UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC. - Annual Report: 2017 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☑	Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

For the fiscal year ended:   December 31, 2017

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

For the transition period from:

 

000-50081

(Commission File Number)

 

Uniroyal Global Engineered Products, 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 970

Sarasota, Florida 34236

(Address of principal executive offices)

 

(941) 906-8580

(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 ☑

 

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 ☑   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 ☑  No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in 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 ☑

 

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

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☑
(Do not check if smaller reporting company)		Emerging growth company ☐

As of July 2, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $20,670,981. 

As of March 12, 2018, the registrant had 17,070,928 shares of ordinary common stock, $0.001 par value and 1,619,102 shares of Class B Common Stock, $0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Uniroyal Global Engineered Products, Inc. definitive 2018 Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2017, are incorporated by reference into Part III of this Form 10-K.

   

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TABLE OF CONTENTS

 

		Page
Part I
Item 1	Business	4
Item 1A	Risk Factors	9
Item 1B	Unresolved Staff Comments	9
Item 2	Properties	10
Item 3	Legal Proceedings	10
Item 4	Mine Safety Disclosures	10
Part II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
Item 6	Selected Financial Data	12
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	18
Item 8	Financial Statements	19
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	50
Item 9A	Controls and Procedures	50
Item 9B	Other Information	51
Part III
Item 10	Directors, Executive Officers and Corporate Governance	51
Item 11	Executive Compensation	52
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	52
Item 13	Certain Relationships and Related Transactions, and Director Independence	52
Item 14	Principal Accounting Fees and Services	52
Part IV
Item 15	Exhibits, Financial Statements Schedules	53
Signature Page		54
Index to Exhibits		56

 

 

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 Uniroyal Global Engineered Products, 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, pricing and availability of equipment, materials and inventories, performance issues with suppliers, economic growth, the Company’s ability to successfully integrate acquired operations, currency fluctuations, risks of technological change, the effectiveness of cost-reduction plans, 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.

 

ITEM 1.          BUSINESS

 

On November 10, 2014, Uniroyal Global Engineered Products, Inc. (“Uniroyal Global” 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”, now known as Uniroyal Global (Europe) Limited,) (“UGEL”), the holding company for Wardle Storeys (Earby) Limited (“Wardle Storeys,” now known as Uniroyal Global Limited), a European manufacturer of textured coatings and polymer films. Management of the acquired entities was not altered in the acquisitions.

 

Uniroyal Global made the acquisition of Uniroyal through a newly formed subsidiary, UEP Holdings, LLC (“UEPH”), to which it contributed certain of its assets and liabilities as part of the organization of that subsidiary. The aggregate purchase consideration paid for 100% of the outstanding equity of Uniroyal was preferred ownership interests issued by UEPH having an aggregate face value of $35 million. In a separate transaction, Uniroyal Global also purchased UGEL for aggregate consideration of 100 shares of Uniroyal Global’s Common Stock and Uniroyal Global’s guaranty of outstanding UGEP 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 fabrics products that have excellent high performance characteristics and capabilities and derive our revenue principally through our subsidiaries Uniroyal and Uniroyal Global Limited.   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 and toxic hazard protection, personal protection, moisture barriers, pram and nursery equipment, movie screen and decorative surface applications. Our primary brands names include Naugahyde^®, BeautyGard^®, Flame Blocker™, Spirit Millennium^®, Ambla^®, Amblon^®, Velbex^®, Cirroflex^®, Plastolene^® and Vynide^®.

 

We are the successor to a long line of businesses that have manufactured vinyl coated fabrics.  Our best known brand, Naugahyde, is the product of many improvements on an original rubber-coated fabric developed a century ago in Naugatuck, Connecticut.  We design, manufacture and market a wide selection of vinyl coated fabric products under a portfolio of recognized brand names.   We believe that our business has continued to be a leading supplier in its marketplace because of our ability to provide specialized materials with high performance characteristics often customized to the end-user specifications and complemented by comprehensive technical and customer support.

 

 

Our Principal Products and Their Markets

 

Our vinyl coated fabrics 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 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 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. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses.  We are a long-established supplier to the global automotive industry and manufacture products for interior trim components from floor to headliner which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene and foam laminated by either flame or hot melt adhesive for seating, fascia and door applications.

 

The automotive sector represented approximately 64.6% of our total sales in 2017. Our products are used primarily in the following automotive applications:

 

·

seating

·

door panels

·

head and arm rests

·

security shades

·

components

 

The non-automotive transportation sector represented 15.4% of our 2017 sales and primarily consists of seating products for original equipment manufacturers of non-automotive and light truck vehicles in the following five categories:

 

·

personal watercraft, ATV’s, snowmobiles, golf carts

·

light and heavy industrial equipment and agricultural equipment (tractors, bulldozers)

·

recreational vehicles, vans and motor homes

·

heavy and medium trucks

·

mass transit (trains, buses)

 

The distribution market sector represented approximately 9.8% of our 2017 sales and consists primarily of sales of the standard Naugahyde and Ambla product lines to local furniture shops, smaller furniture manufacturers and companies serving the hospitality and marine markets for refurbishing and replacement. The sales organization employed to service this market is a network of approximately 51 distributor locations.

 

 

The contract sector, which represented approximately 10.2% of our 2017 sales, includes contract furniture/upholstery, marine, healthcare, child care, and industrial equipment.

 

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

 

We 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 13.4% 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 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 17 full-time sales persons in offices in Sarasota, Florida, Nappanee, Indiana and Earby, Lancashire, two exclusive agents in Italy and Turkey, and an extensive distributor network in the U.S., the United Kingdom, Scandinavia, France, Germany and Hong Kong. 10.5% of our worldwide sales in 2017 were made through distributors. The industrial business is supported mainly from stock and via a catalogue.

 

 

 

Competition

 

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

 

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

 

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

 

 

Markets	Key Uses	Primary Competitors
Automotive	Interior components Seating applications Security shades	Canadian General-Tower Limited Benecke-Kaliko AG Hornschuch Group GmbH Vulcaflex S.p.A. Haartz Corporation Griffine SA Morbern, Inc.
Transportation and Contract	ATV/snowmobile/PWC/golf carts Heavy/light equipment RVs/motor homes	Canadian General-Tower Limited Morbern, Inc. Benecke-Kaliko AG Hornschuch Group GmbH Vulcaflex S.p.A. Spradling International Inc.
Distribution	Approximately 51 distributor and reseller locations	OMNOVA Solutions Inc. Spradling International Inc. Hornschuch Group GmbH Morbern, Inc.
Contract	Office/contract/institutional furniture Restaurant booth Health care Marine	OMNOVA Solutions Inc. Morbern, Inc. Hornschuch Group GmbH Alcor Gislaved Folie AB Griffine Enduction
Other	Home furnishings/dinettes	Spradling International Inc.

 

 

Raw Materials

 

The principal raw materials for our coated fabrics are casting paper, knit fabric, PVC plastic resins, pigments and plasticizers.  We have multiple sources for most of these materials.  We believe that in the few instances where we have a sole supplier we can re-engineer around the sole-sourced materials if necessary with minimal effort and cost.

Concentration of Customers

 

The only customers that account for ten percent or more of our consolidated revenues are FXI, Inc. and Lear Corporation. Our top 25 customers account for approximately 63.8% of our total global sales. Our largest customer contributed 11.2% to our total sales in 2017.

 

 

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®

 

Employees

 

We believe that we maintain a stable, experienced and productive workforce, currently employing a total of 408 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.

Fourteen 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.

 

We spent $1,940,671 in 2017 and $1,727,616 in 2016 for research and development.

 

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. However, during 2018 we will be investing approximately $2.2 million at our Earby facility for a regenerative thermal oxidizer (RTO) to enhance the treatment of exhaust air.

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.

 

The Tax Cuts and Jobs Act

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act, which significantly changes existing U.S. tax laws that affect our business. These changes include, but are not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, imposing a one-time transition tax on deemed repatriation of deferred foreign income and changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. See Note 11 in Part II, Item 8 of this Form 10-K for further discussion.

 

Available Information

The address for the Company’s web site is www.uniroyalglobal.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC. In addition, these reports and documents may be accessed on the SEC’s web site at www.sec.gov.

ITEM 1A.          RISK FACTORS

 

Not applicable.

 

ITEM 1B.          UNRESOLVED STAFF COMMENTS

 

None.

 

 

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. 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, 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.  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 various compound department mixers and holding tanks, three coating lines, four gravure printers, one water based printer, one embosser, one calender, three laminators, one airing-off/relaxer, one perforating process, two paneling machines, and four inspection frames.

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

 

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.

 

ITEM 4.          MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

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 NASD OTC BB under the symbol UNIR.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 5, 2018 there were 816 stockholders of record of our Common Stock.

 

Quarter		High Bid				Low Bid
First Quarter 2016		$	4.00			$	3.00
Second Quarter 2016		$	4.49			$	3.45
Third Quarter 2016		$	4.20			$	2.81
Fourth Quarter 2016		$	3.70			$	2.75
First Quarter 2017		$	3.80			$	2.10
Second Quarter 2017		$	3.54			$	3.00
Third Quarter 2017		$	3.25			$	2.25
Fourth Quarter 2017		$	2.45			$	1.14

 

On March 12, 2018, the high and low prices for shares of our Common Stock in the over-the-counter market, as reported by NASD.OTC.BB were both $1.10 per share.

 

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

 

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

 

Transfer Agent

 

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

 

Recent Sales of Unregistered Securities

None. 

 

 

 The following table provides information on repurchases by the Company of its securities during the fourth quarter of fiscal 2017.

 

Fourth Quarter 2017
For the Period		Total number of shares purchased				Average price paid per share				Total number of shares purchased as part of publicly announced plans or programs				Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
October 2, 2017 to October 29, 2017			—			$	—				—				—
October 30, 2017 to November 26, 2017			8,000			$	1.80				—				—
November 27, 2017 to December 31, 2017			—			$	—				—				—
Total			8,000			$	1.80				—				—

ITEM 6.          SELECTED FINANCIAL DATA

 

Not applicable.

 

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 fabrics 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 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 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. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior soft trim components from floor to headliner which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene foam laminated with either flame or hot melt adhesive for seating, fascia and door applications.

 

 

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

We currently conduct our operations in manufacturing facilities that are located in Stoughton, Wisconsin and Earby, England.

Overview

On November 10, 2014, the Company acquired through its 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 Engineered Products Acquisition Limited (“EPAL”, now known as Uniroyal Global (Europe) Limited), the holding company for Wardle Storeys (Earby) Limited (“Wardle Storeys”, now known as Uniroyal Global Limited).

The Company and its subsidiaries have adopted a 52/53-week fiscal year ending on the Sunday nearest to December 31. The years ended December 31, 2017 and January 1, 2017 were both 52-week years.

Our Earby, England operation’s functional currency is the British Pound Sterling and has sales and purchases transactions that are denominated in currencies other than the Pound Sterling, principally the Euro. Approximately 30% of the Company’s global revenues and 34% of its 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 4.9% lower and the average exchange rate for the Euro to the Pound Sterling was approximately 6.7% higher in 2017 compared to 2016. These exchange rate changes had the net effect of decreasing net sales by approximately $552,000 for the year ended December 31, 2017. The overall effect on the Company’s net loss was a positive amount of approximately $535,000 for the year ended December 31, 2017 compared to the year ended January 1, 2017 as the negative effect of the Pound Sterling was offset by the positive effect of the Euro.

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act, which significantly changes existing U.S. tax laws that affect our business. These changes include, but are not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, imposing a one-time transition tax on deemed repatriation of deferred foreign income and changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. See Note 11 in Part II, Item 8 of this Form 10-K for further discussion.

 

 

Year Ended December 31, 2017 Compared to the Year Ended January 1, 2017

 

The following table sets forth, for the year ended December 31, 2017 (“year ended 2017”) and January 1, 2017 (“year ended 2016”), certain operations data including their respective percentage of net sales:

 

		Year
		December 31, 2017								January 1, 2017								Change				% Change
Net Sales		$	98,138,060				100.0	%		$	100,377,278				100.0	%		$	(2,239,218	)			-2.2	%
Cost of Sales			79,726,380				81.2	%			77,515,316				77.2	%			2,211,064				2.9	%
Gross Profit			18,411,680				18.8	%			22,861,962				22.8	%			(4,450,282	)			-19.5	%
Other Expenses:
Selling			5,113,726				5.2	%			5,078,706				5.1	%			35,020				0.7	%
General and administrative			6,812,448				6.9	%			8,008,975				8.0	%			(1,196,527	)			-14.9	%
Research and development			1,940,671				2.0	%			1,727,616				1.7	%			213,055				12.3	%
Total operating expenses			13,866,845				14.1	%			14,815,297				14.8	%			(948,452	)			-6.4	%
Operating Income			4,544,835				4.6	%			8,046,665				8.0	%			(3,501,830	)			-43.5	%
Interest expense			(1,654,719	)			-1.7	%			(1,616,120	)			-1.6	%			(38,599	)			2.4	%
Other expense			(81,211	)			-0.1	%			(249,640	)			-0.2	%			168,429				-67.5	%
Income before taxes			2,808,905				2.9	%			6,180,905				6.2	%			(3,372,000	)			-54.6	%
Tax provision (benefit)			2,916,118				3.0	%			(1,198,557	)			-1.2	%			4,114,675			<-100		%
Net (loss) income			(107,213	)			-0.1	%			7,379,462				7.4	%			(7,486,675	)		<-100		%
Preferred dividends			(2,994,917	)			-3.1	%			(2,879,798	)			-2.9	%			(115,119	)			4.0	%
Net (loss) income available to    common shareholders		$	(3,102,130	)			-3.2	%		$	4,499,664				4.5	%		$	(7,601,794	)		<-100		%

 

Revenue

Total revenue for the year ended 2017 decreased $2,239,218 or 2.2% to $98,138,060 from $100,377,278 for the year ended 2016. Automotive sales for year-end 2017 decreased 1.5% compared to year-end 2016 as the increase in sales of several new programs in the European market was offset by a decline in the U.S. as automotive manufacturers adjusted their production due to a softening in the U.S. market. Many of the U.S. automotive manufacturers idled production lines or entire assembly plants for multiple weeks to reduce inventories. Industrial sales for the year-end 2017 were down 3.7% compared to the prior year period. Contributing to the decline was the net currency effect of the exchange rate change of approximately $552,000. Without the effect of the exchange rate change, total revenue would have only decreased by 1.7%.

Gross Profit

Total gross profit for the year ended 2017 decreased $4,450,282 or 19.5% to $18,411,680 from $22,861,962 for the year ended 2016. The gross profit percentage was 18.8% of sales for year-end 2017 compared to 22.8% for year-end 2016. Gross profit was negatively impacted by rising raw material prices, unfavorable material usage variances and operating inefficiencies resulting from newly awarded automotive platforms ramping up in Europe. The decrease was partially offset by a positive net currency effect of $422,000. To offset raw material price increases, the Company increased prices in December in several of its markets.

 

Operating Expenses

Selling expenses for the year ended 2017 increased $35,020 or 0.7% to $5,113,726 from $5,078,706 for the year ended 2016. The increase was principally attributable to an increase in commissions from higher European automotive sales. The increase was partially offset by the net currency effect of $49,000.

General and administrative expenses for the year ended 2017 decreased $1,196,527 or 14.9% to $6,812,448 from $8,008,975 for the year ended 2016. This decrease was a result of cost reduction programs which lowered employee costs, professional fees and other administrative expenses for year-end 2017 compared to year-end 2016. Also contributing to the decrease was the net currency effect of $125,000.

 

 

Research and development expenses for the year ended 2017 increased $213,055 or 12.3% to $1,940,671 from $1,727,616 for the year ended 2016. The increase resulted from additional staffing and increased expenditures for new product development. This was partially offset by the net currency effect of the exchange rate change of $38,000.

Operating Income

Operating income for the year ended 2017 decreased $3,501,830 or 43.5% to $4,544,835 from $8,046,665 for the year ended 2016. The operating income percentage was 4.6% of sales for year-end 2017 compared to 8.0% for year-end 2016. Operating income decreased primarily from the decrease in gross profit. This was partially offset by the reduction in operating expenses for year-end 2017 compared to 2016 and a positive net currency effect of $634,000.

Interest Expense

Interest expense for the year ended 2017 increased $38,599 or 2.4% to $1,654,719 from $1,616,120 for the year ended 2016. The increase was primarily due to new capital leases for equipment purchases and higher interest rates on LIBOR and prime during year-end 2017 partially offset by debt repayments compared to year-end 2016.

Other Expense

Other expense for the year ended 2017 decreased $168,429 to $81,211 from $249,640 for the year ended 2016. The amount in other expense principally is the currency gains and losses recognized by the U.K. operations on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros and U.S. Dollars. The Company also recognizes gains and losses from the change in fair values on its foreign currency exchange contracts.

Tax Provision (Benefit)

For the year ended 2017, the tax provision was $2,916,118 as compared to a tax benefit of $1,198,557 for the year ended 2016. Included in the tax provision for 2017 was $1,937,070 related to write-downs of the Company’s U.S. deferred tax assets due to a reduction in our marginal tax rate from 34% to 21%. The marginal tax rate was reduced by the Tax Cuts and Jobs Act. Also included in the tax provision for 2017 was $941,960 in tax expense related to a one-time transition tax on deemed repatriation of deferred foreign income imposed by the Tax Cuts and Jobs Act. Under the Tax Cuts and Jobs Act, an election may be made to pay the repatriation tax in eight installments, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. However, the Company will use a portion of its net operating loss carryforward to offset the repatriation tax owed.

The tax benefit for 2016 was primarily related to the tax benefit recognized from a $1,925,000 reduction in the Company’s U.S. deferred tax asset valuation allowance. Based on management’s review at December 31, 2017 and January 1, 2017, it was determined that a valuation allowance was not required since it was more likely than not that the deferred tax asset would be realized.

Preferred Stock Dividend

The terms of the acquisitions in November 2014 resulted in the issuance of preferred ownership units/stock of UEPH and Uniroyal Global (Europe) Limited (formerly 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 7%. The dividend rate on the Series B UEP Holdings preferred units which started at 5.5% increases by 0.5% on the anniversary of the issuance up to a maximum of 8.0%.

  

 Liquidity and Sources of Capital

Cash, as it is needed, is provided by using the Company’s lines of credit. These lines provide for a total borrowing commitment in excess of $43,000,000 subject to the underlying borrowing base specified in the agreements.  Of the total outstanding borrowings of $19,340,468 at December 31, 2017, $14.9 million of the lines bears interest at LIBOR plus a range of 1.95% to 2.45%, depending on the underlying borrowing base, or, at our option, at the bank's prime or base lending rate and $4.4 million bears interest at the bank’s prime or base lending rate which was 4.50% at December 31, 2017.  At December 31, 2017, the lines provided an additional availability of approximately $2.4 million. The balances due under the lines of credit are recorded as current liabilities on the balance sheet. The Company also has commitments from several lending institutions for capital expenditure lines of credit totaling approximately $3.0 million. We plan to use the availability under the lines of credit at year-end 2017 and these commitments to help finance our cash needs for fiscal 2018.

 

 

Given our capital resources in the U.S. and the potential for increased investment and acquisitions in foreign jurisdictions, we did not have a history of repatriating a significant portion of our foreign cash. Accordingly, we had not recognized a deferred tax liability for these unremitted earnings. However, as discussed previously, the Tax Cuts and Jobs Act imposes a one-time transition tax on deemed repatriation of deferred foreign income. For the year ended 2017, the Company recorded $941,960 in tax expense related to this repatriation tax. In the event that we decide to repatriate these foreign amounts to fund U.S. operations, the Company will not be required to pay any additional U.S. tax related to these amounts.

The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 1.03 at December 31, 2017 and 1.13 at January 1, 2017.

Cash balances decreased $54,267, after the effects of currency translation of $99,102, to $1,267,319 at December 31, 2017 from $1,321,586 at January 1, 2017.  Of the above noted amounts, $1,152,039 and $970,327 were held outside the U.S. by our foreign subsidiaries as of December 31, 2017 and January 1, 2017, respectively.

 

Cash provided by operations was $5,562,511 for the year ended 2017 as compared to $5,643,987 for the year ended 2016. For 2017, cash provided by operations was primarily due to adjustments for non-cash items of $4,818,133. For 2016, cash provided by operations was primarily due to net income of $7,379,462 adjusted for non-cash items of $735,409. The non-cash items were principally changes in deferred taxes and depreciation expense. These amounts were further adjusted by cash flows related to changes in working capital of $925,378 and $(2,506,747) for 2017 and 2016, respectively, and changes in other assets and liabilities of $(73,787) and $35,863 for 2017 and 2016, respectively.

 

Cash used in investing activities was $2,894,081 for the year ended 2017 as compared to $2,356,518 for the year ended 2016. During 2017 and 2016, cash used in investing activities was principally for purchases of machinery and equipment at our manufacturing locations. Included in cash used in investing activities were increases in cash surrender values on company owned life insurance of $395,322, net of policy loans of $661,880, for the year ended 2017 and $324,809 for the year ended 2016.

For the year ended 2017, cash used in financing activities was $2,821,799 as compared to $3,660,913 for the year ended 2016. Included in cash used in financing activities were preferred dividend payments of $2,969,722 and $2,860,825 during the year ended 2017 and 2016, respectively. Also impacting cash used in financing activities for year-end 2017 and 2016 were net advances on the Company’s lines of credit of $1,404,391 and $1,225,943, respectively. In May 2016, the Company modified the terms of the secured promissory note in the amount of $1,285,593 related to the Wardle Storeys acquisition and paid the note in full on May 31, 2016.

Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as of December 31, 2017 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 material 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 generally recognized from product sales upon shipment to the customer or upon receipt by the customer in accordance with the agreed upon customer terms when 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 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. 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, excluding goodwill, and property and equipment 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

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. The Company 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 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.

 

 

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. As of December 31, 2017, the Company’s U.S. deferred tax assets decreased to $3,167,092 due to a lower marginal tax rate to be applied to these assets. The marginal tax rate was reduced by the Tax Cuts and Jobs Act. 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 would be included in the provision for deferred income taxes in the period of change. We have a federal net operating loss carryforward of approximately $16 million as of December 31, 2017, which expires in years beginning 2021 through 2034. As a result of these loss carryforwards, we have deferred tax assets in the amount of $3,167,092. Based on management’s review at December 31, 2017 and January 1, 2017, it was determined that a valuation allowance was not required since it was more likely than not that the deferred tax asset would be realized.

Foreign Currency Translation

The financial position and results of operations of our foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date, while the capital accounts are translated at the historical rate for the date they were recognized. Revenues and expenses are translated at the weighted average exchange rates during the year. The resulting translation gains and losses on assets and liabilities are recorded in accumulated other comprehensive loss, and are excluded from net income until realized through a sale or liquidation of the investment. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operations are included in Other 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 the Company adopted during 2017 and on those recently issued but not yet required to be adopted.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Not applicable

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Uniroyal Global Engineered Products, Inc.
Consolidated Balance Sheets
ASSETS		December 31, 2017				January 1, 2017
CURRENT ASSETS
Cash and cash equivalents		$	1,267,319			$	1,321,586
Accounts receivable, net			15,167,468				14,555,463
Inventories, net			19,769,662				17,046,171
Other current assets			846,362				1,183,932
Related party receivable			37,116				25,456
Total Current Assets			37,087,927				34,132,608
PROPERTY AND EQUIPMENT, NET			17,289,058				13,611,494
OTHER ASSETS
Intangible assets			3,295,896				3,133,564
Goodwill			1,079,175				1,079,175
Other long-term assets			3,902,246				6,665,375
Total Other Assets			8,277,317				10,878,114
TOTAL ASSETS		$	62,654,302			$	58,622,216
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of bank balance		$	686,640			$	679,494
Lines of credit			19,340,468				16,799,592
Current maturities of long-term debt			1,155,490				851,988
Current maturities of capital lease obligations			408,425				368,718
Accounts payable			10,358,761				7,331,213
Accrued expenses and other liabilities			3,594,684				3,645,526
Related party obligation			286,955				371,161
Current portion of postretirement benefit liability - health and life			143,287				158,527
Total Current Liabilities			35,974,710				30,206,219
LONG-TERM LIABILITIES
Long-term debt, less current portion			2,467,433				1,994,910
Capital lease obligations, less current portion			531,218				856,171
Related party lease financing obligation			2,153,327				2,162,151
Long-term debt to related parties			2,765,655				2,826,907
Postretirement benefit liability - health and life, less current portion			2,547,076				2,883,684
Other long-term liabilities			822,492				792,027
Total Long-Term Liabilities			11,287,201				11,515,850
Total Liabilities			47,261,911				41,722,069
STOCKHOLDERS' EQUITY
Preferred units, Series A UEP Holdings, LLC, 200,000 units issued    and outstanding ($100 issue price)			617,571				617,571
Preferred units, Series B UEP Holdings, LLC, 150,000 units issued    and outstanding ($100 issue price)			463,179				463,179
Preferred stock, Uniroyal Global (Europe) Limited, 50 shares    issued and outstanding ($1.51 stated value)			75				75
Common stock, 95,000,000 shares authorized ($.001 par value)    18,690,030 and 18,727,782 shares issued and outstanding as of    December 31, 2017 and January 1, 2017, respectively			18,690				18,728
Additional paid-in capital			34,944,972				34,653,894
Accumulated deficit			(20,276,944	)			(17,174,814	)
Accumulated other comprehensive loss			(375,152	)			(1,678,486	)
Total Stockholders' Equity			15,392,391				16,900,147
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	62,654,302			$	58,622,216
See accompanying notes to the consolidated financial statements.

 

 

Uniroyal Global Engineered Products, Inc.
Consolidated Statements of Operations
		Years Ended
		December 31, 2017				January 1, 2017
NET SALES		$	98,138,060			$	100,377,278
COST OF GOODS SOLD			79,726,380				77,515,316
Gross Profit			18,411,680				22,861,962
OPERATING EXPENSES:
Selling			5,113,726				5,078,706
General and administrative			6,812,448				8,008,975
Research and development			1,940,671				1,727,616
OPERATING EXPENSES			13,866,845				14,815,297
Operating Income			4,544,835				8,046,665
OTHER EXPENSE:
Interest and other debt related expense			(1,654,719	)			(1,616,120	)
Other expense			(81,211	)			(249,640	)
Net Other Expense			(1,735,930	)			(1,865,760	)
INCOME BEFORE TAX PROVISION			2,808,905				6,180,905
TAX PROVISION (BENEFIT)			2,916,118				(1,198,557	)
NET INCOME (LOSS)			(107,213	)			7,379,462
Preferred stock dividend			(2,994,917	)			(2,879,798	)
NET INCOME (LOSS) AVAILABLE TO COMMON  SHAREHOLDERS		$	(3,102,130	)		$	4,499,664
EARNINGS (LOSS) PER COMMON SHARE:
Basic		$	(0.17	)		$	0.24
Diluted		$	(0.17	)		$	0.24
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			18,704,773				18,828,378
Diluted			18,704,773				18,869,709
See accompanying notes to the consolidated financial statements.

 

 

Uniroyal Global Engineered Products, Inc.
Consolidated Statements of Comprehensive Income (Loss)
		Years Ended
		December 31, 2017				January 1, 2017
NET INCOME (LOSS)		$	(107,213	)		$	7,379,462
OTHER COMPREHENSIVE INCOME (LOSS):
Minimum benefit liability adjustment			330,880				(76,405	)
Foreign currency translation adjustment			972,454				(1,621,061	)
OTHER COMPREHENSIVE INCOME (LOSS)			1,303,334				(1,697,466	)
COMPREHENSIVE INCOME			1,196,121				5,681,996
Preferred stock dividend			(2,994,917	)			(2,879,798	)
COMPREHENSIVE INCOME (LOSS) TO COMMON  SHAREHOLDERS		$	(1,798,796	)		$	2,802,198
See accompanying notes to the consolidated financial statements.

 

 

Uniroyal Global Engineered Products, Inc.
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2017 and January 1, 2017
		UEPH Series A								UEPH Series B								UGEL Preferred								Common Stock								Additional Paid In Capital				Accumulated Deficit				Accumu- lated Other Compre- hensive Income (Loss)				Total Equity
		Units				Amount				Units				Amount				Shares				Amount				Shares				Amount
Balance January 3, 2016			200,000			$	617,571				150,000			$	463,179				50			$	75				18,890,909			$	18,892			$	34,823,886			$	(21,674,478	)		$	18,980			$	14,268,105
Net Income			-				-				-				-				-				-				-				-				-				7,379,462				-				7,379,462
Other comprehensive loss			-				-				-				-				-				-				-				-				-				-				(1,697,466	)			(1,697,466	)
Stock-based compensation expense			-				-				-				-				-				-				-				-				381,262				-				-				381,262
Issuance of common stock			-				-				-				-				-				-				3,576				3				(3	)			-				-				-
Treasury shares, purchased at cost and retired			-				-				-				-				-				-				(166,703	)			(167	)			(551,251	)			-				-				(551,418	)
Preferred stock dividend			-				-				-				-				-				-				-				-				-				(2,879,798	)			-				(2,879,798	)
Balance January 1, 2017			200,000			$	617,571				150,000			$	463,179				50			$	75				18,727,782			$	18,728			$	34,653,894			$	(17,174,814	)		$	(1,678,486	)		$	16,900,147
Net loss			-				-				-				-				-				-				-				-				-				(107,213	)			-				(107,213	)
Other comprehensive income			-				-				-				-				-				-				-				-				-				-				1,303,334				1,303,334
Stock-based compensation expense			-				-				-				-				-				-				-				-				405,280				-				-				405,280
Treasury shares, purchased at cost and retired			-				-				-				-				-				-				(37,752	)			(38	)			(114,202	)			-				-				(114,240	)
Preferred stock dividend			-				-				-				-				-				-				-				-				-				(2,994,917	)			-				(2,994,917	)
Balance December 31, 2017			200,000			$	617,571				150,000			$	463,179				50			$	75				18,690,030			$	18,690			$	34,944,972			$	(20,276,944	)		$	(375,152	)		$	15,392,391
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		December 31, 2017				January 1, 2017
Net income (loss)		$	(107,213	)		$	7,379,462
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation			1,866,322				1,706,996
Stock-based compensation expense			405,280				381,262
Deferred tax expense (benefit)			2,515,208				(1,372,880	)
Amortization of intangible assets			20,004				20,004
Loss on disposal of property and equipment			11,319				76,432
Noncash postemployment health and life benefit			-				(76,405	)
Changes in assets and liabilities:
Accounts receivable			262,835				(1,997,110	)
Inventories			(2,005,565	)			(834,706	)
Other current assets			414,281				(393,086	)
Related party receivable			54,538				29,301
Other long-term assets			(18,240	)			(72,697	)
Accounts payable			2,468,604				619,464
Accrued expenses and other liabilities			(269,315	)			69,390
Postretirement benefit liability - health and life			(20,968	)			68,848
Other long-term liabilities			(34,579	)			39,712
Cash provided by operating activities			5,562,511				5,643,987
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(3,160,639	)			(2,031,709	)
Payments on life insurance policies, net of proceeds from policy loans			266,558				(324,809	)
Cash used in investing activities			(2,894,081	)			(2,356,518	)
CASH FLOWS FROM FINANCING ACTIVITIES
Checks issued in excess of bank balance, net			7,146				357,187
Net advances on lines of credit			1,404,391				1,225,943
Payments on long-term debt			(608,947	)			(318,064	)
Proceeds from issuance of long-term debt and capital lease obligations			-				350,000
Payments on capital lease obligations			(386,145	)			(441,689	)
Net payments on related party obligation			(154,282	)			(1,422,047	)
Payment of preferred stock dividends			(2,969,722	)			(2,860,825	)
Purchase and retirement of treasury stock			(114,240	)			(551,418	)
Cash used in financing activities			(2,821,799	)			(3,660,913	)
Net change in cash and cash equivalents			(153,369	)			(373,444	)
Cash and cash equivalents - beginning of period			1,321,586				1,910,112
Effects of currency translation on cash and cash equivalents			99,102				(215,082	)
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	1,267,319			$	1,321,586
For noncash transactions and supplement disclosure of cash flow information see Note 2.
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 December 31, 2017 and January 1, 2017

 

NOTE 1 - 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 primarily for use in transportation, residential, hospitality, health care, office furniture and automotive applications. The Company’s customers are located primarily throughout North America and Europe.

On April 29, 2015, the Board of Directors adopted an amendment to the Articles of Incorporation to change the Company’s name from Invisa, Inc. to Uniroyal Global Engineered Products, Inc. On June 25, 2015, the stockholders approved the amendment. The amended and restated Articles of Incorporation were filed with the Nevada Secretary of State and became effective on July 15, 2015.

On November 10, 2014, the Company acquired all of the ownership interests in Uniroyal Engineered Products, LLC (“Uniroyal”), a U.S. manufacturer of textured coatings, and all of the ordinary common stock of Engineered Products Acquisition Limited (“EPAL”), the holding company for Wardle Storeys (Earby) Limited (“Wardle Storeys”), a European manufacturer of textured coatings and polymer films.

The Company made the acquisition of Uniroyal through its newly formed subsidiary, UEP Holdings, LLC (“UEPH”). The aggregate purchase consideration paid for 100% of the outstanding equity of Uniroyal was preferred ownership interests issued by UEPH having a liquidation preference of $35 million. See Note 13 for a description of the preferred units issued.

In a separate transaction, the Company purchased EPAL for 100 shares of the Company’s Common Stock and the Company’s guaranty of outstanding EPAL preferred stock retained by the seller, having a liquidation preference of £12,518,240 (approximately $20 million at closing). These preferred shares were entitled to a fixed cumulative preferential dividend of £625,912 per annum payable quarterly (approximately $1,000,000 at the date of the transaction). On November 24, 2015, the liquidation preference was changed from £12,518,240 to €17,699,314 (approximately $18,851,539) and the payment of the quarterly dividend from £156,478 to €221,241 (approximately $235,644). These conversions were based on the exchange rates on November 24, 2015.

As a result of beneficial ownership between the principal owner of the Company and the seller of Uniroyal and EPAL, the seller controls in excess of 80% of the Company’s voting rights in all matters to come before the Company’s shareholders. As a result of this common ownership, the November 10, 2014 transaction was treated as a combination between entities under common control and was accounted for in a manner similar to the pooling-of-interest method. The recognized assets and liabilities were transferred at their carrying amounts at the date of the transaction. Further, the companies were also combined retrospectively for prior year comparative information to the extent permitted.

In December 2016, the Company changed the name of EPAL to Uniroyal Global (Europe) Limited (“UGEL”) and the name of Wardle Storeys to Uniroyal Global Limited (“UGL”).

The Company and its subsidiaries have adopted a 52/53-week fiscal year ending on the Sunday nearest to December 31. The years ended December 31, 2017 and January 1, 2017 were both 52-week years.

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. For purposes of comparability, certain reclassifications have been made to amounts previously reported to conform with the current period presentation.

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

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 $282,289 and $328,427 as of December 31, 2017 and January 1, 2017, respectively.

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 $96,044 and $137,141 as of December 31, 2017 and January 1, 2017, respectively.

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 based on inventory aging.

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 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 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 $864,320 and $468,998 as of December 31, 2017 and January 1, 2017, respectively. During the fourth quarter of 2017, the Company obtained loans against the cash value of certain of these insurance policies. These insurance policy loans totaled $661,880 at December 31, 2017 and have a weighted average interest rate of 3.87%. Interest is accrued and paid 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 on the accompanying Consolidated Balance Sheets.

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

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 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 goodwill or trademarks is not recoverable and is in excess of its fair value, an impairment loss is recognized. Impairment is reviewed annually. No impairment loss was deemed necessary as of December 31, 2017 or January 1, 2017.

Income Taxes

 

The Company follows ASC 740 Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax bases of assets and liabilities (temporary differences) using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. 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. 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's tax returns for tax years 2014 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, 2017 and January 1, 2017, the Company has recorded no expense for interest or penalties.

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

Derivatives

The Company recognizes all of its derivative instruments 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, as to whether the hedge is a cash flow hedge or a fair value hedge.

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 flow 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 fair value of these contracts are reported in net earnings as part of other expense.

Fair Value of Financial Instruments

The Company’s short-term financial instruments consist of cash and cash equivalents, receivables, accounts payable and the lines of credit. 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 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 contracts at December 31, 2017 and January 1, 2017 were net assets of $13,292 and $9,718, respectively, and were included in other current assets. 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, 2017, 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:

 

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:

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

 

>

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 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 the capital accounts are translated at the historical rate for the date they were recognized. Revenues and expenses are translated at the weighted average exchange rates during the year. The resulting translation gains and losses on assets and liabilities are recorded in accumulated other comprehensive loss, and are excluded from net income until realized through a sale or liquidation of the investment. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operations are included in Other Expense in the accompanying Consolidated Statements of Operations.

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 disclosures 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 from product sales upon shipment to the customer or upon receipt by the customer in accordance with the agreed upon customer terms when 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 these estimated amounts as an offset to revenue in the same period the related revenue is recognized.

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.

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, 2017 and January 1, 2017.

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

Advertising

Advertising costs, other than promotional materials, are charged to expense as incurred. Promotional materials are expensed as they are distributed. Advertising expense was $209,865 and $191,688 for the years ended December 31, 2017 and January 1, 2017, respectively. As of December 31, 2017 and January 1, 2017, $134,269 and $116,428, 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 $1,940,671 and $1,727,616 for the years ended December 31, 2017 and January 1, 2017, 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 underlying options, warrants or convertible securities) that were outstanding during the period, unless the effect is anti-dilutive.

Recent 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 Company will adopt the new standard effective January 1, 2018 using the modified retrospective method. Based on the evaluation of the Company's current contracts and revenue streams, management believes that the adoption of this standard for the year ending December 30, 2018 will not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows but will result in additional disclosures.

 

 

On July 22, 2015, the Financial Accounting Standards Board issued a new standard, ASU No. 2015-11, “Simplifying the Measurement of Inventory”. The new standard requires entities to measure most inventory at the lower of cost and net realizable value, which is a change from the current guidance under which an entity must measure inventory at the lower of cost or market with market defined as replacement cost, net realizable value or net realizable value less a normal profit margin. The ASU will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method. It became effective for the Company on January 2, 2017. The adoption of this standard for the year ended December 31, 2017 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 December 31, 2017 and January 1, 2017

On November 20, 2015, the Financial Accounting Standards Board issued a new standard, ASU No. 2015-17, “Income Taxes - Balance Sheet Classification of Deferred Taxes”. Under the new guidance, deferred tax assets and liabilities will be classified as noncurrent in a classified statement of financial position. It became effective for the Company on January 2, 2017. The adoption of this standard for the year ended December 31, 2017 did not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows. The Company applied the change retrospectively for all periods presented. Thus, current deferred tax assets in the amount of $1,301,280, which had been included in Other Current Assets in the accompanying Consolidated Balance Sheets at January 1, 2017, were reclassified to Other Long-term Assets or Other Long-term Liabilities at that date.

On February 25, 2016, the Financial Accounting Standards Board issued a new standard, ASU No. 2016-02, “Leases”. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. This standard will be effective for the Company on December 31, 2018. The Company is currently evaluating the effects this standard will have, if any, on its consolidated financial position, results of operations and cash flows together with evaluating the adoption date.

On March 30, 2016, the Financial Accounting Standards Board issued a new standard, ASU No. 2016-09, “Compensation – Stock Compensation.” The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. It became effective for the Company on January 2, 2017. The adoption of this standard for the year ended December 31, 2017 did not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.

On August 26, 2016, the Financial Accounting Standards Board issued a new standard, ASU No. 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments.” The new standard applies to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. It will be effective for the Company on January 1, 2018. The adoption of this standard for the year ending December 30, 2018 is not expected to have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.

On January 26, 2017, the Financial Accounting Standards Board issued a new standard, ASU No. 2017-04, “Intangibles – Goodwill and Other – Simplifying the Test for Goodwill Impairment.” The new standard modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. It will be effective for the Company on December 30, 2019. The Company is currently evaluating the effects this standard will have, if any, on its consolidated financial position, results of operations and cash flows together with evaluating the adoption date.

On May 10, 2017, the Financial Accounting Standards Board issued a new standard, ASU No. 2017-09, “Compensation – Stock Compensation – Scope of Modification Accounting.” The new standard clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. It will be effective for the Company on January 1, 2018. The adoption of this standard for the year ending December 30, 2018 is not expected to have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.

 

On August 28, 2017, the Financial Accounting Standards Board issued a new standard, ASU No. 2017-12, “Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities.” The objective of this new standard is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities and to simplify the application of the hedge accounting guidance in current GAAP. It will be effective for the Company on December 31, 2018. The Company is currently evaluating the effects this standard will have, if any, on its consolidated financial position, results of operations and cash flows together with evaluating the adoption date.

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

The Tax Cuts and Jobs Act

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act, which significantly changes existing U.S. tax laws that affect the Company’s business. These changes include, but are not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, imposing a one-time transition tax on deemed repatriation of deferred foreign income and changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. See Note 11 for further discussion.

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, 2017 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 the years ended December 31, 2017 and January 1, 2017, the Company paid down $384,792 and $389,339, respectively, of its term loans using available borrowings on its various lines of credit.

During the years ended December 31, 2017 and January 1, 2017, the Company entered into several new equipment leases and financing obligations with fair values of $1,686,696 and $619,921, respectively, which are accounted for as capital assets. The fair values were added to property and equipment and a corresponding amount to capital lease or financing obligations.

Supplemental disclosure of cash paid for the years ended:

		December 31, 2017				January 1, 2017
Interest expense		$	1,664,638			$	1,592,550
Income taxes		$	360,850			$	273,477

NOTE 3 - Inventories

Inventories consist of the following:

		December 31, 2017				January 1, 2017
Raw materials		$	5,572,253			$	5,199,632
Work‑in‑process			5,342,359				4,491,250
Finished goods			10,377,480				8,669,625
			21,292,092				18,360,507
Less:  Allowance for inventory obsolescence			(1,522,430	)			(1,314,336	)
Total Inventories		$	19,769,662			$	17,046,171

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

 

NOTE 4 - Property and Equipment

The major categories of property and equipment are summarized as follows:

	Depreciable Lives		December 31, 2017				January 1, 2017
Building and building improvements	8 – 25 yrs.		$	732,086			$	422,910
Machinery and equipment	8 ‑ 10 yrs.			27,244,195				22,097,617
Computer equipment	3 ‑ 10 yrs.			1,399,851				1,263,127
Furniture and fixtures	7 ‑ 10 yrs.			173,904				164,322
Real estate under lease	20 yrs.			2,165,914				2,165,914
Construction‑in‑progress	‑			97,605				57,530
Total Property and Equipment				31,813,555				26,171,420
Less: Accumulated depreciation				(14,524,497	)			(12,559,926	)
Net Property and Equipment			$	17,289,058			$	13,611,494

 

NOTE 5 - Intangible Assets

Intangible assets are summarized as follows:

	Amortizable Lives		December 31, 2017				January 1, 2017
Trademarks and trade names	Indefinite		$	3,274,225			$	3,091,889
Other	5 years			21,671				41,675
Total Intangible Assets			$	3,295,896			$	3,133,564

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

NOTE 6 – Other Long-term Assets

Other long-term assets consist of the following:

		December 31, 2017				January 1, 2017
Deferred tax asset		$	3,167,092			$	5,689,000
Other			735,154				976,375
Total Other Long-term Assets		$	3,902,246			$	6,665,375

 

NOTE 7 – Other Long-term Liabilities

Other long-term liabilities consist of the following:

		December 31, 2017				January 1, 2017
Deferred tax liability		$	793,145			$	743,971
Other			29,347				48,056
Total Other Long-term Liabilities		$	822,492			$	792,027

 

NOTE 8 - Lines of Credit

The Company’s Uniroyal subsidiary has available a $30,000,000 revolving line of credit financing agreement with Wells Fargo Capital Finance, LLC, which matures on October 17, 2019. Interest is payable monthly at the Eurodollar rate plus 2.25% or Wells Fargo Capital Finance, LLC's prime rate at the Company's election on outstanding balances up to $6,000,000 and prime rate on amounts in excess of $6,000,000. The line of credit weighted average interest rate including unused facility fees was approximately 4.32% as of December 31, 2017. 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 outstanding balance on the line of credit (“Uniroyal Line of Credit”) was $10,376,881 and $9,668,388 as of December 31, 2017 and January 1, 2017, respectively. The Company has classified the outstanding balance on this line of credit within current liabilities in the accompanying Consolidated Balance Sheets.

The Company’s U.K. subsidiary has available a £10,000,000 (approximately $13.5 million) revolving line of credit financing agreement with Lloyds Bank Commercial Finance Limited (“U.K. Line of Credit”) which is subject to a six-month notice by either party. The line has several tranches based on currency or underlying security. Interest is payable monthly at the base rate (U.K. LIBOR or Lloyds Bank Base Rate as published) plus 1.95% to 2.45% depending on the tranche. The line of credit weighted average interest rate was approximately 2.36% as of December 31, 2017. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable and inventories. The line of credit is secured by substantially all of the subsidiary's assets and includes certain financial and restrictive covenants.

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

The outstanding balance on the U.K. Line of Credit was £6,631,172 and £5,792,236 ($8,963,587 and $7,131,204) as of December 31, 2017 and January 1, 2017, respectively. The Company has classified the outstanding balance on this line of credit within current liabilities in the accompanying Consolidated Balance Sheets.

NOTE 9 - Long‑Term Debt

Long‑term debt consists of the following:

 

		December 31, 2017				January 1, 2017
Uniroyal term loans with Wells Fargo Capital Finance, LLC, monthly interest only payments at the Eurodollar rate plus 2.25% or Wells Fargo Bank, National Association's prime rate. The term loans' weighted average interest rate was approximately 4.32% as of December 31, 2017. Monthly principal balances are reduced by $24,766 each month, resulting in a conversion, or increase, of the same amount in the line of credit each month (see Note 2). Term loans mature in October 2019 and are secured by substantially all of the Company's assets and include certain financial and restrictive covenants.		$	792,525			$	1,089,721
Term loan with Lloyds Bank Commercial Finance Limited; issued to the Company’s U.K. subsidiary, at £340,000 (approximately $460,000; payable in 60 monthly payments of £5,667 (approximately $7,660). Interest is payable monthly at the rate of 3.15% above the base rate (U.K. LIBOR); monthly, the principal is reduced by required payment resulting in an increase of the same amount in the line of credit (see Note 8). The loan matures in February 2019 and is secured by substantially all of the subsidiaries’ assets and includes certain financial and restrictive covenants.			107,238				181,392
Financing obligation to Kennet Equipment Leasing payable in monthly installments of £16,636 ($22,487) including interest and principal at a rate of 10.9%. The loan matures in May 2021 and is secured by certain equipment.			691,830				801,153
Note payable to Balboa Capital Corporation; assigned to Wells Fargo, payable in quarterly installments of $37,169 including interest and principal at a rate of 5.72% with the remaining principal due May 2018. The note is secured by certain equipment.			73,113				213,230

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

Note payable to Regents Capital Corporation; payable in monthly installments of $10,805 including interest and principal at a rate of 7.41% with the remaining principal due December 2019. The note is secured by certain equipment.			240,350				350,000
Note payable to De Lage Landen Financial Services payable in monthly installments of $2,658 including interest and principal at a rate of 7.35% with the remaining principal due May 2021. The note is secured by certain equipment.			96,123				118,073
Note payable to Ford Motor Credit payable in monthly installments of $849 including interest and principal at a rate of 4.31% with the remaining principal due November 2021. The note is secured by certain equipment.			36,662				44,387
Note payable to Byline Financial Group, payable in monthly installments of $1,999 including interest and principal at a rate of 8.55% with the remaining principal due March 2019. The note is secured by certain equipment.			28,344				48,942
Note payable to Regents Capital Corporation; payable in monthly installments of $6,480 including interest and principal at a rate of 6.20% with the remaining principal due February 2022. The note is secured by certain equipment.			284,852				-
Note payable to Regents Capital Corporation; payable in monthly installments of $6,669 including interest and principal at a rate of 6.47% with the remaining principal due May 2022. The note is secured by certain equipment.			306,702				-
Note payable to Regents Capital Corporation; payable in monthly installments of $3,256 including interest and principal at a rate of 6.50% with the remaining principal due June 2022. The note is secured by certain equipment.			152,169				-
Note payable to BB&T Equipment Finance Corporation; payable in monthly installments of $15,445 including interest and principal at a rate of 4.02% with the remaining principal due October 2022. The note is secured by certain equipment.			813,015				-
Totals			3,622,923				2,846,898
Less: Current portion			(1,155,490	)			(851,988	)
Long‑Term Portion		$	2,467,433			$	1,994,910

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

 

Principal requirements on long‑term debt for years ending after December 31, 2017 are as follows:

 

		Totals
2018		$	1,155,490
2019			1,238,444
2020			605,404
2021			407,093
2022			216,492
Total		$	3,622,923

NOTE 10 - Related Party Obligations

Long‑term debt to related parties consists of the following:

		December 31, 2017				January 1, 2017
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 October 17, 2019. The senior subordinated promissory notes are secured by substantially all assets of the Company 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% which began April 1, 2015; quarterly principal payments of $91,879 which began April 1, 2016 through July 30, 2017; quarterly principal payments of $153,131 will begin October 1, 2018 through January 1, 2020; the note is secured by substantially all the assets of the Company.			918,786				1,194,421
Totals			2,918,786				3,194,421
Less: Current portion			(153,131	)			(367,514	)
Total Long-term Debt to Related Parties		$	2,765,655			$	2,826,907

On October 1, 2017, the Company amended its senior secured promissory note to the Company’s majority shareholder to change the quarterly interest and principal payments to interest only beginning in the fourth quarter of 2017 through the third quarter of 2018, with quarterly principal payments of $153,131 beginning in the fourth quarter of 2018. No other terms of the note were changed at that time. The change became effective October 1, 2017.

 

 

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2017 and January 1, 2017

 

The Company has a lease financing obligation under which it leases its main U.S. manufacturing facility and certain other property from a related party lessor entity, accrues interest at 18.20% and currently requires monthly principal and interest payments of $32,764, which are adjusted annually based on the consumer price index. The lease financing obligation matures on October 31, 2033. The Company has security deposits aggregating $267,500 held by the lessor entity. The lease financing obligation is shown in the accompanying Consolidated Balance Sheets as Related Party Lease Financing Obligation which consists of the following:

 

		December 31, 2017				January 1, 2017
Related party lease financing obligation		$	2,162,151			$	2,165,798
Less: Current portion			(8,824	)			(3,647	)
Long‑Term Portion		$	2,153,327			$	2,162,151

 

The current portions of the long-term debt to related parties and the related party lease financing obligation are combined and are shown in current liabilities as related party obligation. Also included in current liabilities as a related party obligation is a $125,000 subordinated secured promissory note issued to the Company’s majority shareholder on October 12, 2017. This promissory note, which is payable on demand, is at a rate of 4% with quarterly interest payments beginning January 15, 2018. The note is secured by a life insurance policy investment owned by the Company.

		December 31, 2017				January 1, 2017
Current portion of long-term debt to related parties		$	153,131			$	367,514
Current portion of related party lease financing obligation			8,824				3,647
Related party subordinated secured promissory note			125,000				-
Related Party Obligation		$	286,955			$	371,161