column gaiters, headliners and load space covers. Non-automotive applications include stadium seating, 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. The names of our primary brands 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, health care 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, which includes trucks, represented approximately 58.8% of our total sales in 2021. Our products are primarily used in the following automotive applications:
· seating
· door panels
· head and arm rests
· security shades
· components
The industrial sector represented 41.2% of our 2021 sales and includes products for the following customers:
· original equipment manufacturers of non-automotive vehicles
· local furniture shops, smaller furniture manufacturers and companies serving the hospitality and marine markets
· companies serving the health care, child care, fitness and industrial equipment markets
The industrial sector includes seating products for the following categories:
· personal watercraft, ATV’s, snowmobiles and golf carts
· light and heavy industrial equipment and agricultural equipment (tractors, bulldozers)
· recreational vehicles and motor homes
· mass transit (trains, buses)
· stadiums, restaurants and hotels
· airports and medical offices
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 health care 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 and stock products without flame retardant chemical additives to meet new manufacturing 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 24.1% 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. 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 due to the requirements of various market segments. The uses of vinyl coated fabrics are very diverse and include automotive, non-automotive transportation, furniture, industrial, protective clothing, medical furniture, wall coverings, book coverings, 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
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
Vulcaflex S.p.A.
Morbern, Inc.
Spradling International Inc.
Distribution
Approximately 65 distributor and
reseller locations
OMNOVA Solutions Inc.
Spradling International Inc.
Continental AG
Morbern, Inc.
Contract
Office/contract/institutional furniture
Restaurant booth
Health care
Marine
OMNOVA Solutions Inc.
Morbern, Inc.
Continental AG
Alcor
Gislaved Folie AB
Griffine Enduction
Spradling International Inc.
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
One of our customers accounted for 10% or more of our consolidated revenues in 2021 with 11.6% of our net sales. Our top 25 customers accounted for approximately 62.9% of our total global sales.
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 294 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. For example, we plan to invest approximately £75,000 ($103,000) in energy-saving LED lighting at our U.K. production facility in 2022.
Coronavirus
The coronavirus pandemic (“COVID-19”) and its current disruption of the supply chain has had an impact on markets we serve and our operations and liquidity. Since COVID-19 is a continually evolving situation, we cannot predict the long-term impact it will have on the economy or our business. The impact could have a material adverse effect on our financial position, results of operations and cash flows, which may require us to obtain additional financing. We continue to pursue supplementary cash flow opportunities, which have included loans through the Paycheck Protection Program (“PPP”), reimbursed costs under the Coronavirus Job Retention Scheme (“CJRS”), debt refinancing with PNC Business Credit (“PNC”), loans from the automotive lenders, and forgiveness of accrued dividends. For further discussion, see “Liquidity and Sources of Capital” under Item 7 and Notes 8, 9 and 13 to the consolidated financial statements.
Available Information
We provide printed copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing upon request to Uniroyal Global Engineered Products, Inc., Attn: Secretary, 1800 2nd Street, Suite 970, Sarasota, FL 34236. 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 eleven 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.
We fully cooperated with the HSE investigation and negotiated a plea based on the legal advice provided to us. Based on this legal advice, we believed that £150,000 ($193,000) was a reasonable estimate of the fine to be imposed and, accordingly, recorded an accrual for this charge for the year ended January 3, 2021. The related expense was recorded in general and administrative expenses in the accompanying Consolidated Statement of Operations for the year ended January 3, 2021.
In April 2021, a fine of £120,000 ($164,933) was imposed on us related to this matter. At the end of the second quarter of 2021, we began making monthly payments for this fine in order to have it paid in full by the October 2022 due date. The accrual related to the fine was £69,356 ($93,484) and £150,000 ($204,737) as of January 2, 2022 and January 3, 2021, respectively, and was included in accrued expenses and other liabilities in the accompanying consolidated balance sheets. In addition, a fee of £5,463 ($7,509) to reimburse the HSE for legal expenses was paid in May 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.
As of March 10, 2022 there were 681 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 us of dividends on our Common Stock rests within the sole discretion of our 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. We have not been required to or declared any cash dividends since our inception, and have no present intention of paying any cash dividends on our Common Stock in the foreseeable future.
Transfer Agent
The Transfer Agent for our Common Stock is Continental Stock Transfer and Trust Company, 17 Battery Place, New York, NY 10004.
Recent Sales of Unregistered Securities
None.
We made no repurchases of our securities during the fourth quarter of fiscal 2021.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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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, health care 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 health care 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”)).
We and our subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest to December 31. The year ended January 2, 2022 was a 52-week year whereas the year ended January 3, 2021 was a 53-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 30% of our global revenues and 33% 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 7.0% higher and the average exchange rate for the Euro to the Pound Sterling was approximately 3.4% lower in 2021 compared to 2020. These exchange rate changes had the effect of increasing net sales by approximately $1,625,000 for the year ended January 2, 2022. The overall currency effect on our net loss was a positive amount of approximately $253,000 for the year ended January 2, 2022.
The U.K. exit from the European Union on January 31, 2020, commonly referred to as Brexit, caused minimal disruption to our operations during the year ended January 2, 2022. However, 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.
The coronavirus pandemic (“COVID-19”) and its current disruption of the supply chain has had an impact on markets we serve and our operations and liquidity. We continue to pursue supplementary cash flow opportunities, which have included loans through the Paycheck Protection Program (“PPP”), reimbursed costs under the Coronavirus Job Retention Scheme (“CJRS”), debt refinancing with PNC Business Credit (“PNC”), loans from the automotive lenders, and forgiveness of accrued dividends. See “Liquidity and Sources of Capital” below for further discussion.
Year Ended January 2, 2022 Compared to the Year Ended January 3, 2021
The following table sets forth, for the year ended January 2, 2022 (“year ended 2021”) and January 3, 2021 (“year ended 2020”), certain operational data including their respective percentage of net sales:
Year Ended
January 2, 2022
January 3, 2021
Change
%
Change
Net Sales
$ 71,704,995
100.0 %
$ 60,218,355
100.0 %
$ 11,486,640
19.1 %
Cost of Goods Sold
62,786,884
87.6 %
52,437,754
87.1 %
10,349,130
19.7 %
Gross Profit
8,918,111
12.4 %
7,780,601
12.9 %
1,357,510
14.6 %
Operating Expenses:
Selling
3,015,016
4.2 %
3,040,685
5.0 %
(25,669 )
-0.8 %
General and administrative
6,125,583
8.5 %
6,720,969
11.2 %
(595,386 )
-8.9 %
Research and development
1,293,908
1.8 %
980,695
1.6 %
313,213
31.9 %
Total Operating Expenses
10,434,507
14.6 %
10,742,349
17.8 %
(307,842 )
-2.9 %
Operating Loss
(1,516,396 )
-2.1 %
(2,961,748 )
-4.9 %
1,445,352
-48.8 %
Interest expense
(1,640,999 )
-2.3 %
(1,581,907 )
-2.6 %
(59,092 )
3.7 %
Funding from Paycheck
Protection Program
2,000,000
2.8 %
2,217,500
3.7 %
(217,500 )
-9.8 %
Other income (expense)
188,011
0.3 %
(173,214 )
-0.3 %
361,225
<-100 %
Loss before Tax Provision (Benefit)
(969,384 )
-1.4 %
(2,499,369 )
-4.2 %
1,529,985
-61.2 %
Tax provision (benefit)
732,994
1.0 %
(1,275,743 )
-2.1 %
2,008,737
<-100 %
Net Loss
(1,702,378 )
-2.4 %
(1,223,626 )
-2.0 %
(478,752 )
39.1 %
Extinguishment of preferred
stock dividend payable
6,145,463
8.6 %
-
0.0 %
6,145,463
-
Preferred stock dividend
(2,167,605 )
-3.0 %
(3,209,841 )
-5.3 %
1,042,236
-32.5 %
Net Income (Loss) Allocable to
Common Shareholders
$ 2,275,480
3.2 %
$ (4,433,467 )
-7.4 %
$ 6,708,947
<-100 %
Revenue
Total revenue for the year ended 2021 increased $11,486,640 or 19.1% to $71,704,995 from $60,218,355 for the year ended 2020. The lower amount for the year ended 2020 reflected the negative effect of COVID-19, which primarily occurred during the second quarter of 2020. The increase in revenue included a favorable currency effect of approximately $1,625,000.
For the year ended 2021 compared to the year ended 2020, automotive sales for our U.K. operations increased 7.6% (excluding the currency adjustment) and automotive sales for our U.S. operations increased 24.3%, which reflects the negative effect of COVID-19 on prior year sales. However, the year-over-year growth was negatively impacted by supply chain issues experienced by the OEM’s that use our automotive products, which lead to temporary intermittent shutdowns of their production lines beginning in the second quarter of 2021. We are encouraged that automotive sales improved when comparing the fourth quarter of 2021 with the third quarter of 2021.
Additionally, sales for the industrial sector increased 21.4% (20.5% before the currency effect) mostly due to an increase in our U.S. operations (primarily in the contract market) as well as in our U.K. operations. As discussed above, these increases reflect the negative effect of COVID-19 on our prior year operations.
Gross Profit
Total gross profit for the year ended 2021 increased $1,357,510 or 14.6% to $8,918,111 from $7,780,601 for the year ended 2020. The gross profit amount for the year ended 2020 reflected the negative impact of COVID-19. Manufacturing costs were reduced by the CJRS reimbursement of $130,000 and $1,309,000 for the years ended 2021 and 2020, respectively, for salaries of furloughed employees. Excluding the CJRS reimbursement, gross profit would have increased $2,316,510. In addition, the increase in gross profit was partially offset by an unfavorable currency effect of approximately $60,000. The gross profit percentage was 12.4% of sales for the year ended 2021 compared to 12.9% for the year ended 2020. The gross profit and percentage for the year ended 2021 were negatively impacted by supply chain issues, as discussed above, as well as higher costs of raw materials and freight. To offset raw material price increases, we increased prices on most product categories in several of our markets three times in 2021 with effective dates in March, July and December of 2021. However, we have not realized the full positive impact of the most recent increase yet. We expect some additional price increases on other select products to be implemented in 2022 for further offset to raw material price increases.
Operating Expenses
Selling expenses for the year ended 2021 decreased $25,669 or 0.8% to $3,015,016 from $3,040,685 for the year ended 2020. Selling expenses were reduced $7,000 and $99,000 for the years ended 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, selling expenses would have decreased $117,669. The decrease in selling expenses was partially offset by an $84,000 unfavorable currency effect. The lower amount for the year ended 2021 was primarily due to a decline in employment costs for the U.S. operations partially offset by the increase in the U.K. operations due to greater sales activity (as the negative effect of COVID-19 decreased this activity during 2020) and the CJRS reimbursement.
General and administrative expenses for the year ended 2021 decreased $595,386 or 8.9% to $6,125,583 from $6,720,969 for the year ended 2020. General and administrative expenses were reduced $5,000 and $35,000 for the years ended 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, general and administrative expenses would have decreased $625,386. The decrease in general and administrative expenses was partially offset by a $100,000 unfavorable currency effect. The decrease from the year ended 2020 was primarily due to lower costs for cash management consulting services provided to us and a charge relating to the legal proceeding in the U.K. that was expensed in 2020. See Note 1 to the consolidated financial statements for further discussion.
Research and development expenses for the year ended 2021 increased $313,213 or 31.9% to $1,293,908 from $980,695 for the year ended 2020. Research and development expenses were reduced $8,000 and $126,000 for the years ended 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, research and development expenses would have increased $195,213. The increase in research and development expenses included a $45,000 unfavorable currency effect. The increase from the year ended 2020 was primarily due to more activity including qualifying raw material substitutions as a result of supply constraints.
Operating Loss
Operating loss for the year ended 2021 was $1,516,396 compared to $2,961,748 for the year ended 2020. The $1,445,352 or 48.8% smaller operating loss for the year ended 2021 compared to the year ended 2020 was due to the combination of higher gross profit and lower operating expenses. The operating loss percentage was -2.1% of sales for the year ended 2021 compared to -4.9% for the year ended 2020.
Interest Expense
Interest expense for the year ended 2021 increased $59,092 or 3.7% to $1,640,999 from $1,581,907 for the year ended 2020. The increase in interest expense for the U.K. operations, which included amortization of debt issuance costs related to the debt refinancing with PNC, was partially offset by the decrease in interest expense for the U.S. operations.
Funding from Paycheck Protection Program:
Funding from the PPP of $2,000,000 (from the Second Draw PPP Loan) for the year ended 2021 and $2,217,500 (from the First Draw PPP Loan) for the year ended 2020, were the proceeds from the PPP loans that we used during those periods for allowable expenses under the PPP. All of the First and Second Draw PPP Loans were forgiven in June 2021 and August 2021, respectively.
Other Income (Expense)
Other income for the year ended 2021 was $188,011 compared to other expense of $173,214 for the year ended 2020. 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.
Income Taxes
For the year ended 2021, the tax provision was $732,994 compared to a tax benefit of $1,275,743 for the year ended 2020. The tax provision for the year ended 2021 and the tax benefit for the year ended 2020 were principally attributable to the results of the U.S. operations.
Based on management’s review at January 2, 2022 and January 3, 2021, it was determined that there is uncertainty as to the realization of a portion of the federal and state net operating loss carryforwards and, as a result, a valuation allowance was established against them.
Preferred Stock Dividend
Pursuant to the terms of their acquisitions, preferred ownership units/stock of UEPH and UGEL were issued to the sellers. These preferred units/stock (collectively “preferred shares”) have 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 UEPH preferred units which started at 5.5% increased by 0.5% on the anniversary of the issuance and is now at the maximum of 8.0%.
Quarterly preferred dividend payments were deferred beginning with the three months ended December 29, 2019 through the three months ended October 3, 2021. During the third quarter of 2021, the owners of the preferred shares (“preferred shareholders”) agreed to an amendment to the documents that govern the dividends (“amended documents”) whereby the accrued dividends were forgiven. In addition, under the amended documents the preferred shareholders are no longer entitled to a quarterly dividend until such time as the Company declares a dividend payable.
We accounted for the dividend forgiveness as an extinguishment of debt between related parties per ASC 470, “Debt”. As a result, the total balance of accrued dividends of approximately $6,100,000 was derecognized as of October 3, 2021. The amendments to remove the entitlement of a quarterly 5%, 8% and €221,241 (approximately $261,657) dividend (“entitlement amendments”) relating to the preferred shares were considered not significant and, therefore, were considered a modification rather than an extinguishment per ASC 470. The entitlement amendments were considered not significant since the change in the fair values of the preferred shares after the amendments compared to the fair values of the preferred shares immediately before the amendments was less than 10% as management determined that the entitlement amendments resulted in a reduction of fair value of the preferred shares. Per ASC 718, “Compensation - Stock Compensation”, the reduction of fair value of the preferred shares in this modification had no accounting impact (i.e., recognition of a gain).
Liquidity and Sources of Capital
Cash, as it is needed, is provided by using our lines of credit. These lines provide for a total borrowing commitment in excess of $29,000,000 subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of $17,816,919 at January 2, 2022, for the U.S. operations, $6.0 million of the lines bears interest at the Eurodollar rate plus 2.25% and $5.4 million bears interest at the Wells Fargo Capital Finance, LLC’s prime rate (3.25% at January 2, 2022) and, for the U.K. operations, $6.4 million bears interest at the Bank of England Base Rate plus 2.25%-3.00%. The lines provided additional availability of approximately $466,000 and, combined with UEP’s and UGL’s total cash balances, liquidity was approximately $904,000 at January 2, 2022. We plan to use this availability and cash provided by operating activities to finance our cash needs for fiscal 2022. The balances due under the lines of credit are recorded as current liabilities on the consolidated balance sheets.
As previously stated, the coronavirus pandemic (“COVID-19”) and its current disruption of the supply chain has had an impact on markets we serve and our operations and liquidity. Since COVID-19 is a continually evolving situation, we cannot predict the long-term impact it will have on the economy or our business. The impact could have a material adverse effect on our financial position, results of operations and cash flows, which may require us to obtain additional financing. As discussed below, we continue to pursue supplementary cash flow opportunities.
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”), our U.S. operations received $2,000,000 (“Second Draw PPP Loan”) and $2,217,500 (“First Draw PPP Loan”) in March 2021 and in April 2020, respectively, in funds from One Community Bank. We used all proceeds from these PPP loans for allowable expenses (as defined in the PPP loans) and applied for forgiveness of the PPP loans in accordance with the terms of the CARES Act. In June 2021 and August 2021, we were notified that all of our First and Second Draw PPP Loans, respectively, were forgiven. See Note 9 to the consolidated financial statements for further discussion.
For our U.K. operations, during the years ended January 2, 2022 and January 3, 2021, we recorded reimbursed costs of approximately $150,000 and $1,569,000, respectively, under the Coronavirus Job Retention Scheme (“CJRS”) established by the U.K. government to help employers pay the salaries of those employees who would otherwise have been laid off during the coronavirus outbreak but under the CJRS were furloughed instead. The much lower reimbursed costs for the year ended January 2, 2022 reflected that employees were furloughed significantly less than in the prior year. 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.
Also for our U.K. operations, in June 2021 its bank lending facilities with Lloyds Bank Commercial Finance Limited (“Lloyds”) were refinanced with PNC Business Credit (“PNC”). PNC provided us additional availability by expanding the borrowing base to include eligible equipment. This transaction was accounted for as a debt extinguishment per Accounting Standards Codification (“ASC”) 470, “Debt”, under which the existing Lloyds debt was derecognized and the new PNC debt was recorded at fair value. A loss of £46,813 ($64,342) was recognized on this transaction and is recorded in general and administrative expenses in the consolidated statement of operations for the year ended January 2, 2022. Debt issuance costs of £247,114 ($333,081) related to this transaction were capitalized. These capitalized costs are being amortized over 36 months. We classified these debt issuance costs within other long-term assets in the accompanying consolidated balance sheet. See Notes 8 and 9 to the consolidated financial statements for further discussion.
Additionally for our U.K. operations, during 2021 we received the second installment of loans of $411,796 from the automotive lenders per the original loan agreement. These amounts are due to be repaid in the first quarter of 2023. In addition, the amounts due to be repaid at the end of the third and fourth quarters of 2021 (each approximately $162,500) from the first installment of loans from the automotive lenders were deferred until the third and fourth quarters of 2022, respectively.
Also to provide liquidity, quarterly preferred dividend payments on UEPH Series A and Series B preferred units and UGEL preferred stock (collectively “preferred shares”) were deferred beginning with the three months ended December 29, 2019 through the three months ended October 3, 2021. During the third quarter of 2021, the owners of these preferred shares (“preferred shareholders”) agreed to an amendment to the documents that govern the dividends (“amended documents”) whereby the accrued dividends were forgiven. As a result, the total balance of accrued dividends of approximately $6,100,000 was derecognized as of October 3, 2021. Additionally, under the amended documents, the preferred shareholders are no longer entitled to a quarterly dividend until such time as we declare a dividend payable. See Note 13 to the consolidated financial statements for further discussion.
The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 0.99 at January 2, 2022 and 0.89 at January 3, 2021.
Cash balances decreased $1,218,759, before the effects of currency translation of $6,850, to $444,973 at January 2, 2022 from $1,656,882 at January 3, 2021. Of the above noted amounts, $226,612 and $1,621,692 were held outside the U.S. by our foreign subsidiaries as of January 2, 2022 and January 3, 2021, respectively.
Cash used in operations was $1,525,215 and $992,158 for the years ended 2021 and 2020, respectively. For 2021, cash used in operations was primarily due to the net loss of $1,702,378, changes in working capital of $(1,515,589), and changes in other assets and liabilities of $(23,466), partially offset by adjustments for non-cash items of $1,716,218. 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 the year ended 2021, cash used in investing activities was $1,280,112 compared to $1,417,623 for the year ended 2020. During 2021 and 2020, 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 January 2, 2022, we made payments of $194,808 on our company owned life insurance policies. For the year ended January 3, 2021, we obtained $130,000 in loans against the cash value of our company owned life insurance policies and are shown net of payments of $178,771 on the life insurance policies in the consolidated statements of cash flows.
Cash provided by financing activities was $1,586,568 and $3,466,982 for the years ended 2021 and 2020, respectively. Impacting cash flows from financing activities were proceeds from issuance of long-term debt of $2,411,796 ($2,000,000 through the Paycheck Protection Program and $411,796, net of translation adjustment of $(48,745), from automotive lenders) for the year ended 2021 and $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. Also impacting cash flows from financing activities for the years ended 2021 and 2020 were net advances on lines of credit of $931,759 and net payments of $3,074,286, respectively. The changes in the lines of credit reflect the funding of working capital. Payments of $1,115,788 and $1,478,630 were also made during the years ended 2021 and 2020, respectively, on long-term debt (excluding debt extinguishment) and finance lease liabilities. For the year ended 2021, payments were $1,476,713 and proceeds were $2,313,181 relating to the extinguishment of existing long-term debt and recognition of new long-term debt, respectively, while payments were $7,330,745 and proceeds were $6,522,040 relating to the extinguishment of an existing line of credit and recognition of a new line of credit, respectively. Also included for the year ended 2021 were payments for capitalized debt issuance costs of $339,643. For the year ended 2020, proceeds of $1,225,911 (net of translation adjustment of $(72,544)) were received from and payments of $675,000 were made on subordinated secured promissory notes to our majority shareholder. In addition, proceeds of $200,000 were received from a short-term advance from our majority shareholder during the year ended 2020 and was repaid in the same period.
Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as of January 2, 2022 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 any triggering events had occurred to indicate that the carrying amount of our assets may not be fully recoverable, we used a qualitative assessment methodology and concluded that it was not more likely than not that the fair value of our assets was less than the carrying amount as of January 2, 2022. We also performed a quantitative analysis using a discounted cash flow approach and determined that the fair value of our assets exceeded the carrying value as of January 2, 2022. Based on these results, we concluded that no impairment charge was necessary as of January 2, 2022.
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 $16.4 million as of January 2, 2022, of which $11.7 million expire in years beginning 2023 through 2034 and $4.7 million may be carried forward indefinitely. We have state net operating loss carryforwards of approximately $14.2 million as of January 2, 2022, which also expire beginning 2023 through 2034. Additionally, we have foreign net operating loss carryforwards of approximately $2.8 million as of January 2, 2022, which have no expiration date. As a result of the federal and state loss carryforwards, we have deferred tax assets of $5,370,903, which have a valuation allowance against them of $2,106,027 as of January 2, 2022.
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 federal and state net operating loss carryforwards and has established a valuation allowance against them.
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 foreign subsidiaries. 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 2021 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 (PCAOB ID 215)
To the Board of Directors and Stockholders of
Uniroyal Global Engineered Products, Inc.
Sarasota, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Uniroyal Global Engineered Products, Inc. (the “Company”) as of January 2, 2022 and January 3, 2021, and the related consolidated statements of operations, comprehensive income (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 2, 2022 and January 3, 2021, 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the 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, 2022
Uniroyal Global Engineered Products, Inc.
Consolidated Balance Sheets
ASSETS
January 2, 2022
January 3, 2021
CURRENT ASSETS
Cash and cash equivalents
$
444,973
$
1,656,882
Accounts receivable, net
8,561,227
10,114,819
Inventories, net
21,840,404
17,952,850
Other current assets
2,196,322
1,841,153
Related party receivable
Total Current Assets
33,043,379
31,566,611
PROPERTY AND EQUIPMENT, NET
17,047,606
18,491,122
OPERATING LEASE RIGHT-OF-USE ASSETS, NET
5,626,542
6,242,736
OTHER ASSETS
Intangible assets
3,336,068
3,388,357
Goodwill
1,079,175
1,079,175
Other long-term assets
4,322,855
4,679,990
Total Other Assets
8,738,098
9,147,522
TOTAL ASSETS
$
64,455,625
$
65,447,991
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of bank balance
$
76,134
$
275,297
Lines of credit
17,816,919
17,760,583
Current maturities of long-term debt
2,365,905
1,432,301
Current maturities of finance lease liabilities
210,007
257,298
Accounts payable
8,959,467
7,344,785
Accrued expenses and other liabilities
3,658,612
7,987,333
Current maturities of related party finance lease liabilities
167,389
149,366
Current portion of postretirement benefit liability - health and life
169,749
162,977
Total Current Liabilities
33,424,182
35,369,940
LONG-TERM LIABILITIES
Long-term debt, less current portion
6,854,257
7,338,762
Finance lease liabilities, less current portion
36,372
235,116
Operating lease liabilities, less current portion
5,391,395
5,893,268
Related party finance lease liabilities, less current portion
2,344,239
2,504,404
Long-term debt to related parties
4,216,566
4,216,566
Postretirement benefit liability - health and life, less current portion
2,583,610
2,713,585
Other long-term liabilities
960,526
807,190
Total Long-Term Liabilities
22,386,965
23,708,891
Total Liabilities
55,811,147
59,078,831
STOCKHOLDERS' EQUITY
Preferred units, Series A UEP Holdings, LLC, 20,000,000 units authorized; 200,000 units issued and outstanding ($100 issue price)
617,571
617,571
Preferred units, Series B UEP Holdings, LLC, 15,000,000 units authorized; 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 2, 2022 and January 3, 2021
3,736
3,736
Additional paid-in capital
35,290,590
35,290,590
Accumulated deficit
(26,459,190
)
(28,734,670
)
Accumulated other comprehensive loss
(1,271,483
)
(1,271,321
)
Total Stockholders' Equity
8,644,478
6,369,160
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
64,455,625
$
65,447,991
See accompanying notes to the consolidated financial statements.
Uniroyal Global Engineered Products, Inc.
Consolidated Statements of Operations
Years Ended
January 2, 2022
January 3, 2021
NET SALES
$
71,704,995
$
60,218,355
COST OF GOODS SOLD
62,786,884
52,437,754
Gross Profit
8,918,111
7,780,601
OPERATING EXPENSES:
Selling
3,015,016
3,040,685
General and administrative
6,125,583
6,720,969
Research and development
1,293,908
980,695
Total Operating Expenses
10,434,507
10,742,349
Operating Loss
(1,516,396
)
(2,961,748
)
OTHER INCOME (EXPENSE):
Interest expense
(1,640,999
)
(1,581,907
)
Funding from Paycheck Protection Program
2,000,000
2,217,500
Other income (expense)
188,011
(173,214
)
Net Other Income
547,012
462,379
LOSS BEFORE TAX PROVISION (BENEFIT)
(969,384
)
(2,499,369
)
TAX PROVISION (BENEFIT)
732,994
(1,275,743
)
NET LOSS
(1,702,378
)
(1,223,626
)
Extinguishment of preferred stock dividend payable
6,145,463
-
Preferred stock dividend
(2,167,605
)
(3,209,841
)
NET INCOME (LOSS) ALLOCABLE TO COMMON SHAREHOLDERS
$
2,275,480
$
(4,433,467
)
EARNINGS (LOSS) PER COMMON SHARE:
Basic and Diluted
$
0.61
$
(1.19
)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted
3,736,006
3,736,006
See accompanying notes to the consolidated financial statements.
Uniroyal Global Engineered Products, Inc.
Consolidated Statements of Comprehensive Income (Loss)
Years Ended
January 2, 2022
January 3, 2021
NET LOSS
$
(1,702,378
)
$
(1,223,626
)
OTHER COMPREHENSIVE (LOSS) INCOME:
Minimum benefit liability adjustment
77,524
(160,356
)
Foreign currency translation adjustment
(77,686
)
186,474
OTHER COMPREHENSIVE (LOSS) INCOME
(162
)
26,118
COMPREHENSIVE LOSS
(1,702,540
)
(1,197,508
)
Extinguishment of preferred stock dividend payable
6,145,463
-
Preferred stock dividend
(2,167,605
)
(3,209,841
)
COMPREHENSIVE INCOME (LOSS) TO
COMMON SHAREHOLDERS
$
2,275,318
$
(4,407,349
)
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 2, 2022 and January 3, 2021
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 29, 2019
200,000
$
617,571
150,000
$
463,179
$
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
-
-
-
-
-
-
-
(14,944
)
14,944
-
-
-
Balance January 3, 2021
200,000
617,571
150,000
463,179
3,736,006
3,736
35,290,590
(28,734,670
)
(1,271,321
)
6,369,160
Net loss
-
-
-
-
-
-
-
-
-
(1,702,378
)
-
(1,702,378
)
Other comprehensive loss
-
-
-
-
-
-
-
-
-
-
(162
)
(162
)
Extinguishment of preferred stock dividend payable
-
-
-
-
-
-
-
-
-
6,145,463
-
6,145,463
Preferred stock dividend
-
-
-
-
-
-
-
-
-
(2,167,605
)
-
(2,167,605
)
Balance January 2, 2022
200,000
$
617,571
150,000
$
463,179
$
3,736,006
$
3,736
$
35,290,590
$
(26,459,190
)
$
(1,271,483
)
$
8,644,478
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 2, 2022
January 3, 2021
Net loss
$
(1,702,378
)
$
(1,223,626
)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization
2,385,241
2,358,001
Deferred tax provision (benefit)
976,706
(1,319,778
)
Amortization of debt issuance costs
53,057
-
Amortization of intangible assets
26,532
15,948
Loss on disposal of property and equipment
37,967
3,871
Funding from Paycheck Protection Program recognized as income
(2,000,000
)
(2,217,500
)
Deferred interest on loan from Main Street Lending Program
76,447
-
Loss on debt extinguishment
64,342
-
Noncash lease adjustment
95,926
89,624
Changes in assets and liabilities:
Accounts receivable
1,516,925
1,882,167
Inventories
(3,990,961
)
1,414,782
Other current assets
(383,197
)
(834,868
)
Related party receivable
(907
)
Other long-term assets
25,007
175,693
Accounts payable
1,653,901
(2,064,395
)
Accrued expenses and other liabilities
(312,711
)
759,757
Postretirement benefit liability - health and life
(45,680
)
(31,620
)
Other long-term liabilities
(2,793
)
Cash used in operating activities
(1,525,215
)
(992,158
)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
(1,085,304
)
(1,368,852
)
Payments on life insurance policies, net of proceeds from policy loans
(194,808
)
(48,771
)
Cash used in investing activities
(1,280,112
)
(1,417,623
)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in checks issued in excess of bank balance
(199,163
)
(56,844
)
Payments on line of credit relating to debt extinguishment
(7,330,745
)
-
Advances on line of credit relating to debt extinguishment
6,522,040
-
Net advances (payments) on lines of credit - other
931,759
(3,074,286
)
Payments on long-term debt relating to debt extinguishment
(1,476,713
)
-
Payments on long-term debt - other
(857,723
)
(1,115,425
)
Proceeds from issuance of long-term debt - Paycheck Protection Program
2,000,000
2,217,500
Proceeds from issuance of long-term debt - automotive lenders
411,796
3,075,239
Proceeds from issuance of long-term debt - Main Street Lending Program
-
2,432,353
Proceeds from issuance of long-term debt relating to debt extinguishment
2,313,181
-
Payments for capitalized debt issuance costs
(339,643
)
-
Payments on finance lease liabilities
(258,065
)
(363,205
)
Proceeds from finance lease liabilities
11,986
-
Proceeds from related party obligations
-
1,353,367
Payments on related party obligations
(142,142
)
(1,001,717
)
Cash provided by financing activities
1,586,568
3,466,982
Net change in cash and cash equivalents
(1,218,759
)
1,057,201
Cash and cash equivalents - beginning of year
1,656,882
513,588
Effects of currency translation on cash and cash equivalents
6,850
86,093
CASH AND CASH EQUIVALENTS - END OF YEAR
$
444,973
$
1,656,882
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 2, 2022 and January 3, 2021
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 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.
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 2, 2022 was a 52-week year whereas the year ended January 3, 2021 was a 53-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 accounting principles generally accepted in the United States of America (“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 2, 2022 and January 3, 2021
For purposes of comparability, certain reclassifications have been made to amounts previously reported to conform with the current period presentation.
Coronavirus (COVID-19) Impact Update
The coronavirus pandemic (“COVID-19”) and its current disruption of the supply chain has had an impact on markets the Company serves and its operations and liquidity. Since COVID-19 is a continually evolving situation, the Company cannot predict the long-term impact it will have on the economy or the Company’s business. The impact could have a material adverse effect on the Company’s financial position, results of operations and cash flows, which may require the Company to obtain additional financing. The Company continues to pursue supplementary cash flow opportunities, as discussed briefly below and in more detail in Notes 8, 9 and 13.
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 Company’s U.S. operations received $2,000,000 (“Second Draw PPP Loan”) and $2,217,500 (“First Draw PPP Loan”) in March 2021 and in April 2020, respectively, in funds from One Community Bank. The Company used all proceeds from these PPP loans for allowable expenses (as defined in the PPP loans) and applied for forgiveness of the PPP loans in accordance with the terms of the CARES Act. In June 2021 and August 2021, the Company was notified that all of its First and Second Draw PPP Loans, respectively, were forgiven. See Note 9 for further discussion.
For the U.K. operations, during the years ended January 2, 2022 and January 3, 2021, the Company recorded reimbursed costs of approximately $150,000 and $1,569,000, respectively, under the Coronavirus Job Retention Scheme (“CJRS”) established by the U.K. government to help employers pay the salaries of those employees who would otherwise have been laid off during the coronavirus outbreak but under the CJRS were furloughed instead. The much lower reimbursed costs for the year ended January 2, 2022 reflected that employees were furloughed significantly less than in the prior year. 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.
Also for the U.K. operations, in June 2021 its bank lending facilities with Lloyds Bank Commercial Finance Limited (“Lloyds”) were refinanced with PNC Business Credit (“PNC”). PNC provided the Company additional availability by expanding its borrowing base to include eligible equipment. See Notes 8 and 9 for further discussion.
Additionally, quarterly preferred dividend payments on UEPH Series A and Series B preferred units and UGEL preferred stock (collectively “preferred shares”) were deferred beginning with the three months ended December 29, 2019 through the three months ended October 3, 2021. During the third quarter of 2021, the owners of these preferred shares (“preferred shareholders”) agreed to an amendment to the documents that govern the dividends (“amended documents”) whereby the accrued dividends were forgiven. As a result, the total balance of accrued dividends of approximately $6,100,000 was derecognized as of October 3, 2021. In addition, under the amended documents the preferred shareholders are no longer entitled to a quarterly dividend until such time as the Company declares a dividend payable. See Note 13 for further discussion.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
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 negotiated a plea based on the legal advice provided to it. Per this legal advice, the Company believed that £150,000 ($193,000) was a reasonable estimate of the fine to be imposed and, accordingly, recorded an accrual for this charge for the year ended January 3, 2021. The related expense was recorded in general and administrative expenses in the accompanying Consolidated Statement of Operations for the year ended January 3, 2021.
In April 2021, a fine of £120,000 ($164,933) was imposed on the Company related to this matter. At the end of the second quarter of 2021, the Company began making monthly payments for this fine in order to have it paid in full by the October 2022 due date. The accrual related to the fine was £69,356 ($93,484) and £150,000 ($204,737) as of January 2, 2022 and January 3, 2021, respectively, and was included in accrued expenses and other liabilities in the accompanying consolidated balance sheets. In addition, a fee of £5,463 ($7,509) to reimburse the HSE for legal expenses was paid in May 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 2, 2022 and January 3, 2021
Accounts Receivable
Accounts receivable are recorded net of an allowance for doubtful accounts, returns and discounts of $1,018,763 and $940,474 as of January 2, 2022 and January 3, 2021, 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 21 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 $0 and $131,868 as of January 2, 2022 and January 3, 2021, respectively.
Inventories
Inventories are valued at the lower of cost using the first-in, first-out (FIFO) method, or net realizable value. 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, net, accrued expenses and other liabilities, and operating lease liabilities, less current portion in the accompanying consolidated balance sheets. Finance leases are included in property and equipment, net, 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, net, current maturities of related party finance lease liabilities, and related party finance lease liabilities, less current portion 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 15 for further discussion.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
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 $971,130 and $776,323 as of January 2, 2022 and January 3, 2021, respectively. The Company has obtained loans against the cash value of certain of these insurance policies. At both January 2, 2022 and January 3, 2021, these insurance policy loans totaled $590,841, and had a weighted average interest rate of 3.63%. 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 2, 2022 or January 3, 2021.
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 2, 2022 or January 3, 2021.
Income Taxes
The Company follows Accounting Standards Codification (“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 2, 2022 and January 3, 2021
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 2018 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 2, 2022 and January 3, 2021, 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.
For the fiscal year ended January 2, 2022, 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 2, 2022 and January 3, 2021
The Company follows GAAP 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 foreign subsidiaries. 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 income (expense) in the accompanying consolidated statements of operations.
Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with GAAP 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 2, 2022 and January 3, 2021
Revenue Recognition
The Company derives its revenues primarily from the manufacture and sale of vinyl coated fabrics. Revenues are recognized when control of these products is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects 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 and there is no alternative use of the product for the Company.
See Note 21 for further discussion.
Variable Consideration
The nature of the Company’s 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 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 but generally will provide product warranties related to manufacturing defects and specific performance standards for its products. The estimate for potential returns is based upon historical experience and an allowance for potential returns is recorded as contra revenue and within accounts receivable. The allowance for potential customer returns was $399,893 and $774,674 as of January 2, 2022 and January 3, 2021, 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 $96,983 and $80,523 for the years ended January 2, 2022 and January 3, 2021, respectively. As of January 2, 2022 and January 3, 2021, $71,951 and $92,820, 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 $1,293,908 and $980,695 for the years ended January 2, 2022 and January 3, 2021, respectively.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
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.
Liquidity
During the years ended January 2, 2022 and January 3, 2021, the Company incurred operating losses of $1,516,396 and $2,961,748, respectively, and net losses of $1,702,378 and $1,223,626, respectively. In addition, for the years ended January 2, 2022 and January 3, 2021, net cash used in operating activities was $1,525,215 and $992,158, respectively. The worldwide pandemic resulting from COVID-19 and the related disruption of the supply chain has had an impact on markets the Company serves, its operations and liquidity. Since the COVID-19 pandemic is a continually evolving situation, the Company cannot predict the long-term impact it will have on the economy or the Company’s business. The impact could have a material adverse effect on the Company’s financial position, results of operations, and cash flows, which may require the Company to obtain additional financing.
Management believes that the Company’s existing resources, including cash on hand and credit facilities, together with projected cash generated from operations and additional bank borrowings, will be sufficient to fund its cash flow requirements for at least the next twelve months.
Recent Accounting Standards
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 elected to account for PPP loan proceeds under IAS 20 as allowed by TQA 3200.18. Since the Company expected that the $2,000,000 Second Draw PPP Loan and the $2,217,500 First Draw PPP Loan would be forgiven (and subsequently were forgiven in August 2021 and June 2021, respectively), it recorded the funds as grant income under IAS 20.
On November 17, 2021, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (“ASU 2021-10”). ASU 2021-10 requires disclosures that increase the transparency of transactions with a government accounted for by applying a grant or contribution accounting model by analogy. These required disclosures include information about the nature of the transactions, significant terms and conditions of the transactions, and the effect of those transactions on an entity’s financial statements. The Company adopted ASU 2021-10 on January 2, 2022. Since the amendments in this update only include disclosure requirements, the adoption of ASU 2021-10 for the year ending January 2, 2022 did not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
Subsequent Events
The Company has evaluated subsequent events through April 1, 2022 for events requiring recording or disclosure in the January 2, 2022 consolidated financial statements. On February 24, 2022, Russia invaded Ukraine, which has created volatility and disruption in certain sectors of the global economy, including issues with supply chains and increased energy costs. Although the Company does not have any customers or direct suppliers in Ukraine, the negative impact on the global economy from the conflict in Ukraine could adversely impact the Company’s business. The extent and duration of the military action and resulting market disruptions, and related financial impact, cannot be estimated at this time. Should the military action continue for an extended period of time, the impact could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
NOTE 2 - Noncash Transactions and Supplemental Disclosure of Cash Flow Information
Quarterly preferred dividend payments on UEPH Series A and Series B preferred units and UGEL preferred stock (collectively “preferred shares”) were deferred beginning with the three months ended December 29, 2019 through the three months ended October 3, 2021. During the third quarter of 2021, the owners of these preferred shares agreed to an amendment to the documents that govern the dividends whereby the accrued dividends were forgiven. As a result, the total balance of accrued dividends of approximately $6,100,000 was derecognized as of October 3, 2021.
For the year ended January 2, 2022, the Company made payments of $194,808 on its company owned life insurance policies. For the year ended January 3, 2021, the Company obtained $130,000 in loans against the cash value of its company owned life insurance policies and are shown net of payments of $178,771 on the life insurance policies in the consolidated statements of cash flows. These loans have a weighted average interest rate of 3.65% and can be repaid at any time.
The following is supplemental disclosure of cash paid for the years ended:
January 2, 2022
January 3, 2021
Interest
$
1,496,167
$
1,595,346
NOTE 3 - Inventories
Inventories consist of the following:
January 2, 2022
January 3, 2021
Raw materials
$
7,595,155
$
5,193,919
Work-in-process
5,501,493
4,281,035
Finished goods
11,043,667
10,594,088
24,140,315
20,069,042
Less: Allowance for inventory obsolescence
(2,299,911
)
(2,116,192
)
Total Inventories, net
$
21,840,404
$
17,952,850
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
NOTE 4 - Property and Equipment
The major categories of property and equipment are summarized as follows:
Depreciable Lives
January 2, 2022
January 3, 2021
Building and building improvements
8 - 25 yrs.
$
1,458,233
$
1,441,432
Machinery and equipment
8 - 10 yrs.
32,411,520
31,633,706
Computer equipment
3 - 10 yrs.
1,580,034
1,569,881
Furniture and fixtures
7 - 10 yrs.
202,164
203,362
Real estate under lease
20 yrs.
2,565,914
2,565,914
Construction-in-progress
-
145,972
241,195
Total Property and Equipment
38,363,837
37,655,490
Less: Accumulated depreciation
(21,316,231
)
(19,164,368
)
Property and Equipment, net
$
17,047,606
$
18,491,122
NOTE 5 - Intangible Assets
Intangible assets are summarized as follows:
Amortizable Lives
January 2, 2022
January 3, 2021
Trademarks and trade names
Indefinite
$
3,268,401
$
3,294,158
Other
5 years
67,667
94,199
Total Intangible Assets
$
3,336,068
$
3,388,357
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
NOTE 6 - Other Long-term Assets
Other long-term assets consist of the following:
January 2, 2022
January 3, 2021
Deferred tax asset, net
$
3,264,876
$
4,072,184
Life insurance policies, net of policy loans
380,289
185,482
Debt issuance costs
281,049
-
Other
396,641
422,324
Total Other Long-term Assets
$
4,322,855
$
4,679,990
NOTE 7 - Other Long-term Liabilities
Other long-term liabilities consist of the following:
January 2, 2022
January 3, 2021
Deferred tax liability
$
957,263
$
801,136
Other
3,263
6,054
Total Other Long-term Liabilities
$
960,526
$
807,190
NOTE 8 - Lines of Credit
The Company's Uniroyal subsidiary has available a $15,000,000 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 (“WF Prime”) at the Company's election on outstanding balances up to $6,000,000 and WF Prime on amounts in excess of $6,000,000. The line of credit weighted average interest rate including unused facility fees was approximately 3.53% as of January 2, 2022. 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 2, 2022.
The outstanding balance on the Uniroyal Line of Credit was $11,400,409 and $9,204,572 as of January 2, 2022 and January 3, 2021, respectively. The Company has classified the outstanding balance on the line of credit within current liabilities in the accompanying consolidated balance sheets. Based upon eligible accounts receivable, inventories and equipment at January 2, 2022, the Uniroyal Line of Credit provided additional availability of approximately $192,000 and, combined with its total cash balance of $211,828, Uniroyal had liquidity of approximately $404,000 as of January 2, 2022.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
In June 2021, UGL’s bank lending facilities with Lloyds Bank Commercial Finance Limited (“Lloyds”), including its revolving line of credit (“Old UGL Line of Credit”), were refinanced with PNC Business Credit (“PNC”). PNC provided the Company additional availability by expanding its borrowing base to include eligible equipment. This transaction was accounted for as a debt extinguishment per ASC 470, “Debt”, under which the existing Lloyds debt was derecognized and the new PNC debt was recorded at fair value. The existing Lloyds debt that was derecognized included the Old UGL Line of Credit of £5,333,627 ($7,330,745) and all term debt held by Lloyds, including notes payable and a financing obligation aggregating £1,027,598 ($1,476,713). The new PNC Business Credit debt that was recorded included a revolving line of credit financing agreement with PNC (“New UGL Line of Credit”) of £4,745,238 ($6,522,040) and a new term loan of £1,683,000 ($2,313,181). See Note 9 for information on the Lloyds and PNC long-term debt.
A loss of £46,813 ($64,342) was recognized on this transaction and is recorded in general and administrative expenses in the consolidated statement of operations for the year ended January 2, 2022. Debt issuance costs of £247,114 ($333,081) related to this transaction were capitalized. These capitalized costs are being amortized over 36 months. The balance of these debt issuance costs was £208,512 ($281,049) as of January 2, 2022. The Company has classified these debt issuance costs related to the refinanced line of credit within other long-term assets in the accompanying consolidated balance sheet.
UGL has available £11,000,000 (approximately $14.8 million) under the revolving line of credit financing agreement with PNC (‘‘New UGL Line of Credit”), which is subject to a three-month notice by either party after a minimum term of three years. Interest is payable monthly at the Bank of England Base Rate (“BoE Base”) plus 2.25%-3.00%. The line of credit weighted average interest rate was approximately 2.35% as of January 2, 2022. Borrowings on the New UGL 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 UGL’s assets and includes certain financial and restrictive covenants. The Company was in compliance with these covenants as of January 2, 2022.
The outstanding balance on the New UGL Line of Credit was £4,760,432 ($6,416,510) as of January 2, 2022 and on the Old UGL Line of Credit was £6,268,526 ($8,556,011) as of January 3, 2021. The Company has classified the outstanding balance on the line of credit within current liabilities in the accompanying consolidated balance sheets. Based upon eligible accounts receivable, inventories and equipment at January 2, 2022, the New UGL Line of Credit provided additional availability of approximately $274,000 and, combined with its total cash balance of $226,612, UGL had liquidity of approximately $500,000 as of January 2, 2022.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
NOTE 9 - Long-term Debt
Long-term debt consists of the following:
January 2, 2022
January 3, 2021
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' effective interest rate was 3.25% as of January 2, 2022. 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 Uniroyal’s assets and include certain financial and restrictive covenants.
$
471,299
$
785,501
Note payable to Lloyds Bank Commercial Finance Limited payable in monthly installments of £1,148 ($1,578) including interest and principal at a rate of 4.43%. The loan was secured by certain equipment and the remaining principal was due August 2023. The loan was refinanced with PNC Business Credit in June 2021.
-
51,905
Notes payable to Lloyds Bank Commercial Finance Limited payable in monthly installments of £1,756-£3,932 ($2,414-$5,404) including interest and principal at a rate of 4.87%. The loans were secured by certain equipment and the remaining principal was due April 2022-October 2022. The loans were refinanced with PNC Business Credit in June 2021.
-
156,422
Notes payable to automotive lenders at 0% payable in increasing quarterly installments beginning March 2022 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 equipment financing obligation with PNC Business Credit. (1)
3,631,715
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.
2,508,800
2,432,353
6,611,814
6,694,845
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
Equipment Financing Obligations
Financing obligation to Kennet Equipment Leasing payable in monthly installments of £16,636 ($22,865) including interest and principal at a rate of 10.9%. The loan matured in May 2021 and was secured by certain equipment.
-
23,960
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.
339,859
678,329
Financing obligation to Lloyds Bank Commercial Finance Limited payable in monthly installments of £21,878 $(30,069) including interest and principal at a rate of 3.95%. The loan was secured by certain equipment and was to mature in February 2025. The loan was refinanced with PNC Business Credit in June 2021.
-
1,373,929
Financing obligation to PNC Business Credit payable in monthly principal installments of £33,000 ($45,356) beginning January 2022 with the remaining principal due May 2024. The loan is at the Bank of England base rate plus 3.00% and is secured by certain equipment.
2,268,489
-
2,608,348
2,076,218
Total
9,220,162
8,771,063
Less: Current portion
(2,365,905
)
(1,432,301
)
Long-term portion
$
6,854,257
$
7,338,762
(1)
During 2021, the Company received the second installment of loans of £299,610 ($411,796) from the automotive lenders per the original loan agreement. These amounts are due to be repaid in the first quarter of 2023. In addition, the amounts due to be repaid at the end of the third and fourth quarters of 2021 (each approximately $162,500) from the first installment of loans from the automotive lenders were deferred until the third and fourth quarters of 2022, respectively.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
Principal requirements on long-term debt for years ending after January 2, 2022 are as follows:
Totals
$
2,365,905
3,574,740
1,576,870
1,702,647
Total
$
9,220,162
Paycheck Protection Program Loans
In March 2021 and in April 2020, the Company’s U.S. operations received $2,000,000 and $2,217,500, respectively, in funds from One Community Bank through the PPP administered by the U.S. Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act. The $2,000,000 loan (“Second Draw PPP Loan”) was scheduled to mature in March 2026 and the $2,217,500 loan (“First Draw PPP Loan”) was scheduled to mature in April 2022, and each bore an interest rate of 1.0%. The loans may be prepaid at any time prior to maturity with no prepayment penalties.
All or a portion of the loans 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 March 1, 2021 for the Second Draw PPP Loan and April 13, 2020 for the First Draw PPP Loan. The Company used all proceeds from the loans to maintain payroll and make payments for lease, utility and other allowable expenses. In accordance with International Accounting Standards 20, “Accounting for Government Grants and Disclosure of Government Assistance,” the Company recognized the funding from the PPP as grant income of $2,000,000 for the year ended January 2, 2022 and $2,217,500 for the year ended January 3, 2021, respectively. These amounts are included as a component of net other income in the consolidated statements of operations.
In June 2021 and August 2021, the Company was notified that all of its First and Second Draw PPP Loans, respectively, were forgiven.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
NOTE 10 - Related Party Obligations
Long-term debt to related parties consists of the following:
January 2, 2022
January 3, 2021
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, 2023. The senior subordinated promissory notes are secured by substantially all of Uniroyal’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, 2023. The note is secured by substantially all of Uniroyal’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, 2023. The note is secured by substantially all of UGL’s assets subject to the note’s subordination to the line of credit and equipment financing obligation with PNC Business Credit.
225,000
225,000
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 UGL’s assets subject to the notes’ subordination to the line of credit and equipment financing obligation with PNC Business Credit.
1,225,911
1,225,911
Total Long-term Debt to Related Parties
$
4,216,566
$
4,216,566
The total amount of long-term debt to related parties of $4,216,566 is due in 2023.
Interest expense on these notes was $319,516 and $310,358 for the year ended January 2, 2022 and January 3, 2021, respectively. Accrued interest of $23,786 and $47,573 related to these notes was included in accrued expenses and other liabilities in the accompanying consolidated balance sheets as of January 2, 2022 and January 3, 2021, respectively.
For the year ended January 3, 2021, proceeds of $1,225,911 were received from and payments of $675,000 were made on subordinated secured promissory notes to our majority shareholder. Proceeds of $200,000 were received from a short-term advance from our majority shareholder during the first three months of 2020 which was repaid in the same period.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
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. There were no new right-of-use assets obtained in exchange for related party finance lease obligations for the years ended January 2, 2022 and January 3, 2021. 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 2, 2022 and January 3, 2021 are as follows:
Years Ended
January 2, 2022
January 3, 2021
Finance lease expense:
Amortization of right-of-use assets
$
167,177
$
167,177
Interest on lease liabilities
408,597
420,008
Total finance lease expense
$
575,774
$
587,185
Cash paid for amounts included in the measurement of related party finance lease liabilities for the years ended January 2, 2022 and January 3, 2021 are as follows:
Years Ended
January 2, 2022
January 3, 2021
Operating cash flows from finance leases
$
408,597
$
420,008
Financing cash flows from finance leases
$
142,142
$
126,717
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
Supplemental balance sheet and other information regarding related party finance leases are as follows:
January 2, 2022
January 3, 2021
Finance leases:
Property and equipment, net
$
1,873,504
$
2,040,681
Current maturities of finance lease liabilities
$
167,389
$
149,366
Finance lease liabilities, less current portion
2,344,239
2,504,404
Total finance lease liabilities
$
2,511,628
$
2,653,770
Weighted average remaining lease term
10.5 years
11.2 years
Weighted average discount rate
16.95
%
16.77
%
Maturities of related party finance lease liabilities as of January 2, 2022 are as follows:
Totals
$
562,927
546,476
468,098
472,275
476,494
Thereafter
3,115,015
Total lease payments
5,641,285
Less: Interest
(3,129,657
)
Total related party finance lease liabilities
$
2,511,628
Quarterly preferred dividend payments on UEPH Series A and Series B preferred units and UGEL preferred stock (collectively “preferred shares”) were deferred beginning with the three months ended December 29, 2019 through the three months ended October 3, 2021. During the third quarter of 2021, the owners of the preferred shares agreed to an amendment to the documents that govern the dividends whereby the accrued dividends were forgiven. As a result, the total balance of accrued dividends of approximately $6,100,000 was derecognized as of October 3, 2021. The preferred shares are primarily owned by the Company’s majority shareholder. See Note 13 for further discussion.
At the end of the first quarter of 2022, the Company’s majority shareholder waived the interest expense on the related party finance leases and the $2,000,000 senior subordinated promissory notes for the remaining nine months of fiscal year 2022 and the first three months of fiscal year 2023. In addition, executive officers of the Company agreed to a reduction in their salaries over the same time period. The total amount of cost savings will be approximately $731,000 for fiscal year 2022 and $244,000 for fiscal year 2023 which will provide additional liquidity to the Company.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
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.
As previously discussed, the quarterly dividend payments were deferred beginning with the three months ended December 29, 2019 through the three months ended October 3, 2021. During the third quarter of 2021, the owners of the preferred shares agreed to an amendment to the documents that govern the dividends whereby the accrued dividends were forgiven. As a result, the total balance of accrued dividends of approximately $6,100,000 was derecognized as of October 3, 2021. In addition, under the amended documents, the preferred shareholders are no longer entitled to a quarterly dividend until such time as the Company declares a dividend payable. See Note 13 for further discussion.
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 credits; 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 years ended January 2, 2022 and 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 would be deductible. Some states have not conformed to the Federal treatment. Since the Company expected that the $2,000,000 Second Draw PPP Loan and the $2,217,500 First Draw PPP Loan would be forgiven (and subsequently were forgiven in August 2021 and June 2021, respectively), it recorded the funds as grant income under IAS 20, and excluded this income for tax purposes for the years ended January 2, 2022 and January 3, 2021, respectively.
The following is information on the provision (benefit) for income taxes for the years ended January 2, 2022 and January 3, 2021:
January 2, 2022
January 3, 2021
Current
Federal
$
-
$
-
State, net
-
220,544
Foreign
(243,712
)
(176,509
)
Total current income tax (benefit) provision
(243,712
)
44,035
Deferred
Federal
847,915
(1,346,818
)
State
(40,606
)
(30,813
)
Foreign
169,397
57,853
Total deferred income tax provision (benefit)
976,706
(1,319,778
)
Total income tax provision (benefit)
$
732,994
$
(1,275,743
)
The federal benefit of $428,398 for the year ended January 2, 2022 was adjusted by an increase in the valuation allowance of $1,276,313. There was no comparable adjustment to the federal benefit for the year ended January 3, 2021. The state tax benefit of $41,909 and state tax expense of $199,978 for the years ended January 2, 2022 and January 3, 2021, respectively, were reduced by a change in the valuation allowance in the amounts of $1,303 and $10,248, respectively.
Income tax expense differs from the amount computed by applying the federal statutory income tax rate to income before income taxes. The effective income tax rate is computed as the total of federal, state and foreign taxes as a percentage of income before taxes. The Company has calculated an effective income tax expense rate of 75.6% and an effective income tax benefit rate of 51.0% for the years ended January 2, 2022 and January 3, 2021, respectively.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
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 2, 2022 and January 3, 2021:
January 2, 2022
January 3, 2021
Income tax benefit at statutory rates
$
(203,570
)
$
(524,867
)
Foreign tax rate differential
17,569
18,417
Funding from Paycheck Protection Program not taxable
(420,000
)
(465,675
)
U.K. Research and development credit
(172,915
)
(130,777
)
Effect of change in U.K. tax rate on deferred items
217,101
137,631
Prior year true-up
(3,742
)
(324,994
)
State tax benefits
(31,594
)
(37,772
)
Valuation allowance
1,277,616
10,248
Other
52,529
42,046
Income tax expense (benefit)
$
732,994
$
(1,275,743
)
Effective income tax expense (benefit) rate
75.6
%
(51.0
)%
The following table summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities:
January 2, 2022
January 3, 2021
Deferred tax assets:
Net operating loss carry forward
$
5,309,574
$
4,757,408
Section 163j interest limitation
527,635
270,713
UEPH basis adjustments
569,429
569,429
Total deferred tax assets
6,406,638
5,597,550
Valuation allowance
(2,106,027
)
(828,411
)
Total deferred tax assets, net
4,300,611
4,769,139
Deferred tax liabilities:
Trademarks
(509,600
)
(382,510
)
Deferred gain
(238,826
)
(183,801
)
Capital allowances
(1,244,572
)
(931,780
)
Total deferred tax liabilities
(1,992,998
)
(1,498,091
)
Net deferred tax assets
$
2,307,613
$
3,271,048
Total deferred tax assets as of January 2, 2022 and January 3, 2021 of $6,406,638 and $5,597,550, respectively, includes $5,370,903 and $4,900,595, respectively, of carryforwards related to U.S. net operating losses and $1,035,735 and $696,955, respectively, of carryforwards resulting from U.K. losses. The $5,370,903 and $4,900,595 of deferred tax assets for U.S. losses and the $2,106,027 and $828,411 of valuation allowances against them as of January 2, 2022 and January 3, 2021, respectively, are included in other long-term assets. The $1,035,735 and $696,955 of deferred tax assets for U.K. losses are netted with deferred tax liabilities of $1,992,998 and $1,498,091, which are all related to U.K. tax. These amounts net to total deferred tax liabilities of $957,263 and $801,136, which are included in other long-term liabilities in the accompanying consolidated balance sheets as of January 2, 2022 and January 3, 2021, respectively
The Company has federal net operating loss carryforwards of approximately $16.4 million as of January 2, 2022, of which $11.7 million expire in years beginning 2023 through 2034 and $4.7 million may be carried forward indefinitely. The Company has state net operating loss carryforwards of approximately $14.2 million as of January 2, 2022, which also expire in years beginning 2023 through 2034. Additionally, the Company has foreign net operating loss carryforwards of approximately $2.8 million as of January 2, 2022, which have no expiration date.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
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 federal and state net operating loss carryforwards and has established a valuation allowance against them.
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 were as follows:
January 2, 2022
January 3, 2021
Postretirement Benefit Liability - Health and Life
$
2,676,221
$
2,721,900
Less: Plan assets
-
-
Accrued postretirement benefit cost
2,676,221
2,721,900
Unrecognized net loss
77,138
154,662
Accumulated postretirement benefit obligation
2,753,359
2,876,562
Less: Current portion
(169,749
)
(162,977
)
Long-term Portion
$
2,583,610
$
2,713,585
For the years ended January 2, 2022 and January 3, 2021, the net postretirement benefit expense for the plan was comprised of interest cost of $54,504 and $74,758, respectively, on the projected benefit obligation. In addition, the postretirement benefit liability adjustment in other comprehensive income consisted of net actuarial gain of $77,524 for the year ended January 2, 2022 and net actuarial loss of $160,356 for the year ended January 3, 2021.
At January 2, 2022, there was $77,138 of unrecognized net actuarial losses in accumulated other comprehensive loss that had not yet been recognized as a component of net periodic benefit costs. At January 2, 2022, there was no amount of net actuarial losses in accumulated other comprehensive loss that was expected to be recognized as a component of net periodic benefit costs during 2022.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
The significant assumptions used in determining the accumulated postretirement benefit obligation and net periodic benefit cost are as follows:
January 2, 2022
January 3, 2021
Health Care Cost Trend Rates:
4.00%
4.00%
Thereafter
4.00%
4.00%
Discount rate
2.38%
1.95%
Measurement Date
January 2, 2022
January 3, 2021
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.
Employer and employee contributions to the plan were $100,183 and $807, respectively, during the year ended January 2, 2022 and $106,377 and $7,777, respectively, during the year ended January 3, 2021. 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:
$
169,749
170,296
168,868
169,443
169,251
2027 - 2031
821,453
Total
$
1,669,060
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 2, 2022 and January 3, 2021 was $3,261 and $6,054, 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 2.38% and 1.95% as of January 2, 2022 and January 3, 2021, respectively.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
NOTE 13 - Equity
The following table summarizes the Company’s common stock outstanding by class.
January 2, 2022
January 3, 2021
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.
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. Prior to an amendment to the document that governs the UEPH Series A and Series B preferred units (discussed below), the owners of these preferred units were entitled to a preferred return in the form of quarterly dividends. The UEPH Series A preferred units were 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 were 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 2, 2022, the preferred return percentage of the UEPH Series B preferred units was 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 $20,046,243). As part of the transaction, 50 shares of the UGEL common stock held by the seller had been converted and reclassified as preferred shares. Prior to an amendment to the document that governs the UGEL preferred stock (discussed below), the owner of this preferred stock was entitled to a quarterly dividend payment of €221,241 (approximately $261,657). These shares of preferred stock are owned by the Company’s majority shareholder.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
Quarterly preferred dividend payments on UEPH Series A and Series B preferred units and UGEL preferred stock (collectively “preferred shares”) were deferred beginning with the three months ended December 29, 2019 through the three months ended October 3, 2021. During the third quarter of 2021, the owners of the preferred shares (“preferred shareholders”) agreed to an amendment to the documents that govern the dividends (“amended documents”) whereby the accrued dividends were forgiven. In addition, under the amended documents, the preferred shareholders are no longer entitled to a quarterly dividend until such time as the Company declares a dividend payable.
The Company accounted for the dividend forgiveness as an extinguishment of debt between related parties per ASC 470, “Debt”. As a result, the total balance of accrued dividends of approximately $6,100,000 was derecognized as of October 3, 2021. The amendments to remove the entitlement of a quarterly 5%, 8% and €221,241 (approximately $261,657) dividend (“entitlement amendments”) relating to the preferred shares were considered not significant and, therefore, were considered a modification rather than an extinguishment per ASC 470. The entitlement amendments were considered not significant since the change in the fair values of the preferred shares after the amendments compared to the fair values of the preferred shares immediately before the amendments was less than 10% as management determined that the entitlement amendments resulted in a reduction of fair value of the preferred shares. Per ASC 718, “Compensation - Stock Compensation”, the reduction of fair value of the preferred shares in this modification had no accounting impact (i.e., recognition of a gain).
NOTE 14 - Income (Loss) Per Common Share
The calculation of diluted earnings per share for the year ended January 2, 2022 excluded options (as provided under the Company’s 2015 Stock Option Plan) to purchase 133,050 shares of common stock because the options’ weighted average exercise price of $14.04 per share was greater than the average market price of the common shares. Due to the net loss allocable to common shareholders for the year ended January 3, 2021, 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 calculation of diluted loss per share would have been anti-dilutive. However, if diluted earnings per share had been reported for the year ended January 3, 2021, the calculation would have excluded options to purchase 139,300 shares of common stock because the options’ weighted average exercise price of $14.02 per share was greater than the average market price of the common shares.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
NOTE 15 - Leases
The Company has operating leases for equipment and office facilities and finance leases for equipment. These leases expire at various dates from January 2022 through March 2039.
The components of lease expense for the years ended January 2, 2022 and January 3, 2021 are as follows:
Years Ended
January 2, 2022
January 3, 2021
Operating lease expense
$
981,712
$
993,636
Finance lease expense:
Amortization of right-of-use assets
$
80,113
$
208,859
Interest on lease liabilities
16,673
30,635
Total finance lease expense
$
96,786
$
239,494
Cash paid for amounts included in the measurement of lease liabilities for the years ended January 2, 2022 and January 3, 2021 are as follows:
Years Ended
January 2, 2022
January 3, 2021
Operating cash flows from operating leases
$
1,024,968
$
882,709
Operating cash flows from finance leases
$
16,673
$
30,635
Financing cash flows from finance leases
$
258,065
$
363,205
Right-of-use assets obtained in exchange for lease obligations for the years ended January 2, 2022 and January 3, 2021 are as follows:
Years Ended
January 2, 2022
January 3, 2021
Operating leases
$
-
$
-
Finance leases
$
11,986
$
-
Supplemental balance sheet and other information related to operating leases are as follows:
January 2, 2022
January 3, 2021
Operating leases:
Operating lease right-of-use assets, net
$
5,626,542
$
6,242,736
Operating lease liabilities, current portion (1)
$
419,001
$
440,386
Operating lease liabilities, less current portion
5,391,395
5,893,268
Total operating lease liabilities
$
5,810,396
$
6,333,654
Weighted average remaining lease term
15.5 years
15.7 years
Weighted average discount rate
7.35%
7.26%
(1)
Included in accrued expenses and other liabilities in the consolidated balance sheets.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
Supplemental balance sheet and other information related to finance leases are as follows:
January 2, 2022
January 3, 2021
Finance leases:
Property and equipment, net
$
911,833
$
1,084,394
Current maturities of finance lease liabilities
$
210,007
$
257,298
Finance lease liabilities, less current portion
36,372
235,116
Total finance lease liabilities
$
246,379
$
492,414
Weighted average remaining lease term
1.1 years
1.8 years
Weighted average discount rate
4.75%
4.56%
Maturities of operating and finance lease liabilities as of January 2, 2022 are as follows:
Operating Leases
Finance Leases
$
832,815
$
216,869
658,939
29,578
539,364
4,042
525,470
3,001
525,470
2,001
Thereafter
7,192,642
-
Total lease payments
10,274,700
255,491
Less: Interest
(4,464,304
)
(9,112
)
Total lease liabilities
$
5,810,396
$
246,379
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
NOTE 16 - Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss were as follows:
Minimum
Benefit
Liability
Adjustments
Foreign Currency
Translation
Adjustments
Total
Balance at December 29, 2019
$
5,694
$
(1,303,133
)
$
(1,297,439
)
Other comprehensive (loss) income
(160,356
)
186,474
26,118
Balance at January 3, 2021
(154,662
)
(1,116,659
)
(1,271,321
)
Other comprehensive income (loss)
77,524
(77,686
)
(162
)
Balance at January 2, 2022
$
(77,138
)
$
(1,194,345
)
$
(1,271,483
)
NOTE 17 - 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 $90,000 and $0 for the years ended January 2, 2022 and January 3, 2021, 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. 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 Company will contribute 8% if the employee contributes the minimum required amount of 5%. For all salaried employees hired after June 2015 and all wage employees, the Company will contribute 3% if the employee contributes the minimum required amount of 5%. The Company made contributions of £218,261 ($299,987) and £175,134 ($224,898) to the U.K. plan for the years ended January 2, 2022 and January 3, 2021, respectively.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
NOTE 18 - 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 44.8% and 46.3% of total Company sales during the years ended January 2, 2022 and January 3, 2021, respectively. Accounts receivables from these customers totaled 53.7% and 56.6% of receivables as of January 2, 2022 and January 3, 2021, 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 Item 1 for further discussion.
NOTE 19 - Related Party Transactions
The Company has debt and finance leases to a related party. See Note 10 for further discussion.
Related party receivable of $453 and $907 at January 2, 2022 and January 3, 2021, respectively, were short-term advances to employees that were repaid after January 2, 2022 and January 3, 2021, respectively.
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 2, 2022 and January 3, 2021. There was $19,750 and $14,000 in accrued expenses relating to this fee at January 2, 2022 and January 3, 2021, respectively.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 2, 2022 and January 3, 2021
NOTE 20 - 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 2, 2022 and January 3, 2021:
Years Ended
January 2, 2022
January 3, 2021
Revenue by sector:
Automotive
$
42,197,558
$
35,906,304
Industrial
29,507,437
24,312,051
Total Revenue
$
71,704,995
$
60,218,355
The following table sets forth revenue disaggregated by the geographic locations of the Company’s customers for the years ended January 2, 2022 and January 3, 2021:
Years Ended
January 2, 2022
January 3, 2021
Revenue by customer location:
North America
$
37,225,243
$
30,604,611
Europe
30,350,907
25,733,859
Asia
3,471,872
3,311,849
Other
656,973
568,036
Total Revenue
$
71,704,995
$
60,218,355

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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.

---

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 2, 2022.
Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of January 2, 2022, the Company’s disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting as discussed below.
In light of the conclusion that our internal disclosure controls are ineffective as of January 2, 2022, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regard to this annual report. Accordingly, the Company believes, based on its knowledge, that: (i) this annual report does not contain any untrue statement of a material fact or omit a material fact; and (ii) the financial statements, and other financial information included in this annual report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this annual report.
Management’s 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 GAAP. 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 GAAP, 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of January 2, 2022. 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, as of January 2, 2022, the Company’s internal control over financial reporting was not effective as a result of the material weakness described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that material misstatements of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
We have identified the following material weakness:
Ineffective monitoring controls due to the lack of resources to provide sufficient analysis of certain accounts.
Management is committed to maintaining a strong internal control environment. In response to the identified material weakness, management, with the oversight of the Audit Committee, has taken actions toward the remediation of the respective material weakness in internal control over financial reporting, which includes adopting sufficient written policies and procedures for accounting and financial reporting.
The Audit Committee and management will continue to monitor the implementation of these remediation measures and the effectiveness of the Company’s internal controls over financial reporting on an ongoing basis.
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 2, 2022, except as disclosed above, 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.

---

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

---

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 “2022 Annual Meeting”) will be included in the section of the Company’s Definitive Proxy Statement in connection with our 2022 Annual Meeting (the “2022 Proxy Statement”) , which will be filed with the SEC within 120 days after our fiscal year end of January 2, 2022, 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 2022 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 2022 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 2022 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 2022 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 2022 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 2022 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 2022 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.