UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC. - Quarter Report: 2022 April (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number: 000-50081

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

(Name of registrant as specified in its charter)

1800 2nd Street, Suite 970

Sarasota, FL 34236

(Address of principal executive offices)

(941) 906-8580

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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

As of May 2, 2022, the issuer had 3,412,186 shares of ordinary Common Stock, $0.001 par value, and 323,820 shares of Class B Common Stock, $0.001 par value, outstanding.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

Form 10-Q

Table of Contents

 CAUTIONARY 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.

PART 1 - FINANCIAL INFORMATION

ITEM 1 - Financial Statements

Uniroyal Global Engineered Products, Inc.

Consolidated Balance Sheets

See accompanying notes to the consolidated financial statements.

Uniroyal Global Engineered Products, Inc.

Consolidated Statements of Operations

(Unaudited)

See accompanying notes to the consolidated financial statements.

Uniroyal Global Engineered Products, Inc.

Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

See accompanying notes to the consolidated financial statements.

Uniroyal Global Engineered Products, Inc.

Consolidated Statements of Changes in Stockholders' Equity

(Unaudited)

See accompanying notes to the consolidated financial statements.

Uniroyal Global Engineered Products, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

See Note 2 for noncash transactions and supplemental disclosure of cash flow information.

See accompanying notes to the consolidated financial statements.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

Notes to Consolidated Financial Statements

April 3, 2022

(Unaudited) 

Uniroyal Global Engineered Products, Inc. (the “Company,” “Uniroyal Global,” “we,” or “us”) owns all of the ownership interests in Uniroyal Engineered Products, LLC (“Uniroyal”), a U.S. manufacturer of textured coatings, and its holding company, UEP Holdings, LLC (“UEPH”), and all of the ordinary common stock of Uniroyal Global (Europe) Limited (“UGEL”) formerly known as Engineered Products Acquisition Limited (“EPAL”), the holding company for Uniroyal Global Limited (“UGL”) formerly Wardle Storeys (Earby) Limited (“Wardle Storeys”), a European manufacturer of textured coatings. 

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared based upon U.S. Securities and Exchange Commission rules that permit reduced disclosure for interim periods. Therefore, they do not include all information and footnote disclosures necessary for a complete presentation of the Company’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. Uniroyal Global filed audited consolidated financial statements as of and for the fiscal years ended January 2, 2022 and January 3, 2021 which included all information and notes necessary for such complete presentation in conjunction with its 2021 Annual Report on Form 10-K.

The results of operations for the interim period ended April 3, 2022 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended January 2, 2022, which are contained in the Company’s 2021 Annual Report on Form 10-K.

The Company and its subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest to December 31. The current year ending January 1, 2023 and the prior year ended January 2, 2022 are 52-week years. The Company’s U.K. subsidiaries use the calendar year end of December 31. The activity of the U.K. subsidiaries that occurs on the days that do not coincide with the Company’s year-end is not material.

The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of April 3, 2022 and the results of operations, comprehensive (loss) income and cash flows for the interim periods ended April 3, 2022 and April 4, 2021.

The unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company uses the U.S. dollar as the reporting currency for financial reporting. The financial position and results of operations of the Company’s U.K.-based operations are measured using the British Pound Sterling as the functional currency. See Note 4 – “Foreign Currency Translation” for additional discussion. 

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

Significant Accounting Policies

For a discussion of Uniroyal Global’s significant accounting policies, refer to Note 1 – “Basis of Presentation and Summary of Significant Accounting Policies” to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2022.

Coronavirus (COVID-19) Impact Update

The coronavirus pandemic (“COVID-19”) and its related disruption of the supply chain has had an impact on markets the Company serves, its operations and liquidity. Since COVID-19 is a continually evolving situation, the Company cannot predict the long-term impact it will have on the economy or the Company’s business. The impact could have a material adverse effect on the Company’s financial position, results of operations and cash flows, which may require the Company to obtain additional financing. The Company continues to pursue supplementary cash flow opportunities, as discussed briefly below and in more detail in Notes 9 and 10.

Through the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”) under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”), the Company’s U.S. operations received $2,000,000 in March 2021 in funds from One Community Bank. The Company used all proceeds from the PPP loan for allowable expenses (as defined in the PPP loan) and applied for forgiveness of the PPP loan in accordance with the terms of the CARES Act. In August 2021, the Company was notified that all of its PPP Loan was forgiven. See Note 9 for further discussion.

For the remaining nine months of fiscal year 2022 and the first three months of fiscal year 2023, the Company’s majority shareholder waived the interest expense and associated payments on the Company’s related party finance leases with him and the Company’s $2,000,000 senior subordinated promissory notes issued to him. See Note 10 for further discussion. In addition, executive officers of the Company agreed to a reduction in their salaries over the same time period. The total amount of cost savings will be approximately $731,000 for fiscal year 2022 and $244,000 for fiscal year 2023 which will provide additional liquidity to the Company.

In addition, under amended documents that govern the preferred stock dividends, the preferred shareholders are no longer entitled to a quarterly dividend until such time as the Company declares a dividend payable. To preserve cash, quarterly preferred dividends were not declared on UEPH Series A and Series B preferred units and UGEL preferred stock during the three months ended April 3, 2022. Also to preserve cash, quarterly preferred dividend payments were deferred beginning with the three months ended December 29, 2019 through the three months ended April 4, 2021.

Legal Proceedings

In April 2021, a fine of £120,000 ($166,026) was imposed on the Company related to an incident in which an employee was injured in the course of his employment. At the end of the second quarter of 2021, the Company began making monthly payments for this fine in order to have it paid in full by the October 2022 due date. The accrual related to the fine was £46,856 ($61,543) and £69,356 ($93,484) as of April 3, 2022 and January 2, 2022, respectively, and was included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

The following is supplemental disclosure of cash paid for the three months ended:

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

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

For the three months ended April 3, 2022, there have been no changes in the application of valuation methods applied to similar assets and liabilities.

The financial position and results of operations of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date, while the capital accounts are translated at the historical rate for the date they were recognized. Revenues and expenses are translated at the weighted average exchange rates during the year. The resulting translation gains and losses on assets and liabilities are recorded in accumulated other comprehensive loss and are excluded from net income until realized through a sale or liquidation of the foreign subsidiaries. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of the Company’s foreign operations are included in other (expense) income in the accompanying consolidated statements of operations.

Inventories consist of the following:

Other long-term assets consist of the following:

Other long-term liabilities consist of the following:

The Company’s Uniroyal subsidiary has available a $15,000,000 revolving line of credit financing agreement with Wells Fargo Capital Finance, LLC (“Uniroyal Line of Credit”), which matures on June 15, 2023. Interest is payable monthly at the Eurodollar rate plus 2.25% or Wells Fargo Capital Finance, LLC's prime rate (“WF Prime”) at the Company's election on outstanding balances up to $6,000,000 and WF Prime on amounts in excess of $6,000,000. The line of credit weighted average interest rate including unused facility fees was approximately 3.41% as of April 3, 2022. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable, inventories and equipment. The line of credit is secured by substantially all of Uniroyal's assets and includes certain financial and restrictive covenants. The Company was in compliance with these covenants as of April 3, 2022.

The outstanding balance on the Uniroyal Line of Credit was $12,635,149 and $11,400,409 as of April 3, 2022 and January 2, 2022, respectively. The Company has classified the outstanding balance on the line of credit within current liabilities in the accompanying consolidated balance sheets. Based upon eligible accounts receivable, inventories and equipment at April 3, 2022, the Uniroyal Line of Credit provided additional availability of approximately $394,000 and, combined with its total cash balance of $111,728, Uniroyal had liquidity of approximately $506,000 as of April 3, 2022.

UGL has available an £11,000,000 (approximately $14.4 million) revolving line of credit financing agreement with PNC Business Credit (‘‘UGL Line of Credit”), which is subject to a three-month notice by either party after a minimum term of three years. Interest is payable monthly at the Bank of England Base Rate (“BoE Base”) plus 2.25%-3.00%. The line of credit weighted average interest rate was approximately 2.72% as of April 3, 2022. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable and inventories. The line of credit is secured by substantially all of UGL’s assets and includes certain financial and restrictive covenants. The Company was in compliance with these covenants as of April 3, 2022 except for the ratio of Earnings before interest, taxes, depreciation and amortization (“EBITDA”) to debt service charges, which was less than the required minimum of 1.15 to 1. PNC Business Credit is in the process of reviewing an amendment to revise the covenant calculation to more closely align with the current business environment.

The outstanding balance on the UGL Line of Credit was £6,706,359 and £4,760,432 ($8,808,447 and $6,416,510) as of April 3, 2022 and January 2, 2022, respectively. The Company has classified the outstanding balance on the line of credit within current liabilities in the accompanying consolidated balance sheets. Based upon eligible accounts receivable and inventories at April 3, 2022, the UGL Line of Credit provided additional availability of approximately $121,000 and, combined with its total cash balance of $205,067, UGL had liquidity of approximately $326,000 as of April 3, 2022.

Long-term debt consists of the following:

Paycheck Protection Program Loan

In March 2021, the Company’s U.S. operations received $2,000,000 in funds from One Community Bank through the PPP administered by the U.S. Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act. The $2,000,000 loan was scheduled to mature in March 2026 and bore an interest rate of 1.0%. The loan may be prepaid at any time prior to maturity with no prepayment penalties.

All or a portion of the loan may be forgiven by the SBA for costs the Company incurred for payroll, rent, utilities and all other allowable expenses during the 24-week period that began March 1, 2021. The Company used all proceeds from the loan to maintain payroll and make payments for lease, utility and other allowable expenses. In accordance with International Accounting Standards (“IAS”) 20, “Accounting for Government Grants and Disclosure of Government Assistance,” the Company recognized the funding from the PPP as grant income of $838,864 for the three months ended April 4, 2021. This amount is included as a component of net other (expense) income in the consolidated statement of operations for the three months ended April 4, 2021.

In August 2021, the Company was notified by the SBA that all of its PPP Loan was forgiven.

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

The above notes were issued to the Company’s majority shareholder. The first three notes above were amended on March 25, 2022 to change the maturity date to January 15, 2024. No other terms of the notes were changed. Interest expense on these notes was $79,616 and $95,033 for the three months ended April 3, 2022 and April 4, 2021, respectively. Accrued interest of $23,367 and $23,786 related to these notes was included in accrued expenses and other liabilities in the accompanying consolidated balance sheets as of April 3, 2022 and January 2, 2022, respectively.

The Company has finance leases under which it leases its main U.S. manufacturing facility and certain other property from a related party lessor entity, owned by the Company’s majority shareholder. These related party finance leases expire at various dates from October 2023 through October 2033. Related party finance leases are included in property and equipment, net, current maturities of related party finance lease liabilities, and related party finance lease liabilities, less current portion in the accompanying consolidated balance sheets. There were no new right-of-use assets obtained in exchange for related party finance lease obligations for the three months ended April 3, 2022 and April 4, 2021. The Company has security deposits aggregating $267,500 held by the lessor entity.

The components of lease expense for the related party finance leases for the three months ended April 3, 2022 and April 4, 2021 are as follows:

Cash paid for amounts included in the measurement of related party finance lease liabilities for the three months ended April 3, 2022 and April 4, 2021 are as follows:

Supplemental balance sheet and other information regarding related party finance leases are as follows:

Maturities of related party finance lease liabilities as of April 3, 2022 are as follows:

The lower amount that is due in one year or less in the above table reflects the interest expense that was waived by the Company’s majority shareholder for the remaining nine months of fiscal year 2022 and the first three months of fiscal year 2023. The Company’s majority shareholder also waived the interest expense on the $2,000,000 senior subordinated promissory notes over the same time period. The total amount of cost savings will be approximately $446,000 for fiscal year 2022 and $148,000 for fiscal year 2023.

The Company has operating leases for equipment and office facilities and finance leases for equipment. These leases expire at various dates from April 2022 through March 2039. Operating leases are included in operating lease right-of-use assets, net, accrued expenses and other liabilities, and operating lease liabilities, less current portion in the accompanying consolidated balance sheets. Finance leases are included in property and equipment, net, current maturities of finance lease liabilities, and finance lease liabilities, less current portion in the accompanying consolidated balance sheets. There were no new right-of-use assets obtained in exchange for lease obligations for the three months ended April 3, 2022 and April 4, 2021.

The components of lease expense for the three months ended April 3, 2022 and April 4, 2021 are as follows:

Cash paid for amounts included in the measurement of lease liabilities for the three months ended April 3, 2022 and April 4, 2021 are as follows:

Supplemental balance sheet and other information related to operating leases are as follows:

Supplemental balance sheet and other information related to finance leases are as follows:

Maturities of operating and finance lease liabilities as of April 3, 2022 are as follows:

The changes in accumulated other comprehensive loss for the three months ended April 3, 2022 and April 4, 2021 were as follows:

Due to the net loss allocable to common shareholders for the three months ended April 3, 2022, the calculations of basic and diluted loss per share were the same since including options (as provided under the Company’s 2015 Stock Option Plan) to purchase shares of the Company’s common stock in the calculation of diluted loss per share would have been anti-dilutive. However, if diluted earnings per share had been reported for the three months ended April 3, 2022, the calculation would have excluded options to purchase 124,050 shares of common stock because the options’ weighted average exercise price of $14.05 per share was greater than the average market price of the common shares. The calculation of diluted earnings per share for the three months ended April 4, 2021 excluded options to purchase 139,300 shares of common stock because the options’ weighted average exercise price of $14.02 per share was greater than the average market price of the common shares.

The Company recognizes revenue and related accounts receivable when obligations under the terms of a contract with a customer are satisfied, which includes the control of products transferring to the customer. For Uniroyal, this generally occurs when products are shipped and, for UGL, this generally occurs when the customer accepts delivery either at the Company’s U.K. facility or at a mutually agreed upon location. Revenue is measured as the amount of consideration the Company expects to receive in exchange for products transferred to the customer.

The following table sets forth revenue disaggregated by the Company’s automotive and industrial sectors for the three months ended April 3, 2022 and April 4, 2021:

The following table sets forth revenue disaggregated by the geographic locations of the Company’s customers for the three months ended April 3, 2022 and April 4, 2021:

The Company has evaluated subsequent events occurring through May 13, 2022 for events requiring recording or disclosure in the April 3, 2022 consolidated financial statements. There were no material events or transactions occurring during this period requiring recognition or disclosure.

Business Description

We are a leading provider of manufactured vinyl coated fabrics. Our best-known brand, Naugahyde, is the product of many improvements on a 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 performance characteristics customized to the end-user specifications, complemented by technical and customer support for the use of our products in manufacturing.

Our vinyl coated fabric products have undergone considerable evolution and today are distinguished by superior performance in a wide variety of applications as alternatives to leather, cloth and other synthetic fabric coverings. Our standard product lines consist of more than 525 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts five color character prints and non-registered prints, lamination and panel cutting.

Our vinyl coated fabric products have various high-performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, health care facilities and athletic equipment. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior soft trim components from floor to headliner, which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene foam laminated by either flame or hot melt adhesive for seating, fascia and door applications.

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

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

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. For further discussion of our significant accounting policies, refer to Note 1 – “Basis of Presentation and Summary of Significant Accounting Policies” to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies, Judgments and Estimates” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022.

Overview:

We and our subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest to December 31. The current year ending January 1, 2023 and the prior year ended January 2, 2022 are 52-week years. Our U.K. subsidiaries use the calendar year end of December 31. The activity of the U.K. subsidiaries that occurs on the days that do not coincide with our year-end is not material.

Our Earby, England operation’s functional currency is the British Pound Sterling (“Pound Sterling”) and has sales and purchases transactions that are denominated in currencies other than the Pound Sterling, principally the Euro. Approximately 26% of our global revenues and 33% of our global raw material purchases are derived from these Euro transactions.

The average year-to-date exchange rate for the Pound Sterling to the U.S. Dollar was approximately 2.8% lower and the average exchange rate for the Euro to the Pound Sterling was approximately 4.4% lower in 2022 compared to 2021. These exchange rate changes had the effect of decreasing net sales by approximately $515,000 for the three months ended April 3, 2022. The overall currency effect on our net loss was a negative amount of approximately $44,000 for the three months ended April 3, 2022.

The coronavirus pandemic (“COVID-19”) and its related disruption of the supply chain has had an impact on markets we serve, our operations and liquidity. Since COVID-19 is a continually evolving situation, we cannot predict the long-term impact it will have on the economy or our business. The impact could have a material adverse effect on our financial position, results of operations and cash flows, which may require us to obtain additional financing.

We continue to pursue supplementary cash flow opportunities, which have included loans through the Paycheck Protection Program (“PPP”). Also to preserve cash and provide additional liquidity, our majority shareholder waived the interest expense on certain related-party debt and our executive officers agreed to a reduction in their salaries. In addition, no quarterly preferred dividends were declared in the three months ended April 3, 2022, while quarterly preferred dividend payments were deferred beginning with the three months ended December 29, 2019 through the three months ended April 4, 2021. See “Liquidity and Sources of Capital” below for further discussion.

Three Months Ended April 3, 2022 Compared to the Three Months Ended April 4, 2021

The following table sets forth, for the three months ended April 3, 2022 (“three months 2022”) and April 4, 2021 (“three months 2021”), certain operational data including their respective percentage of net sales: 

Revenue:

Total revenue for the three months 2022 decreased $1,825,450 or 8.3% to $20,070,551 compared to $21,896,001 for the three months 2021. The decrease in revenue included an unfavorable currency effect of approximately $515,000. Sales in the first quarter of 2022 increased $4,396,706 or 28.1% compared to the fourth quarter of 2021. Revenue for the three months 2022 reflects the impact of all of the price increases we implemented in 2021 due to higher costs of raw materials. To offset raw material price increases, we increased prices on most product categories in several of our markets three times in 2021 (effective dates in March, July and December of 2021) and in March 2022. We expect some additional price increases on other select products to be implemented during 2022 to further offset raw material price increases.

For the three months 2022 compared to the three months 2021, automotive sales declined 15.0% due to a decline in sales of 14.4% (excluding the currency adjustment) and 9.1% for our U.K. and U.S. operations, respectively. The supply chain issues currently being experienced by the OEM’s that use our automotive products has led to temporary shutdowns of their production lines, which has had a negative impact on our sales. Since these supply chain issues began during the first quarter of 2021, they had a much greater impact on our sales for the three months 2022 than on our sales for the three months 2021. Automotive sales have increased 27.7% compared to the fourth quarter of 2021 due to shutdowns becoming less prevalent and our price increases.

Additionally for the three months 2022 compared to the three months 2021, sales for the industrial sector increased 3.6% (4.20% before the currency effect) primarily due to an increase in our U.S. operations contract market. Sales for the industrial sector increased 28.5% when compared to the fourth quarter of 2021 due to growth in orders from existing and new customers and our price increases.

Gross Profit:

Total gross profit for the three months 2022 decreased $572,281 or 17.7% to $2,665,056 compared to $3,237,337 for the three months 2021. The decrease in gross profit included an unfavorable currency effect of approximately $94,000. The gross profit percentage was 13.3% of sales for the three months 2022 compared to 14.8% for the three months 2021. The gross profit and percentage for the three months 2022 were negatively impacted by supply chain issues, as discussed above, as well as higher costs of raw materials, freight and power. As previously discussed, we increased prices in 2021 (effective dates in March, July and December of 2021) and in March 2022 to offset raw material price increases. Both the gross profit amount and percentage for the first quarter of 2022 improved when compared to the fourth quarter of 2021 gross profit amount and percentage of $1,903,982 and 12.1%, respectively.

Operating Expenses:

Selling expenses for the three months 2022 decreased $174,391 or 19.4% to $724,321 from $898,712 for the three months 2021. The decrease in selling expenses included a $20,000 favorable currency effect. When comparing the first quarter of 2022 with the fourth quarter of 2021, selling expenses increased $124,152 or 20.7%. The decrease from the three months 2021 was primarily due to lower commissions from U.K. automotive programs due to UGL’s lower automotive sales while the increase from the fourth quarter of 2021 was primarily due to higher commissions from U.K. automotive programs due to UGL’s higher automotive sales.

General and administrative expenses for the three months 2022 increased $221,191 or 14.0% to $1,800,218 from $1,579,027 for the three months 2021. The increase in general and administrative expenses was partially offset by a $13,000 favorable currency effect. When comparing the first quarter of 2022 with the fourth quarter of 2021, general and administrative expenses increased $248,810 or 16.0%. Both the increase from the three months 2021 and the fourth quarter of 2021 were due to increases in various expenses, the most significant of which was higher insurance costs.

Research and development expenses for the three months 2022 increased $61,650 or 18.8% to $389,108 from $327,458 for the three months 2021. The increase in research and development expenses was partially offset by a $5,000 favorable currency effect. When comparing the first quarter of 2022 with the fourth quarter of 2021, research and development expenses increased $61,906 or 18.9%. Both the increase from the three months 2021 and the fourth quarter of 2021 were primarily due to more activity including the testing and qualification of raw material substitutions as a result of supply constraints.

Operating Loss:

Operating loss for the three months 2022 was $248,591 compared to operating income of $432,140 for the three months 2021, a decrease of $680,731. The decrease was due to the combination of the decline in gross profit and 3.9% increase in operating expenses. The operating loss for the fourth quarter of 2021 was $574,797. The smaller operating loss for the three months 2022 compared to the fourth quarter of 2021 was due to higher gross profit more than offsetting the increase in operating expenses. The operating loss percentage was -1.2% of sales for the three months 2022 compared to 2.0% for the three months 2021 and -3.7% for the fourth quarter of 2021.

Interest Expense:

Interest expense for the three months 2022 increased $34,762 or 8.6% to $438,508 from $403,746 for the three months 2021. The increase was primarily due to debt issuances and the amortization of capitalized debt issuance costs, partially offset by debt repayments.

Funding from Paycheck Protection Program:

Funding from the PPP of $838,864 for the three months 2021 were the proceeds from the PPP loan that we used during the period for allowable expenses under the PPP. As previously discussed, all of the PPP Loan was forgiven in August 2021.

Other (Expense) Income:

Other expense for the three months 2022 was $(14,396) compared to other income of $206,304 for the three months 2021. Included in other (expense) income are the currency gains and losses recognized on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros as these currencies fluctuated during the period.

Income Taxes:

We file income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. Our U.S. operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits pass through to its members. We acquired Uniroyal through UEPH, a limited liability company, which issued preferred ownership interests to the sellers that provide for quarterly dividends. Uniroyal’s taxable income is allocated entirely to UEPH as its sole member and since it is a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on our tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual tax returns.

We do not have a history of repatriating a significant portion of our foreign cash. However, if we decided to repatriate these foreign amounts to fund U.S. operations, we would not be required to pay any additional U.S. tax related to these amounts since we previously recorded a one-time transition tax on deemed repatriation of deferred foreign income.

The tax benefit for the three months 2022 was $156,139 compared to a tax provision of $37,561 for the three months 2021. The tax benefit for the three months 2022 was principally attributable to the results of the U.S. operations while the tax provision for the three months 2021 was attributable to the results of the U.K. operations partially offset by the results of the U.S. operations.

Preferred Stock Dividend:

Pursuant to the terms of their acquisitions, preferred ownership units/stock of UEPH and UGEL were issued to the sellers. These preferred units/stock (collectively “preferred shares”) have carried quarterly dividend requirements on a total value of $55,000,000 at rates ranging from 5.0% to 8.0%. The dividend rate on the Series B UEPH preferred units which started at 5.5% increased by 0.5% on the anniversary of the issuance and is now at the maximum of 8.0%.

Under amended documents that govern the dividends, the preferred shareholders are no longer entitled to a quarterly dividend until such time as the Company declares a dividend payable. To preserve cash, quarterly preferred dividends were not declared on UEPH Series A and Series B preferred units and UGEL preferred stock during the three months ended April 3, 2022. In addition, quarterly preferred dividend payments were deferred beginning with the three months ended December 29, 2019 through the three months ended April 4, 2021.

Liquidity and Sources of Capital

Cash, as it is needed, is provided by using our lines of credit. These lines provide for a total borrowing commitment in excess of $29,000,000 subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of $21,443,596 at April 3, 2022, for the U.S. operations, $6.0 million of the lines bears interest at the Eurodollar rate plus 2.25% and $6.6 million bears interest at the Wells Fargo Capital Finance, LLC’s prime rate (3.50% at April 3, 2022) and, for the U.K. operations, $8.8 million bears interest at the Bank of England Base Rate plus 2.25%-3.00%. The lines provided additional availability of approximately $514,000 and, combined with UEP’s and UGL’s total cash balances, liquidity was approximately $831,000 at April 3, 2022. We plan to use this availability and cash provided by operating activities to finance our cash needs for the remaining months of fiscal 2022 and future periods. The balances due under the lines of credit are recorded as current liabilities on the consolidated balance sheets.

As previously stated, the coronavirus pandemic (“COVID-19”) and its related disruption of the supply chain has had an impact on markets we serve and our operations and liquidity. Since COVID-19 is a continually evolving situation, we cannot predict the long-term impact it will have on the economy or our business. The impact could have a material adverse effect on our financial position, results of operations and cash flows, which may require us to obtain additional financing. As discussed below, we continue to pursue supplementary cash flow opportunities.

Through the PPP administered by the U.S. Small Business Administration (“SBA”) under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”), our U.S. operations received $2,000,000 in March 2021 in funds from One Community Bank. We used all proceeds from the PPP loan for allowable expenses (as defined in the PPP loan) and applied for forgiveness of the PPP loan in accordance with the terms of the CARES Act. In August 2021, we were notified that all of our PPP Loan was forgiven. See Note 9 to the consolidated financial statements for further discussion.

For the remaining nine months of fiscal year 2022 and the first three months of fiscal year 2023, our majority shareholder waived the interest expense on our related party finance leases with him and our $2,000,000 senior subordinated promissory notes issued to him. See Note 10 to the consolidated financial statements for further discussion. In addition, our executive officers agreed to a reduction in their salaries over the same time period. The total amount of cost savings will be approximately $731,000 for fiscal year 2022 and $244,000 for fiscal year 2023 which will provide us additional liquidity.

Also to preserve cash, quarterly preferred dividends were not declared on UEPH Series A and Series B preferred units and UGEL preferred stock during the three months ended April 3, 2022, while quarterly preferred dividend payments were deferred beginning with the three months ended December 29, 2019 through the three months ended April 4, 2021.

The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 0.95 at April 3, 2022 and 0.99 at January 2, 2022.

Cash balances decreased $115,011 before the effects of currency translation of $(5,463) to $324,499 at April 3, 2022 from $444,973 at January 2, 2022. Of the above noted amounts, $205,067 and $226,612 were held outside the U.S. by our foreign subsidiaries as of April 3, 2022 and January 2, 2022, respectively.

Cash used in operations was $3,519,251 for the three months 2022 compared to $1,794,634 for the three months 2021. For the three months 2022, cash used in operations was primarily due to changes in working capital of $(3,434,691), the net loss of 545,356 and changes in other assets and liabilities of $(13,153), offset by adjustments for non-cash items of $473,949. For the three months 2021, cash used in operations was primarily due to changes in working capital of $(2,725,218), adjustments for non-cash items of $(104,409) and changes in other assets and liabilities of $(1,008), offset by net income of $1,036,001.

Cash used in investing activities was $198,118 for the three months 2022 compared to $252,679 for the three months 2021. During 2022 and 2021, cash used in investing activities was principally for purchases of machinery and equipment at our manufacturing locations and payments made for company-owned key man life insurance premiums.

For the three months 2022, cash provided by financing activities was $3,602,358 compared to $2,194,415 for the three months 2021. Impacting cash flows from financing activities for the three months 2022 and 2021 were net advances on lines of credit of $3,843,578 and $782,781, respectively. The changes in the lines of credit reflect the funding of working capital. Additionally, payments of $406,904 and $387,443 were made during the three months 2022 and 2021, respectively, on long-term debt and finance lease liabilities. Impacting cash flows from financing activities for the three months 2021 were proceeds from issuance of long-term debt of $2,000,000 through the Paycheck Protection Program.

Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as of April 3, 2022 and through the date of filing of this report except for UGL’s ratio of Earnings before interest, taxes, depreciation and amortization (“EBITDA”) to debt service charges, which was less than the required minimum of 1.15 to 1. PNC Business Credit is in the process of reviewing an amendment to revise the covenant calculation to more closely align with the current business environment.

We currently have several on-going capital projects that are important to our long-term strategic goals. Machinery and equipment will also be added as needed to increase capacity or enhance operating efficiencies in our manufacturing plants. We will use a combination of financing arrangements to provide the necessary capital. We believe that our existing resources, including cash on hand and our credit facilities, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However, there can be no assurance that additional financing will be available on favorable terms, if at all.

We have no off balance sheet arrangements.

Not applicable.

The Company maintains “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of April 3, 2022 and concluded that our disclosure controls and procedures were effective as of April 3, 2022.

Changes in Internal Controls over Financial Reporting

During the three months ended April 3, 2022, there were changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As discussed in Item 9A of the Company’s Annual Report on Form 10-K for the year ended January 2, 2022, management evaluated the effectiveness of the design and operation of its disclosure controls and procedures and concluded that the Company’s disclosure controls and procedures were not effective because of a material weakness in its internal control over financial reporting. The material weakness has been remediated as a result of changes to the Company’s internal control over financial reporting that was implemented by management.

None.

Not applicable.

Issuer Purchases of Equity Securities

None.

None.

Not applicable.

None.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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