UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC. - Annual Report: 2014 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

000-50081

(Commission File Number)

Invisa, Inc.

(Exact name of registrant as specified in its charter)

Nevada

(State or other jurisdiction of incorporation or organization)

65-1005398

(I.R.S. employer identification number)

1800 2nd Street Suite 965

Sarasota, Florida 34236

(Address of principal executive offices)

(941) 870-3950

(Registrant’s telephone number)

Securities registered under Section 12(b) of the Act:   None.

Securities registered under Section 12(g) of the Act:   Common Stock, $0.001 par value per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ¨  No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   ¨

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes þ   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes þ  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):   Yes ¨  No þ

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

As of June 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $7,805,786.

As of March 30, 2015, the registrant had 14,524,498 shares of Invisa Common Stock, $0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE 

Portions of the Invisa, Inc. definitive 2015 Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2014, are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

PART I

Note regarding forward-looking statements:

Except for statements of historical fact, certain information contained herein constitutes forward-looking statements including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” and words of similar import, as well as all references to future results. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of Invisa, Inc. to be materially different from any future results or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: risks involved in implementing our business strategy, our ability to obtain financing on acceptable terms, competition, our ability to manage growth, risks of technological change, our dependence on key personnel, our ability to protect our intellectual property rights, risks of new technology and new products, and government regulation. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update any such forward-looking statements to reflect events, developments or circumstances after the date hereof.

On November 10, 2014 Invisa, Inc. (“Invisa” or 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 (Group) Limited (“Wardle Storeys”), a European manufacturer of textured coatings and polymer films. Management of the acquired entities was not altered in the acquisitions. 

Invisa made the acquisition of Uniroyal through its 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, Invisa also purchased EPAL for aggregate consideration of 100 shares of Invisa’s Common Stock and Invisa’s guaranty of outstanding EPAL preferred stock retained by the seller having a face value of £12,601,198 (approximately $20 million at closing). Details of the acquisitions are set forth in the Current Report on Form 8-K filed by the Company on November 10, 2014, which is incorporated herein by reference.

As a result of the acquisitions, we are a manufacturer and seller of vinyl coated fabrics products that have various high performance characteristics and capabilities and derive our revenue principally through our subsidiaries Uniroyal and Wardle Storeys.  Our coated fabrics products are durable, stain resistant, easily processed, cost-effective and better performing than traditional leather or fabric coverings.  Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment.   In the automotive industry our products are used primarily in seating, door panels, head and arm rests, security shades and trim components, including instrument panels, door casings, seating, gear lever and steering column gaiters, headliners and load space covers.  Non-automotive applications include outdoor seating for utility and sports vehicles, and sheeting used in medical, nuclear protection, personal protection, moisture barriers, pram and nursery, movie screen and decorative surface applications. Our primary brands names include Naugahyde^®, BeautyGard^®, Flameblocker™, 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 a 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.

We continue to maintain our legacy Smartgate technology business. Our sensors are based on presence sensing technology that we call InvisaShield.

Our Principal Products and Their Markets

Our 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 600 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes, adhesive back coatings and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts character prints and non-registered prints, lamination and panel cutting. 

Our vinyl coated fabrics products have various high performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment. Materials that we manufacture come in a wide range of colors and textures and 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 foam laminated with either flame or hot melt adhesive for seating, fascia and door applications. 

The automotive sector represented approximately 63% of our total sales in 2014. Our products are used primarily in the following automotive applications: 

The non-automotive transportation sector represented 13% of our 2014 sales and primarily consisted of seating products for original equipment manufacturers of non-automotive and light truck vehicles in the following five categories: 

The distribution market sector represented approximately 11% of our 2014 sales and consists primarily of sales of the standard Naugahyde and Ambla product lines to local furniture shops, smaller furniture manufacturers and companies serving the hospitality and automotive and marine aftermarkets for refurbishing and replacement. The sales organization employed to service this market is a network of approximately 40 distributor locations. 

The contract sector, which represented approximately 13% of our 2014 sales, includes contract furniture/upholstery, marine, healthcare, child care, and industrial equipment. 

Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for durability and weatherability is used. We also manufacture a line of products called BeautyGard, with water-based topcoats that contain agents to protect against bacterial and fungal micro-organisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally friendlier than solvent-based topcoats. The line is widely used in hospitals and other healthcare facilities. Flame and smoke retardant vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and residential care centers and seats for school busses and aircraft.

We produce vinyl coated fabrics and laminated composites through a continuous cast 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 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 specification, 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 17% 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. Our UK 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 legacy Smartgate safety sensors are used in or with parking gates to protect life and property. Our sensors are based on presence-sensing technology that we call InvisaShield. Although we believe that our InvisaShield technology may have additional applications for safety products, substantially all of our revenue from this business has been derived from the sale of SmartGate sensors used in parking gates.

Our Distribution Methods

Products are developed and marketed based upon the performance characteristics required by end-users. We currently serve customers world-wide with 18 full-time sales persons in offices in Sarasota, Florida, Nappanee, Indiana and Earby, Lancashire and three exclusive agents in Italy, Germany and Turkey and an extensive distributor network in the U.S., the United Kingdom, Scandinavia, France, Germany and Hong Kong. 11% of our worldwide sales in 2014 were made through distributors. The industrial business is supported mainly from stock and via a catalogue.

We maintain websites for our principal U.S. non-automotive products at www.naugahyde.com and for our global products at www.wardlestoreys.com and www.ambla.com.

Our top 25 customers account for approximately 70% our sales. No single customer accounted for more than 18% of our total sales in 2014.

We sell our safety sensor products directly to manufacturers, dealers and end users. We have attended trade shows and have continued our relationships with our customer list, which comprises manufacturers, dealers and end users. We also receive unsolicited orders by telephone, fax or the internet. In addition, we have sought relationships with architectural engineering firms and municipalities that are implementing projects requiring parking barrier gates, such as municipal parking lots and airport reconstruction. Although we have not maintained a full-time sales force for this business, we have engaged outside consultants.

Competition

We compete primarily on the basis of style, color, product breadth and quality, as well as price and customer service.

The global vinyl coated fabrics market is highly fragmented. The uses of vinyl coated fabrics include automotive, furniture, industrial, protective clothing, wall coverings, book coverings, non-automotive transportation and awnings and tents.

The following table sets forth product applications in the markets in which we actively compete domestically and our primary competitors in those markets.

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 

The only customer that accounts for ten percent or more of our consolidated revenues is Lear Corporation. 70% of our global sales in 2014 were contributed by our top 25 customers. Our largest customer contributed 18% to our total sales in 2014. 

Trademarks and Material Contracts

We own the following proprietary brands and trademarks, among others: 

Employees

 We believe that we maintain a stable, experienced and productive workforce, currently employing a total of 410 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 facility are represented by UNITE. The collective bargaining agreement with UNITE does not specify a termination date. 

Our executive and corporate employees work in our executive office in Sarasota, Florida, and our domestic automotive sales support employees work in our sales office in Nappanee, Indiana. 

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. 

Our safety sensor product is subject to regulation of radio frequency (RF) by the Federal Communications Commission. Our safety sensor product does have FCC Certification. On March 1, 2001, Underwriters Laboratory (UL) implemented a new safety standard for the powered gate, door and window industry. This rule, while not a governmental regulation, is considered an indication of reasonable safety for powered gates, doors and windows. Manufacturers of gates and operators that rely upon UL certification or consider UL certification to be significant could require that our product be certified by UL. Our safety sensor product is not UL certified. The absence of UL certification could present a barrier to sales to potential customers. 

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 for customers and then deliver them in sample form or by computer-aided design (CAD).  We have access to a vast range of grain, 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 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. Hi-Loft and anti-squeak finish (ASF) are examples of product developments providing customers with cost reduction and material performance enhancements. 

We spent $1,527,589 for research and development in 2014 and $1,394,267 in 2013. 

Compliance with Environmental Laws 

We believe that we are in compliance with all applicable environmental laws and regulations. We have not needed to make any material expenditure to maintain such compliance during the past two fiscal years, nor do we anticipate having to make any material expenditure to maintain such compliance in the foreseeable future. 

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 facility 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 

Not applicable.

None.

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. The plant achieved ISO 9001:2008 certification and renews this certification on an annual basis. Major equipment at the production facility includes two cast coating lines, five rotogravure printers, four paper reconditioning machines one buffer, four standard embossers, one GAP embosser, two micro-perforators, nine inspection stations 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. This facility consists of approximately 250,000 square feet. The term of the lease extends to March 2, 2029. Major equipment at the production facility includes three coating lines, six inspection tables, four printers, one calender, three laminators, one embosser, and one perforating process. 

Our executive and sales offices occupy approximately 9,010 square feet of premises in Sarasota, Florida under a lease that extends to May 31, 2018. 

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.

Not applicable.

PART II

Market Information

Our Common Stock trades on the NASD OTC BB under the symbol INSA.OB. The following table sets forth the range of high and low bids to purchase our Common Stock during the last two fiscal years. Such prices represent quotations between dealers, without dealer markup, markdown, or commissions, as reported on NASDAQ.com and may not represent actual transactions.

As of March 30, 2015, there were 400 stockholders of record of Invisa Common Stock.

On March 24, 2015, the high and low prices for shares of our Common Stock in the over-the-counter market, as reported by NASD.OTC.BB were $2.99 and $2.94 per share.

We believe that there are presently approximately eight (8) market makers for our Common Stock. When stock is traded in the public market, characteristics of depth, liquidity and orderliness of the market may depend upon the existence of market makers as well as the presence of willing buyers and sellers. We do not know if these or other market makers will continue to make a market in our Common Stock. Further, the trading volume in our Common Stock has historically been both sporadic and light.

Currently, the payment by the Company of dividends on its Common Stock rests within the sole discretion of its Board of Directors. The payment of dividends will depend upon our earnings, our capital requirements and our financial condition, as well as other relevant factors. The Company has not been required to or declared any cash dividends since its inception, and has no present intention of paying any cash dividends on its Common Stock in the foreseeable future.

Transfer Agent

The Transfer Agent for the Common Stock of the Company is Continental Stock Transfer and Trust Company 17 Battery Place, New York, NY 10004.

Recent Sales of Unregistered Securities

During the years ended December 31, 2014 and December 31, 2013 a total of 140,000 shares of common stock were issued to an aggregate of four directors and officers for services rendered in 2013. The Company charged the fair value of these shares to operations in 2013. However, the par value of these shares was recorded at the time of issuance of these shares in the first quarter of 2014.

Not applicable.

The following discussion provides an analysis of the Company’s financial condition and results of its operations and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K. 

Results of Operations

Invisa, Inc.

Consolidated Operating Results

For the Years Ended December 31, 2014 and December 31, 2013

Overview:

On November 10, 2014, the Company acquired all of the ownership interests in Uniroyal Engineered Products, LLC (“Uniroyal”), and all of the ordinary common stock of Engineered Products Acquisition Limited (“EPAL”), the holding company for Wardle Storeys (Group) Limited (“Wardle Storeys”). As further explained in the consolidated financial statements and notes thereto this 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.

Prior to its acquisition by Invisa, EPAL had acquired 100% of the common stock of Wardle Storeys on March 4, 2013 using acquisition accounting. Therefore the combined operating results for 2013 only include the results of Wardle Storeys for the period March 4, 2013 through December 31, 2013 or approximately 10 months partially explaining the increases from year to year.

Wardle Storeys’ functional currency is the British Pound Sterling. The average exchange rate for the Pound Sterling to the U.S. Dollar was approximately 5% higher in 2014 compared to 2013. Although it affected and increased each line item in 2014, the overall effect on net income was approximately $80,000 for the 2014 year compared to 2013.

Revenue:

Total revenue in 2014 increased $3,556,575 or 3.8% to $98,323,226 from $94,766,651 in 2013. The 2013 results only included 10 months for Wardle Storeys whereas 2014 included a full 12 months. Assuming the Wardle Storeys transaction had occurred on January 1, 2013, total consolidated revenues would have shown a decrease of $5.4 million. The decrease was primarily due to the end of a one-year 2013 special automotive program that totaled approximately $6 million and the roll off of some legacy automotive platforms. The decrease in revenue was partially offset by new automotive platform launches and favorable impact of the change in the average Sterling exchange rate for 2014 compared to 2013.

Gross Profit:

Total gross profit in 2014 was $19,318,986 or 19.6% of sales compared with $17,206,607 or 18.2% of sales in 2013. Assuming the Wardle Storeys transaction had occurred on January 1, 2013, the consolidated gross profit would have been $18,375,994 or 17.7% of sales, an increase of approximately $943,000 despite lower revenue. The gross profit percentage increased in 2014 primarily due to the rolling off of lower margin automotive platforms which were replaced with higher margin platforms and the positive results of cost efficiency programs implemented in 2013 and 2014.

Operating Expenses:

Selling expenses in 2014 increased $985,318 or 26.6% to $4,691,974 from $3,706,656 in 2013. Assuming the Wardle Storeys transaction had occurred on January 1, 2013, selling expenses would have only increased $456,326. The increase resulted primarily due to increases in administrative, marketing and support staff expenses and partially to the change in the exchange rate.

General and administrative expenses in 2014 increased by $2,013,343 to $8,437,348 from $6,424,005 in 2013. Assuming the Wardle Storeys transaction had occurred on January 1, 2013, general and administrative expenses would have only increased by $1,632,062. Expenses increased in 2014 due to costs associated with the acquisition in the amount of $414,000 and increasing labor costs and administrative expenses necessary to prepare the Company to become a multinational SEC reporting company. Included in general and administrative expense is approximately $492,000 and $123,826 for 2014 and 2013, respectively, of statutory severance payments as a result of labor reduction programs at our U.K. facility. The severance program was fully expensed in 2014.

Research and development expenses in 2014 increased by $133,322 to $1,527,589 from $1,394,267 in 2013. Assuming the Wardle Storeys transaction had occurred on January 1, 2013, research and development expenses would have only increased by $51,652, primarily due to increased development for new automotive platforms in 2014 and to the change in the exchange rate.

Interest expense:

Interest expense in 2014 increased by $270,009 to $1,552,541 from $1,282,532 in 2013. Assuming the Wardle Storeys transaction had occurred on January 1, 2013, interest expense would have increased by $228,110, primarily due to the capital lease transaction on the Company’s US manufacturing facility that was signed in November 2013.

Gain on bargain purchase:

The gain on bargain purchase was associated with the acquisition of Wardle Storeys by EPAL on March 4, 2013. The purchase price was £2,910,000 or approximately $4,381,000. The assets acquired and the liabilities assumed were adjusted to their fair values. Because the fair value of the net assets was greater than the purchase price, the Company recorded the difference of $4,646,046 as a gain on bargain purchase.

Tax (benefit) provision:

The income tax provision in 2013 is related to EPAL and calculated in accordance with the U.K. tax regulations. Prior to its acquisition by the Company, Uniroyal, for tax purposes, was a pass-through LLC with the members being responsible to pay any federal and state income taxes. Invisa, Inc., as a separate company, had a net operating loss and therefore did not incur a tax liability.

The benefit for 2014 in the amount of $1,340,682 is primarily related to a reduction in the Company’s U.S. deferred tax asset valuation allowance. The Company had a deferred tax asset resulting from accumulated net operating losses but they had been fully reserved as of December 31, 2013 because the Company concluded that it was more likely than not that some portion or all of the deferred tax assets would not be realized. At December 31, 2014, the Company concluded after an analysis that it was now more likely than not that some of the asset would be realized and accordingly reduced the valuation allowance by $1,253,000, creating a tax benefit which is recognized in the operating results.

During 2014, the Company filed in the U.K. a special return to claim tax deductions related to research and development expenses incurred during the tax periods 2012 and 2013. This resulted in an addition to the deferred tax asset in the amount of $414,600 and, net of our regular provision on the U.K. operating results of $326,917, created a net benefit for the period of $87,682.

Preferred stock dividend:

The terms of the acquisitions in November 2014 resulted in the issuance of preferred ownership units/stock of UEP Holdings, LLC and EPAL to the sellers. These preferred units carried quarterly dividend requirements on a total value of $55,000,000 at rates ranging from 5% to 5.5%. The dividend reflected in the financial statements for the 2014 is the dividend payable for the period November 10, 2014 through December 31, 2014 which was paid in January 2015.

Liquidity and Sources of Capital

The Company maintains zero based cash accounts at its corporate offices in the U.S and minimal cash balances in the U.K. accounts for outstanding checks. Cash as it is needed is provided by using the Company’s lines of credit. These lines provide for a total borrowing commitment in excess of $40,000,000 subject to the underlying borrowing base specified in the agreements. At December 31, 2014, $16,396,306 is outstanding under these lines with additional availability of $2,977,011. The balances due under the lines of credit are recorded as current liabilities on the balance sheet.

Given our capital resources in the U.S. and the potential for increased investment and acquisitions in foreign jurisdictions, we do not have a history of repatriating a significant portion of our foreign cash. Accordingly, we have not recognized a deferred tax liability for these unremitted earnings. In the event that circumstances should change in the future and we decide to repatriate these foreign amounts to fund U.S. operations, the Company would record a tax expense and pay the applicable U.S. taxes on these repatriated foreign amounts.

The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 1.15 at December 31, 2014 compared to 1.16 at December 31, 2013. 

Cash balances increased $293,205, after the effects of currency translation of $28,542, to $604,234 at December 31, 2014 from $311,029 at December 31, 2013. This was a result of cash flows generated from operations during the year and the net increase in outstanding debt, offset by equipment purchases and distributions to members of Uniroyal. Of the above noted amounts $480,803 and $290,455 were held outside the U.S. by our foreign subsidiaries as of December 31, 2014 and 2013, respectively.

Cash provided by operations was $4,195,458 for the year ended December 31, 2014 compared to $6,485,445 for the year ended December 31, 2013. Cash provided by operations during 2014 was primarily due to operating income and increased accounts payable due to the timing of vendor payments offset by increases in accounts receivable and inventories. Cash provided by operations during 2013 was primarily due to operating income and decreased accounts receivables and inventories and offset by decreases in accounts payable and accrued expenses.

Cash used in investing activities was $3,273,143 for the year ended December 31, 2014 compared to $2,421,559 for the year ended December 31, 2013. During 2014, cash used for investing activities was principally for purchases of machinery and equipment at our manufacturing locations. Of the $3,255,643 total capital expenditures for 2014, $2,504,998 was for the U.K. manufacturing facility and of this amount $1,603,236 was for the construction of a new production line. The total cost of the line will be approximately $2.3 million. We have arranged a financing lease for approximately $1.8 million which was funded in March 2015. The proceeds from this lease will primarily be used to reduce the Company’s U.K. line of credit. During 2013, the Company used $681,340 of net cash to acquire Wardle Storeys.

Cash used in financing activities was $600,568 for the year ended December 31, 2014 compared to $3,873,691 for the year ended December 31, 2013. During both 2014 and 2013, cash used in financing activities included distributions to the former members of Uniroyal of $1,800,604 and $1,927,836, respectively, for taxes payable by the members as required by the member agreement. Included in 2014 was an increase in long-term debt of $725,798 which primarily was from the term loan on equipment previously owned by the Company not previously financed. Included in 2013 was a net increase in related party debt obligations of $919,162 primarily used to acquireWardle Storeys and an increase in Company owned life insurance of $423,986.

We have revolving lines of credit commitment totaling in excess of $40,000,000 subject to the underlying borrowing base. The lines bears interest at LIBOR plus a range of 2.15% to 3.15%, depending on the underlying borrowing base, or, at our option, at the bank's prime or base lending rate. At December 31, 2014 the outstanding borrowings were $16,396,306 with additional availability of $2,977,011. We plan to use this availability to help finance our cash needs in fiscal 2015 and future periods.

Our credit agreements contains customary affirmative and negative covenants. We were in compliance with our debt covenants as of December 31, 2014.

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 material off balance sheet arrangements.  

Contractual Obligations

______________ 

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. Our critical accounting policies are described below.

Revenue Recognition

Revenue is generally recognized when goods are shipped, title and risk of ownership have passed, the price to the buyer is fixed or determinable and collectability is reasonably assured. Based on historical results and analysis, we estimate and calculate provisions for customer rebates and sales returns and allowances and record as an offset to revenue in the same period the related revenue is recognized.

Accounts Receivable

On an ongoing basis, we evaluate the 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. We assess the recoverability of inventory and record a provision for obsolescence based upon specifically identified, discontinued, or obsolete items and 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.

Goodwill, Intangible Assets, and Other Long-Lived Assets

Long-lived assets consist of goodwill, identifiable intangible assets, trademarks, and property and equipment. We have deemed that our trademarks have indefinite useful lives and are not amortized unless we determine their useful lives are no longer indefinite. Other intangible assets and property and equipment, excluding goodwill, are amortized using the straight-line method over their estimated useful life. We review long-lived assets, including property, equipment, and intangible assets, for impairment 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.

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 are allocated to its members. Prior to November 10, 2014, as the previous owners, the sellers were the sole members and reported the allocations on their personal tax returns. As a result, in the Consolidated Statements of Comprehensive Income for the years ended December 31, 2014 and December 31, 2013, there is no tax provision on its income prior to November 10, 2014. After this date, Uniroyal’s income is allocated entirely to UEPH as its sole member. We then receive this income allocation as a member of UEPH less the dividends paid on the preferred units held by the former members of Uniroyal. 

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 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. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax asset to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. We have a federal net operating loss carryforward of approximately $18 million as of December 31, 2014, which expires in years beginning 2018 through 2033. We have deferred tax assets as a result of these loss carryforwards which have been reduced by a valuation allowance to $1,253,000 at December 31, 2014. 

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 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 Income (Loss), and are excluded from net income until realized through a sale or liquidation of the investment. 

Fair Value of Financial Instruments

Our short-term financial instruments consist primarily of the following: cash and cash equivalents, accounts receivable and accounts payable. We adjust the carrying value of financial assets denominated in other currencies such as cash, accounts receivable, accounts payable and the 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. 

The fair value of the our interest rate swaps are based on the estimated amounts that we would receive, or pay, to sell or transfer the swaps to a third party, taking into account current and future interest rates and our nonperformance risk and the counterparty. Our interest rate swaps are recorded at their estimated fair values in the accompanying balance sheets.

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. 

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board issued a new standard ASU No. 2014-09, "Revenue from Contracts with Customers." Under ASU 2014-09 recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for the Company January 1, 2017. The Company is in the process of determining what impact, if any, the adoption of this ASU will have on its financial position, results of operations and cash flows. 

On February 18, 2015, the Financial Accounting Standards Board issued a new standard ASU No. 2015-02, " Consolidation (Topic 810): Amendments to the Consolidation Analysis." The new standard affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. It will be effective for the Company January 1, 2016. The Company is in the process of determining what impact, if any, the adoption of this ASU will have on its financial position, results of operations and cash flows.

Not applicable.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Invisa, Inc.

Sarasota, Florida

We have audited the accompanying consolidated balance sheet of Invisa, Inc. and subsidiaries (the "Company") as of December 31, 2014 and the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Frazier & Deeter, LLC

Frazier & Deeter, LLC

Tampa, Florida

March 30, 2015

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Invisa, Inc.

We have audited the consolidated balance sheet of Invisa, Inc. and subsidiaries (the “Company”) as of December 31, 2013, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the financial statements of Engineered Products Acquisition Limited (“EPAL”), a wholly-owned subsidiary, which statements reflect total assets and revenues constituting 45 percent and 43 percent, respectively, of the related consolidated totals. Those statements were audited by KPMG LLP whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EPAL, is based solely on the report of the other auditors.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of KPMG LLP, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Kingery & Crouse, P.A.

Kingery & Crouse, P.A.

Certified Public Accountants

Tampa, Florida

March 30, 2015

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Engineered Products Acquisition Limited

We have audited the consolidated balance sheet of Engineered Products Acquisition Limited and subsidiaries as of December 31, 2013 and the related consolidated profit and loss account, cash flow statement and reconciliation of movements in shareholders’ funds for the year ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Engineered Products Acquisition Limited and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the year ended December 31, 2013, in conformity with generally accepted accounting principles in the United Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain significant respects from U.S. generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in note 25 to the consolidated financial statements. 

/s/ KPMG LLP

KPMG LLP 

Manchester, United Kingdom
March 30, 2015

INVISA, INC.

Consolidated Balance Sheets

As of December 31, 2014 and December 31, 2013

(Continued)

See accompanying notes to the consolidated financial statements.

INVISA, INC.

Consolidated Balance Sheets

As of December 31, 2014 and December 31, 2013

(Continued) 

See accompanying notes to the consolidated financial statements.

 INVISA, INC.

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2014 and December 31, 2013

(Continued)

See accompanying notes to the consolidated financial statements.

INVISA, INC.

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2014 and December 31, 2013

(Continued)

See accompanying notes to the consolidated financial statements.

INVISA, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2014 and December 31, 2013

See accompanying notes to the consolidated financial statements.

 INVISA, INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2014 and December 31, 2013

(Continued)

See accompanying notes to the consolidated financial statements

INVISA, INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2014 and December 31, 2013

(Continued)

For noncash transactions and supplemental disclosure of cash flow information see Note 2.

See accompanying notes to the consolidated financial statements

INVISA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2014 and December 31, 2013

NOTE 1 – Summary of Significant Accounting Policies

Description of the Business

INVISA, INC. (the “Company”) is primarily engaged in the development, manufacturing and distribution of vinyl coated fabrics primarily for use in transportation, residential, hospitality, health care, office furniture and automotive applications. The Company's customers are primarily located 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 (Group) Limited (“Wardle Storeys”), a European manufacturer of textured coatings and polymer films.

Invisa 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 an aggregate face value of $35 million. See Note 15 for a description of the preferred units issued. In a separate transaction, Invisa purchased EPAL for 100 shares of Invisa’s Common Stock and Invisa’s guaranty of outstanding EPAL preferred stock retained by the seller having a liquidation preference of £12,518,240 (approximately $20 million at closing).

The principal owner of Uniroyal and EPAL also owned all of Invisa’s outstanding shares of Series A preferred stock and Series B preferred stock; a substantial portion of Invisa’s outstanding Series C preferred stock; and approximately 6.8 million shares of Invisa common stock. As a result of this beneficial ownership, the seller controls in excess of 80% of Invisa voting rights in all matters to come before the Invisa shareholders. As a result of this common ownership and as required by current accounting pronouncements, 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.

On March 4, 2013, EPAL acquired 100% of the common stock of Wardle Storeys. The purchase price was £2,910,000 or approximately $4,381,000. Included in the statement of comprehensive income for the year ended December 31, 2013 is the operating results of Wardle Storeys for the period March 4, 2013 to December 31, 2013 or approximately ten months of Wardle Storeys’ operating results. Whereas, in the results for the year ended December 31, 2014 there is a full year of their operating results. The assets acquired and the liabilities assumed were adjusted to their fair value at the date of the acquisition. Since the fair value of the net assets was greater than the purchase price, the Company recorded the difference of $4,646,046 as a gain which is shown as gain on bargain purchase in the statement of comprehensive income.

The Company and its subsidiaries other than Uniroyal have a year-end of December 31. Uniroyal prior to the acquisition and since its inception has been on a 52/53 week year depending on the nearest Sunday to December 31. The years ended December 28, 2014 and December 29, 2013 were 52 week years and are included in the consolidated statements of the Company as of and for the years ended December 31, 2014 and 2013. 

INVISA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2014 and December 31, 2013

NOTE 1 – Summary of Significant Accounting Policies (Continued)

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries and are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). All intercompany balances 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. The accounts of EPAL were translated into USD at the average rate for the reporting period for the consolidated statements of comprehensive income and at the rate at the end of the reporting period for the consolidated balance sheets.

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.

Accounts Receivable

Accounts receivable are recorded net of an allowance for doubtful accounts, returns and discounts of $278,000 and $249,813 as of December 31, 2014 and December 31, 2013.

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 and accounts receivable. Accounts receivable are recorded net of an allowance for customer rebates of $167,778 and $150,226 as of December 31, 2014 and December 31, 2013.

Inventories

Inventories are valued at the lower of cost, using the first-in, first-out (FIFO) method, or market. The Company and its subsidiaries have policies which are consistently applied to maintain reserves for obsolescence based on specific identification or a percentage of the amount on hand exceeding a certain aging. 

INVISA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2014 and December 31, 2013

NOTE 1 – Summary of Significant Accounting Policies (Continued)

Property and Equipment

Property and equipment are stated at cost. Major expenditures for property and equipment are capitalized. Maintenance, repairs, and minor renewals are expensed as incurred. When assets are retired or otherwise 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.

Cash Surrender Value of Insurance Policies

Cash surrender value of insurance policies are valued at the cash surrender value of the contract as determined by the life insurance company. The gross cash value of the insurance policies totaled $36,687 and $219,341 as of December 31, 2014 and December 31, 2013. The cash value of the insurance policies are recorded net of loans of $23,689 as of December 31, 2013 and are included in other long-term assets on the accompanying 2013 balance sheet. During 2014 and 2013, certain policies were sold or distributed as compensation to related parties (see Notes 2 and 11).

Impairment of Finite-Lived Long-Lived Assets

The Company reviews long-lived assets, including property, equipment, and intangible assets, for impairment 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. To date, there have been no such losses.

Goodwill and In-Definite-Lived Intangible 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 goodwill or trademarks are not recoverable and is in excess of its fair value, an impairment loss is recognized. Impairment is reviewed annually. No impairment loss adjustment was deemed necessary as of December 31, 2014 or December 31, 2013.

INVISA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2014 and December 31, 2013

NOTE 1 – Summary of Significant Accounting Policies (Continued)

Income Taxes

The Company follows ASC 740 Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities 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. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax asset to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

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 subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits are allocated to its members. Prior to November 10, 2014, as the previous owners, the sellers were the sole members and reported the allocations on their personal tax returns. As a result, in the accompanying Consolidated Statements of Comprehensive Income, there is no tax provision on its income prior to November 10, 2014. After this date, Uniroyal’s income is allocated entirely to UEPH as its sole member. Invisa then receives this income allocation as a member of UEPH less the dividends paid on the preferred units held by the former members of Uniroyal.

The Company's tax returns for tax years 2011 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. For the years ended December 31, 2014 and December 31, 2013, the Company has recorded no expense for interest or penalties.

Derivatives

The Company recognizes all of its derivative instruments, which consist of interest rate swaps, as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, whether the hedge is a cash flow hedge or a fair value hedge.

The Company uses interest rate swaps to manage interest rate risk on its variable interest rate long-term debt instruments. The gain or loss on the effective portion of interest rate swaps treated as cash flow hedges is initially included as a component of other comprehensive income and is subsequently reclassified into earnings when interest on the related debt is paid. The gain or loss on the portion of interest rate swaps that are not effective is treated as financial instruments and are included as a component of interest expense on the accompanying statements of operations. The Company did not have any interest rate swaps outstanding as of December 31, 2014.

INVISA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2014 and December 31, 2013

NOTE 1 – Summary of Significant Accounting Policies (Continued)

Derivatives (Continued) 

The Company incurs foreign currency risk on sales and purchases denominated in other currencies primarily the British Pound Sterling and the Euro. Foreign currency exchange contracts are used by the Company principally to limit the exchange rate fluctuations of the Euro. The Euro risk is partially limited due to natural cash flows offsets. Currency exchange contracts are purchased for approximately 25% of the net risk. These contracts are not designated as cash flow hedges for accounting purposes. Changes in the fair value of these contracts are reported in net earnings as part of other income and expense.

Fair Value of Financial Instruments

The Company’s short-term financial instruments consist of the following: cash and cash equivalents, receivables and accounts payable. The Company adjusts the carrying value of financial assets denominated in other currencies such as cash, receivables, accounts payable and the lines of credit using the appropriate exchange rates at the balance sheet date. The Company believes that the carrying values of these short-term financial instruments approximate their estimated fair values. 

The fair value of the Company’s long-term debt is estimated based on current rates for similar instruments with the same remaining maturities. In determining the current interest rates for similar instruments the Company takes into account its risk of nonperformance. The Company believes that the carrying value of its long-term debt approximates its estimated fair value.

The fair value of the Company’s interest rate swaps are the estimated amounts that the Company would receive, or pay, to sell or transfer the swaps to a third party, taking into account current and future interest rates and the nonperformance risk of the Company and the counterparty. The Company's interest rate swaps are recorded at their estimated fair values in the accompanying balance sheets.

The Company uses foreign currency exchange contracts which are recorded at their estimated fair values in the accompanying Consolidated Balance Sheets. The fair values of the currency exchange contracts are based upon observable market transactions of spot and forward rates.

For the fiscal year ended December 31, 2014, there have been no changes in the application of valuation methods applied to similar assets and liabilities.

The Company follows accounting principles generally accepted in the United States of America for measuring, reporting, and disclosing fair value. These standards apply to all assets and liabilities that are measured, reported, and/or disclosed on a fair value basis.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Assets and liabilities measured, reported and/or disclosed at fair value will be classified and disclosed in one of the following three categories:

INVISA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2014 and December 31, 2013

NOTE 1 – Summary of Significant Accounting Policies (Continued)

Fair Value of Financial Instruments (Continued) 

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 used 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 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 Income (Loss), and are excluded from net income until realized through a sale or liquidation of the investment.  

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Revenue is generally recognized when goods are shipped, title and risk of ownership have passed, the price to the buyer is fixed or determinable and collectability is reasonably assured. Based on historical results and analysis, we estimate and calculate provisions for customer rebates and sales returns and allowances and record as an offset to revenue in the same period the related revenue is recognized.

INVISA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2014 and December 31, 2013

NOTE 1 – Summary of Significant Accounting Policies (Continued)

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 are included in cost of goods sold.

Warranties

The Company warrants that the materials and workmanship of its products will meet customer specifications. The Company estimates its accrued warranty expenses based upon prior warranty claims experience. Accrued warranty expenses were not material as of December 31, 2014 and December 31, 2013.

Advertising

Advertising costs, other than promotional materials, are charged to expense as incurred. Advertising expense was $249,144 and $171,852 for the years ended December 31, 2014 and December 31, 2013, respectively. Promotional materials are expensed as they are distributed. As of December 31, 2014 and December 31, 2013, $210,269 and $206,162 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 $1,527,589 and $1,394,267 for the years ended December 31, 2014 and December 31, 2013, respectively. 

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 such as options, warrants or convertible securities) that were outstanding during the period, unless the effect is antidilutive. At December 31, 2014 and 2013, the Company’s 28,541 shares of convertible preferred stock Series A, Series B and Series C can be converted into 4,756,833 common shares. This amount was added to the weighted average common shares to calculate the diluted earnings per share.

Future Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued a new standard ASU No. 2014-09, "Revenue from Contracts with Customers." Under ASU 2014-09 recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for the Company January 1, 2017. The Company is in the process of determining what impact, if any, the adoption of this ASU will have on its financial position, results of operations and cash flows.

INVISA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2014 and December 31, 2013

NOTE 1 – Summary of Significant Accounting Policies (Continued)

Future Accounting Pronouncements (Continued)

On February 18, 2015, the Financial Accounting Standards Board issued a new standard ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." The new standard affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. It will be effective for the Company on January 1, 2016. The Company is in the process of determining what impact, if any, the adoption of this ASU will have on its financial position, results of operations and cash flows. 

Subsequent Events

The Company has evaluated subsequent events occurring through the date that the financial statements were issued, for events requiring recording or disclosure in the December 31, 2014 financial statements. There were no material events or transactions occurring during this period requiring recognition or disclosure.

NOTE 2 – Noncash Transactions and Supplemental Disclosure of Cash Flow Information

During 2014 and 2013, the Company had reduced borrowings on its line of credit by converting dollars to additional borrowings on its term loans with Wells Fargo Capital Finance, LLC of $573,972 and $200,000, respectively. During 2014 and 2013, the Company paid down its term loans using available borrowings on its various lines of credit of $556,348 and $382,428, respectively.

The Company entered into several new equipment leases during the year with a fair value of $380,000 which are accounted for as capital leases. The fair value was added to property and equipment and a corresponding amount to capital lease obligations.

During 2013, the Company sold real estate and certain insurance policies for $2,117,098 to a related party owned by the Company's majority owners. The proceeds were used to reduce the Company's term debt and line of credit obligations by same amount. Additionally, as part of the transaction with the related party, the Company leased real estate and entered into a lease financing obligation with the related party for $2,024,865. (see Note 11). 

INVISA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2014 and December 31, 2013

NOTE 3 – Inventories

Inventories consist of the following: