UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended April 2, 2017 | ||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from __________ to __________ | ||
Commission file number: 000-50081
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
(Name of registrant as specified in its charter)
| Nevada | 65-1005398 | |
| (State or Other Jurisdiction of Organization) | (IRS Employer Identification Number) | |
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 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 (§232.405 of this chapter) 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 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 ☑ | ||
Emerging growth company ☐ |
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 ☑
As of May 04, 2017, the issuer had 17,085,678 shares of ordinary Common Stock, $0.001 par value, and 1,619,102 shares of Class B Common Stock, $0.001 par value, outstanding.
1
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
Form 10-Q
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| PART I. FINANCIAL INFORMATION | |||
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| PART II. OTHER INFORMATION | |||
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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,” 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, risks of technological change, currency fluctuations, our dependence on key personnel, our ability to protect our intellectual property rights, risks relating to customer plans and commitments, the pricing and availability of equipment, materials and inventory, the Company’s ability to successfully integrate acquired operations, 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.
| Uniroyal Global Engineered Products, Inc. | ||||||||
| (Unaudited) | ||||||||
| ASSETS | April 2, 2017 | January 1, 2017 | ||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 1,537,716 | $ | 1,321,586 | ||||
| Accounts receivable, net | 16,329,872 | 14,555,463 | ||||||
| Inventories, net | 18,953,494 | 17,046,171 | ||||||
| Other current assets | 716,713 | 1,183,932 | ||||||
| Related party receivable | 25,000 | 25,456 | ||||||
| Total Current Assets | 37,562,795 | 34,132,608 | ||||||
| PROPERTY AND EQUIPMENT, NET | 14,108,416 | 13,611,494 | ||||||
| OTHER ASSETS | ||||||||
| Intangible assets | 3,156,493 | 3,133,564 | ||||||
| Goodwill | 1,079,175 | 1,079,175 | ||||||
| Other long-term assets | 6,829,509 | 6,665,375 | ||||||
| Total Other Assets | 11,065,177 | 10,878,114 | ||||||
| TOTAL ASSETS | $ | 62,736,388 | $ | 58,622,216 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Checks issued in excess of bank balance | $ | 800,633 | $ | 679,494 | ||||
| Line of credit | 17,195,833 | 16,799,592 | ||||||
| Current maturities of long-term debt | 925,688 | 851,988 | ||||||
| Current maturities of capital lease obligations | 366,375 | 368,718 | ||||||
| Accounts payable | 9,733,152 | 7,331,213 | ||||||
| Accrued expenses | 4,226,196 | 3,645,526 | ||||||
| Related party obligation | 372,583 | 371,161 | ||||||
| Current portion of postretirement benefit liability - health and life | 158,527 | 158,527 | ||||||
| Total Current Liabilities | 33,778,987 | 30,206,219 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Long-term debt, less current portion | 2,047,908 | 1,994,910 | ||||||
| Capital lease obligations, less current portion | 776,539 | 856,171 | ||||||
| Related party lease financing obligations | 2,160,158 | 2,162,151 | ||||||
| Long-term debt to related parties | 2,735,029 | 2,826,907 | ||||||
| Postretirement benefit liability - health and life, less current portion | 2,880,650 | 2,883,684 | ||||||
| Other long-term liabilities | 783,239 | 792,027 | ||||||
| Total Long-Term Liabilities | 11,383,523 | 11,515,850 | ||||||
| Total Liabilities | 45,162,510 | 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, Engineered Products Acquisition Limited, 50 shares issued and outstanding ($1.51 stated value) | 75 | 75 | ||||||
Common stock, 95,000,000 shares authorized ($.001 par value) 18,714,142 and 18,727,782 shares issued and outstanding as of April 2, 2017 and January 1, 2017, respectively | 18,714 | 18,728 | ||||||
| Additional paid-in capital | 34,711,744 | 34,653,894 | ||||||
| Accumulated deficit | (16,704,038 | ) | (17,174,814 | ) | ||||
| Accumulated other comprehensive income | (1,533,367 | ) | (1,678,486 | ) | ||||
| Total Stockholders' Equity | 17,573,878 | 16,900,147 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 62,736,388 | $ | 58,622,216 | ||||
See accompanying notes to the consolidated financial statements
| Uniroyal Global Engineered Products, Inc. | ||||||||
| (Unaudited) | ||||||||
| Three Months Ended | ||||||||
| April 2, 2017 | April 3, 2016 | |||||||
| NET SALES | $ | 25,758,429 | $ | 24,967,595 | ||||
| COST OF GOODS SOLD | 20,382,282 | 19,241,135 | ||||||
| Gross Profit | 5,376,147 | 5,726,460 | ||||||
| OPERATING EXPENSES: | ||||||||
| Selling | 1,284,947 | 1,382,643 | ||||||
| General and administrative | 1,821,466 | 2,041,834 | ||||||
| Research and development | 533,854 | 428,529 | ||||||
| OPERATING EXPENSES | 3,640,267 | 3,853,006 | ||||||
| Operating Income | 1,735,880 | 1,873,454 | ||||||
| OTHER INCOME (EXPENSE): | ||||||||
| Interest and other debt related expense | (389,856 | ) | (417,188 | ) | ||||
| Other income (expense) | 99,254 | (173,496 | ) | |||||
| Net Other Expense | (290,602 | ) | (590,684 | ) | ||||
| INCOME BEFORE TAX PROVISION | 1,445,278 | 1,282,770 | ||||||
| TAX PROVISION | 234,586 | 129,766 | ||||||
| NET INCOME | 1,210,692 | 1,153,004 | ||||||
| Preferred stock dividend | (739,916 | ) | (718,901 | ) | ||||
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS | $ | 470,776 | $ | 434,103 | ||||
| EARNINGS PER COMMON SHARE: | ||||||||
| Basic | $ | 0.03 | $ | 0.02 | ||||
| Diluted | $ | 0.03 | $ | 0.02 | ||||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||
| Basic | 18,723,226 | 18,863,420 | ||||||
| Diluted | 18,813,333 | 18,876,578 | ||||||
See accompanying notes to the consolidated financial statements
| Uniroyal Global Engineered Products, Inc. | ||||||||
| (Unaudited) | ||||||||
| Three Months Ended | ||||||||
| April 2, 2017 | April 3, 2016 | |||||||
| NET INCOME | $ | 1,210,692 | $ | 1,153,004 | ||||
| OTHER COMPREHENSIVE INCOME (LOSS): | ||||||||
| Minimum benefit liability adjustment | - | (1,173 | ) | |||||
| Foreign currency translation adjustment | 145,119 | (286,009 | ) | |||||
| OTHER COMPREHENSIVE INCOME (LOSS) | 145,119 | (287,182 | ) | |||||
| COMPREHENSIVE INCOME | 1,355,811 | 865,822 | ||||||
| Preferred stock dividend | (739,916 | ) | (718,901 | ) | ||||
COMPREHENSIVE INCOME TO COMMON SHAREHOLDERS | $ | 615,895 | $ | 146,921 | ||||
See accompanying notes to the consolidated financial statements
| Uniroyal Global Engineered Products, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||
| For the Three Months Ended April 2, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||
| UEPH Series A | UEPH Series B | EPAL Preferred | Common Stock | |||||||||||||||||||||||||||||||||||||||||||||
| Units | Amount | Units | Amount | Shares | Amount | Shares | Amount | Additional Paid In Capital | Accumulated Deficit | Accumulated Other Compre- hensive Income | Total Equity | |||||||||||||||||||||||||||||||||||||
| 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 Income | - | - | - | - | - | - | - | - | - | 1,210,692 | - | 1,210,692 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | - | - | - | - | 145,119 | 145,119 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | - | - | 103,322 | - | - | 103,322 | ||||||||||||||||||||||||||||||||||||
| Purchase treasury shares at cost | - | - | - | - | - | - | (13,640 | ) | (14 | ) | (45,472 | ) | - | - | (45,486 | ) | ||||||||||||||||||||||||||||||||
| Preferred stock dividend | - | - | - | - | - | - | - | - | - | (739,916 | ) | - | (739,916 | ) | ||||||||||||||||||||||||||||||||||
| Balance April 2, 2017 | 200,000 | $ | 617,571 | 150,000 | $ | 463,179 | 50 | $ | 75 | 18,714,142 | $ | 18,714 | $ | 34,711,744 | $ | (16,704,038 | ) | $ | (1,533,367 | ) | $ | 17,573,878 | ||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements
| Uniroyal Global Engineered Products, Inc. | ||||||||
| (Unaudited) | ||||||||
| Three Months Ended | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | April 2, 2017 | April 3, 2016 | ||||||
| Net income | $ | 1,210,692 | $ | 1,153,004 | ||||
| Adjustments to reconcile net income to net cash flows from operating activities: | ||||||||
| Depreciation | 420,247 | 414,082 | ||||||
| Stock-based compensation expense | 103,322 | 59,141 | ||||||
| Amortization of intangible assets | 5,001 | 5,001 | ||||||
| Loss on disposal of property and equipment | - | 2,744 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (1,631,870 | ) | (1,922,063 | ) | ||||
| Inventories | (1,799,860 | ) | (1,792,392 | ) | ||||
| Other current assets | 477,648 | (91,397 | ) | |||||
| Other long-term assets | (23,098 | ) | 15,937 | |||||
| Accounts payable | 2,319,928 | 1,830,189 | ||||||
| Accrued expenses | 527,891 | 484,869 | ||||||
| Postretirement benefit liability - health and life | (3,034 | ) | (1,980 | ) | ||||
| Other long-term liabilities | (19,772 | ) | 117,671 | |||||
| Cash Flows provided by Operating Activities | 1,587,095 | 274,806 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Capital expenditures | (482,959 | ) | (401,089 | ) | ||||
| Net payments on life insurance policies | (139,922 | ) | (82,731 | ) | ||||
| Cash Flows used in Investing Activities | (622,881 | ) | (483,820 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Checks issued in excess of bank balance, net | 121,138 | 124,789 | ||||||
| Net advances on line of credit | 188,894 | 855,402 | ||||||
| Payments on long-term debt | (120,287 | ) | (96,459 | ) | ||||
| Payments on capital lease obligations | (99,424 | ) | (115,158 | ) | ||||
| Proceeds from (payments on) related party obligation | (86,037 | ) | 60,098 | |||||
| Payment of preferred stock dividends | (720,121 | ) | (699,165 | ) | ||||
| Purchase of treasury stock | (45,486 | ) | (159,668 | ) | ||||
| Cash Flows used in Financing Activities | (761,323 | ) | (30,161 | ) | ||||
| Net Change in Cash and Cash Equivalents | 202,891 | (239,175 | ) | |||||
| Cash And Cash Equivalents - Beginning Of Period | 1,321,586 | 1,910,112 | ||||||
| Effects of currency translation on cash and cash equivalents | 13,239 | (47,964 | ) | |||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 1,537,716 | $ | 1,622,973 | ||||
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.
April 2, 2017
(Unaudited)
| 1. | 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 Uniroyal Global Engineered Products, Inc.’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. Uniroyal Global Engineered Products, Inc. (the “Company,” “Uniroyal Global,” “we,” or “us”) filed audited consolidated financial statements as of and for the fiscal years ended January 1, 2017 and January 3, 2016 which included all information and notes necessary for such complete presentation in conjunction with its 2016 Annual Report on Form 10-K/A.
The results of operations for the interim period ended April 2, 2017 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 1, 2017, which are contained in the Company’s 2016 Annual Report on Form 10-K/A.
The Company owns all of the ownership interests in Uniroyal Engineered Products, LLC (“Uniroyal”) and its holding company UEP Holdings, LLC (“UEPH”), a U.S. manufacturer of textured coatings, and all of the ordinary common stock of Uniroyal Global (Europe) Limited (“UGEL”) formerly known as Engineered Products Acquisition Limited (“EPAL”), the holding company for Uniroyal Global Limited (“UGL”) formerly Wardle Storeys (Group) Limited (“Wardle Storeys”), a European manufacturer of textured coatings and polymer films.
The Company and its subsidiaries have adopted a 52/53-week fiscal year ending on the Sunday nearest to December 31. The current year ending December 31, 2017 and the prior year ended January 1, 2017 are 52-week years.
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 statement of the Company’s financial position as of April 2, 2017 and the results of operations, comprehensive income and cash flows for the interim periods ended April 2, 2017 and April 3, 2016.
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 US dollar as the reporting currency for financial reporting. The financial position and results of operations of the Company’s UK-based operations are measured using the British Pound Sterling as the functional currency. See Note 5, Foreign Currency Translation.
| 2. | Noncash Transactions and Supplemental Disclosure of Cash Flow Information |
During the three months ended April 2, 2017 and April 3, 2016, the Company paid down its term loans using available borrowings on its various lines of credit of $102,363 and $131,495, respectively.
During the three months ended April 2, 2017 and April 3, 2016, the Company entered into new equipment financing arrangements with a value of $335,251 and $256,244, respectively. The fair value was added to property and equipment and a corresponding amount to long-term debt or capital lease obligations.
Supplemental disclosure of cash paid for:
| April 2, 2017 | April 3, 2016 | |||||||
| Interest | $ | 373,134 | $ | 429,434 | ||||
| Tax payments | $ | - | $ | - |
| 3. | 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 income and expense.
| 4. | 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 April 2, 2017 and January 1, 2017 were assets of $11,910 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 three months ended April 2, 2017, there have been no changes in the application of valuation methods applied to similar assets and liabilities.
| 5. | 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 reporting period. The resulting translation gains and losses on assets and liabilities are recorded in accumulated other comprehensive income (loss), and are excluded from net income until realized through a sale or liquidation of the investment. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operations are included in Other Income (Expense) in the accompanying Consolidated Statements of Operations.
| 6. | Inventory |
Inventories consist of the following:
| April 2, 2017 | January 1, 2017 | |||||||
| Raw materials | $ | 5,815,120 | $ | 5,199,632 | ||||
| Work-in-process | 4,453,198 | 4,491,250 | ||||||
| Finished goods | 10,035,890 | 8,669,625 | ||||||
| 20,304,208 | 18,360,507 | |||||||
| Less: Allowance for inventory obsolescence | (1,350,714 | ) | (1,314,336 | ) | ||||
| Total Inventories | $ | 18,953,494 | $ | 17,046,171 | ||||
| 7. | Other Long-term Assets |
Other long-term assets consist of the following:
| April 2, 2017 | January 1, 2017 | |||||||
| Non-current deferred tax asset | $ | 5,676,917 | $ | 5,689,000 | ||||
| Other | 1,152,592 | 976,375 | ||||||
| Total Other Long-term Assets | $ | 6,829,509 | $ | 6,665,375 | ||||
| 8. | Other Long-term Liabilities |
Other long-term liabilities consist of the following:
| April 2, 2017 | January 1, 2017 | |||||||
| Non-current deferred tax liability | $ | 736,016 | $ | 743,971 | ||||
| Other | 47,223 | 48,056 | ||||||
| Total Other Long-term Liabilities | $ | 783,239 | $ | 792,027 | ||||
| 9. | Line 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. 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 $10,173,349 and $9,668,388 as of April 2, 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 £8,500,000 (approximately $10.5 million) revolving line of credit financing agreement with Lloyds Bank Commercial Finance Limited (“UK 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 (UK LIBOR or Lloyds Bank Base Rate as published) plus 1.95% to 2.45% depending on the tranche. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable and inventories. The line of credit is secured by substantially all of the subsidiary's assets and includes certain financial and restrictive covenants.
The outstanding balance on the UK Line of Credit was £5,619,628 and £5,792,236 ($7,022,484 and $7,131,204) as of April 2, 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.
| 10. | Long-term Debt |
Long-term debt consists of the following:
| Interest Rate | April 2, 2017 | January 1, 2017 | ||||||||
| Wells Fargo Capital Finance LLC | Prime | $ | 1,015,422 | $ | 1,089,721 | |||||
| Lloyds Bank Commercial Finance Limited | LIBOR + 3.15% | 155,788 | 181,392 | |||||||
| Kennet Equipment Leasing Limited | 10.90% | 771,800 | 801,153 | |||||||
| Balboa Capital Corporation | 5.72% | 178,946 | 213,230 | |||||||
| Regents Capital Corporation | 7.40% | 321,717 | 350,000 | |||||||
| De Lage Landen Financial Services | 7.35% | 114,191 | 118,073 | |||||||
| Ford Motor Credit | 4.30% | 43,005 | 44,387 | |||||||
| Byline Financial Group | 8.56% | 43,956 | 48,942 | |||||||
| Regents Capital Corporation | 6.20% | 328,771 | - | |||||||
| 2,973,596 | 2,846,898 | |||||||||
| Current portion | (925,688 | ) | (851,988 | ) | ||||||
| $ | 2,047,908 | $ | 1,994,910 | |||||||
| 11. | Related Party Obligations |
Long-term debt to related parties consists of the following:
| Interest Rate | April 2, 2017 | January 1, 2017 | ||||||||
| Senior subordinated promissory note | 9.25% | $ | 2,000,000 | $ | 2,000,000 | |||||
| Senior secured promissory note | 10.00% | 1,102,543 | 1,194,421 | |||||||
| 3,102,543 | 3,194,421 | |||||||||
| Current portion | (367,514 | ) | (367,514 | ) | ||||||
| $ | 2,735,029 | $ | 2,826,907 | |||||||
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 $32,439, 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. This obligation is shown in the accompanying Consolidated Balance Sheets as Related Party Lease Financing Obligation which consists of the following:
| April 2, 2017 | January 1, 2017 | |||||||
| Related party lease financing obligation | $ | 2,165,227 | $ | 2,165,798 | ||||
| Less: current portion | (5,069 | ) | (3,647 | ) | ||||
| Long-term Portion | $ | 2,160,158 | $ | 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 obligations.
| April 2, 2017 | January 1, 2017 | |||||||
Current portion of long-term debt to related parties | $ | 367,514 | $ | 367,514 | ||||
| Current portion related party lease financing obligation | 5,069 | 3,647 | ||||||
| Related Party Obligation | $ | 372,583 | $ | 371,161 | ||||
| 12. | Capital Leases |
The Company has several capital leases on equipment which expire from April 2, 2017 through January 2021 with monthly lease payments ranging from approximately $1,119 to $31,120 per month. The capital lease obligations are secured by the related equipment. As of April 2, 2017 and January 1, 2017, assets recorded under capital leases are included in property and equipment in the accompanying Consolidated Balance Sheets. Amortization of items under capital lease obligations has been included with depreciation expense on owned property and equipment in the accompanying Consolidated Statements of Operations. Interest rates on these obligations range from 3.84% to 19.15%
Capital lease obligations consist of the following:
| April 2, 2017 | January 1, 2017 | |||||||
| Capital lease obligation | $ | 1,142,914 | $ | 1,224,889 | ||||
| Less: current portion | (366,375 | ) | (368,718 | ) | ||||
| Long-term Portion | $ | 776,539 | $ | 856,171 | ||||
| 13. | Accumulated Other Comprehensive Income |
The changes in accumulated other comprehensive income (loss) were as follows:
Minimum Benefit Liability Adjustments | Foreign Currency Translation Adjustment | Total | ||||||||||
| Balance at January 1, 2017 | $ | 233,877 | $ | (1,912,363 | ) | $ | (1,678,486 | ) | ||||
| Other comprehensive losses before reclassifications, net | - | 145,119 | 145,119 | |||||||||
| Balance at April 2, 2017 | $ | 233,877 | $ | (1,767,244 | ) | $ | (1,533,367 | ) | ||||
The gain (loss) reclassified from accumulated other comprehensive income (loss) into income is recorded to the following income statement line items:
Other Comprehensive Income Component | Income Statement Line Item | |
| Minimum Benefit Liability Adjustments | General and administrative expense |
| 14. | Stock Option Plan |
On June 25, 2015, the Company’s stockholders approved the adoption of the 2015 Stock Option Plan. This plan provides for the granting of options to purchase the Company’s common stock to employees and directors. The options granted are subject to a vesting schedule as set forth in each individual option agreement. Each option expires on the tenth anniversary of its date of grant unless an earlier termination date is provided in the grant agreement. The maximum aggregate number of shares of common stock that may be optioned and sold under the plan shall be 6% of the shares outstanding on the date of grant. The shares that may be optioned under the plan may be authorized but unissued or may be treasury shares.
Compensation expense is recognized on a straight-line basis over a three-year vesting period from date of grant.
Stock option activity for the three months ended April 2, 2017 and April 3, 2016 is as follows:
| Stock Options | |||||||||||||||||||||
| Total | Weighted Average Exercise Price | Exercis- able | Weighted Average Exercise Price | Non-Vested | Weighted Average Exercise Price | ||||||||||||||||
| Outstanding at January 3, 2016 | 665,000 | $2.37 | - | - | 665,000 | $2.37 | |||||||||||||||
| Granted | - | - | - | - | - | - | |||||||||||||||
| Vested | - | - | - | - | - | - | |||||||||||||||
| Exercised | - | - | - | - | - | - | |||||||||||||||
| Forfeited or cancelled | - | - | - | - | - | - | |||||||||||||||
| Outstanding at April 3, 2016 | 665,000 | $2.37 | - | 665,000 | $2.37 | ||||||||||||||||
| Outstanding at January 1, 2017 | 997,950 | $2.80 | 217,501 | $2.37 | 780,249 | $2.92 | |||||||||||||||
| Granted | - | - | - | - | - | - | |||||||||||||||
| Vested | - | - | - | - | - | - | |||||||||||||||
| Exercised | - | - | - | - | - | - | |||||||||||||||
| Forfeited or cancelled | - | - | - | - | - | - | |||||||||||||||
| Outstanding April 2, 2017 | 997,750 | $2.80 | 217,501 | $2.37 | 780,249 | $2.92 | |||||||||||||||
| Aggregate Intrinsic Value | |||||||||||||||||||||
| April 3, 2016 | $ | 1,017,450 | $ | - | $ | 1,017,450 | |||||||||||||||
| Aggregate Intrinsic Value | |||||||||||||||||||||
| April 2, 2017 | $ | 758,150 | $ | 256,651 | $ | 501,499 | |||||||||||||||
Option expense recognized was $103,322 and $59,141 for the three months ended April 2, 2017 and April 3, 2016, respectively. As of April 2, 2017, there was $678,192 in unrecognized compensation cost related to the options granted under the 2015 Stock Option Plan. We expect to recognize those costs over the remaining vesting term of 24 months.
| 15. | Recent Accounting Pronouncements |
In May 2014, the Financial Accounting Standards Board issued a new standard ASU No. 2014-09, "Revenue from Contracts with Customers." Under ASU 2014-09 recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for the Company January 1, 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 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 ending December 31, 2017 will not have a significant effect on its consolidated financial position, results of operations and cash flows.
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 liabilities and assets 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 ending December 31, 2017 will not have a significant effect on its consolidated financial position, results of operations and cash flows. The Company is applying 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 Asset 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. 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.
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 ending December 31, 2017 will not have a significant effect on its 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 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 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.
| 16. | Earnings per Common Share |
The following table sets for the computation of earnings per common share - basic and earnings per common share - diluted:
| April 2, 2017 | April 3, 2016 | |||||||
| Numerator | ||||||||
| Net income available to common shareholders | $ | 470,776 | $ | 434,103 | ||||
| Denominator | ||||||||
| Denominator for basic earnings per share - weighted average shares outstanding | 18,723,226 | 18,863,420 | ||||||
| Weighted average effect of dilutive securities | 90,107 | 13,158 | ||||||
| Denominator for dilutive earnings per share - weighted average shares outstanding | 18,813,333 | 18,876,578 | ||||||
| Basic and Diluted Income Per Share | ||||||||
| Net income available to common shareholders | $ | 0.03 | $ | 0.02 | ||||
| Effect of dilutive securities | (0.00 | ) | (0.00 | ) | ||||
| Net income available to common shareholders | $ | 0.03 | $ | 0.02 | ||||
For the three months ended April 2, 2017 and April 3, 2016, there were 90,107 and 13,158, respectively, of dilutive common stock equivalents related to stock options included in the calculation of diluted earnings per common share.
| 17. | 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 April 2, 2017 financial statements. There were no material events or transactions occurring during this period requiring recognition or disclosure.
| 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 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 600 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes, adhesive back coatings and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts character prints and non-registered prints, lamination and panel cutting.
Our vinyl coated fabric products have various high performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior trim components from floor to headliner which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene 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 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 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. 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. For further discussion of our significant accounting policies, refer to Note 1 – “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 and Estimates” in our Annual Report on Form 10-K/A for the fiscal year ended January 1, 2017.
Recent Accounting Pronouncements
See Note 15 – “Recent Accounting Pronouncements” to the Consolidated Financial Statements for a discussion of recent accounting guidance.
Overview:
The Company and its subsidiaries have adopted a 52/53-week fiscal year ending on the Sunday nearest to December 31. The current year ending December 31, 2017 and the prior year ended January 1, 2017 are 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 its functional currency, principally the Euro. Approximately 29% of the Company’s global revenues and 32% of its global raw material purchases are derived from these transactions. The average year-to-date exchange rate for the Pound Sterling to the U.S. Dollar was approximately 13.5% lower and the average exchange rate for the Euro to the Pound Sterling was approximately 13.5% higher in 2017 compared to 2016. These exchange rate changes had the net effect of decreasing net sales by approximately $1.1 million for the three months ended April 2, 2017. Since the Pound Sterling exchange rate change also reduced the fixed expenses, the overall effect on net income was a positive amount of approximately $152,000 for the three months ended April 2, 2017 compared to the corresponding period of 2016.
Three Months Ended April 2, 2017 Compared to the Three Months Ended April 3, 2016
The following table sets forth, for the three months ended April 2, 2017 (“three months 2017”) and April 3, 2016 (“three months 2016”), certain operations data including their respective percentage of net sales:
| Three Months | ||||||||||||||||||||
| April 2, 2017 | April 3, 2016 | Change | % Change | |||||||||||||||||
| Net Sales | $ | 25,758,429 | 100.0% | $ | 24,967,595 | 100.0% | $ | 790,834 | 3.2% | |||||||||||
| Cost of Sales | 20,382,282 | 79.1% | 19,241,135 | 77.1% | 1,141,147 | 5.9% | ||||||||||||||
| Gross Profit | 5,376,147 | 20.9% | 5,726,460 | 22.9% | (350,313 | ) | -6.1% | |||||||||||||
| Other Expenses: | ||||||||||||||||||||
| Selling | 1,284,947 | 5.0% | 1,382,643 | 5.5% | (97,696 | ) | -7.1% | |||||||||||||
| General and administrative | 1,821,466 | 7.1% | 2,041,834 | 8.2% | (220,368 | ) | -10.8% | |||||||||||||
| Research and development | 533,854 | 2.1% | 428,529 | 1.7% | 105,325 | 24.6% | ||||||||||||||
| Total operating expenses | 3,640,267 | 14.1% | 3,853,006 | 15.4% | (212,739 | ) | -5.5% | |||||||||||||
| Operating Income | 1,735,880 | 6.7% | 1,873,454 | 7.5% | (137,574 | ) | -7.3% | |||||||||||||
| Interest expense | (389,856 | ) | -1.5% | (417,188 | ) | -1.7% | 27,332 | -6.6% | ||||||||||||
| Other income (expense) | 99,254 | 0.4% | (173,496 | ) | -0.7% | 272,750 | <-100% | |||||||||||||
| Income before taxes | 1,445,278 | 5.6% | 1,282,770 | 5.1% | 162,508 | 12.7% | ||||||||||||||
| Tax provision | 234,586 | 0.9% | 129,766 | 0.5% | 104,820 | 80.8% | ||||||||||||||
| Net income | 1,210,692 | 4.7% | 1,153,004 | 4.6% | 57,688 | 5.0% | ||||||||||||||
| Preferred dividends | (739,916 | ) | -2.9% | (718,901 | ) | -2.9% | (21,015 | ) | 2.9% | |||||||||||
| Net income available to common shareholders | $ | 470,776 | 1.8% | $ | 434,103 | 1.7% | $ | 36,673 | 8.4% | |||||||||||
Revenue:
Total revenue for the three months 2017 increased $790,834 or 3.2% to $25,758,429 from $24,967,595 for the three months 2016. As a result of several new programs, automotive sales increased 7.7% versus last year primarily with increases in the European market. Industrial sales declined 5.2% due to general weakness in the markets in which we compete. These net gains were partially offset by the decrease from the net currency effect of the exchange rate change in the amount of $1,130,000. Without the effect of the exchange rate change, total revenue would have increased by 7.7%.
Gross Profit:
Total gross profit for the three months 2017 decreased $350,313 or 6.1% to $5,376,147 from $5,726,460 for the three months 2016. The gross profit percentage was 20.9% of sales for the three months 2017 compared to 22.9% for the three months 2016. The lower gross profit percentage was partially due to mix as lower margin automotive sales increased and higher margin industrial sales decreased for the three months 2017 compared to the three months 2016. Gross profit was also negatively impacted by rising raw material prices and operating inefficiencies resulting from newly awarded automotive platforms ramping up in Europe.
Operating Expenses:
Selling expenses for the three months 2017 decreased $97,696 or 7.1% to $1,284,947 from $1,382,643 for the three months 2016. The decrease resulted primarily from the net currency effect of the exchange rate change.
General and administrative expenses for the three months 2017 decreased by $220,368 or 10.8% to $1,821,466 from $2,041,834 for the three months 2016. This decrease was due to lower employee benefit costs for the three months 2017 compared to the three months 2016. Also contributing to the decrease was the net currency effect of $92,000.
Research and development expenses for the three months 2017 increased by $105,325 or 24.6% to $533,854 from $428,529 for the three months 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.
Operating Income:
Operating income for the three months 2017 decreased by $137,574 or 7.3% to $1,735,880 from $1,873,454 for the three months 2016. The operating income percentage was 6.7% of sales for the three months 2017 compared to 7.5% for the three months 2016. Operating income decreased primarily from the decrease in gross profit.
Interest Expense:
Interest expense for the three months 2017 decreased by $27,332 or 6.6% to $389,856 from $417,188 for the three months 2016. The decrease was primarily due to debt repayment partially offset by new capital leases for equipment purchases and higher interest rates on LIBOR and prime during the three months 2017 compared to the three months 2016.
Other Income (Expense):
Other income (expense) for the three months 2017 increased $272,750 to a gain of $99,254 from a loss of $173,496 for the three months 2016. The amount in other income (expense) principally is the currency gains and losses recognized by the UK 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:
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 member. Uniroyal’s income is allocated entirely to UEPH as its sole member. Uniroyal Global then receives this income allocation as a member of UEPH less the dividends paid on the preferred units held by the former members of Uniroyal. For federal income tax purposes UEPH is a pass through entity and the Company’s share of its taxable income is reported on its tax return. The taxable income applicable to the distribution for the preferred ownership interests is reported to the members who report it on their respective individual tax returns.
For the three months 2016, the tax provision was comprised of U.K. tax plus a state and local tax provision on the Company’s U.S. income. There was no U.S. Federal tax provision for the 2016 period due to a reduction of deferred tax asset valuation allowances that offset the provision. At January 1, 2017, the Company concluded after an analysis that it was more likely than not that all of the deferred tax asset would be realized and accordingly eliminated the valuation allowance. Therefore, the provisions for the three months ended April 2, 2017 included, in addition to the U.K. tax and state and local tax, a provision for Federal tax on the Company’s income less the income applicable to the distribution for the preferred ownership interests.
Preferred Stock Dividend:
The terms of the acquisitions in November 2014 resulted in the issuance of preferred ownership units/stock of UEP Holdings, LLC and UGEL (formerly EPAL) to the sellers. These preferred units carry quarterly dividend requirements on a total value of $55,000,000 at rates ranging from 5.0% to 6.5%. 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 $40,000,000 subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of $17,195,833 at April 2, 2017, $13.0 million of the lines bears interest at LIBOR plus a range of 1.95% to 2.45%, depending on the underlying borrowing base and $4.2 million bears interest at the bank’s prime or base lending rate which was 4.0% at April 2, 2017. At April 2, 2017, the lines provided an additional availability of approximately $6.6 million. We plan to use this availability to help finance our cash needs for the remaining months of fiscal 2017 and future periods. The balances due under the lines of credit are recorded as current liabilities on the balance sheet.
Given our capital resources in the U.S. and the potential for increased investment and acquisitions in foreign jurisdictions, we do not have a history of repatriating a significant portion of our foreign cash. Accordingly, we have not recognized a deferred tax liability for these unremitted earnings. In the event that circumstances should change in the future and we decide to repatriate these foreign amounts to fund U.S. operations, the Company would record a tax expense and pay the applicable U.S. taxes on these repatriated foreign amounts.
The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 1.11 at April 2, 2017 and 1.13 at January 1, 2017.
Cash balances increased $216,130, after the effects of currency translation of $13,239, to $1,537,716 at April 2, 2017 from $1,321,586 at January 1, 2017. Of the above noted amounts, $842,303 and $970,327 were held outside the U.S. by our foreign subsidiaries as of April 2, 2017 and January 1, 2017, respectively.
Cash provided by operations was $1,587,095 for the three months 2017 compared to $274,806 for the three months 2016. Cash provided by operations came from net income of $1,210,692 and $1,153,044 for the three months 2017 and 2016, respectively, as adjusted by cash flows related to changes in assets and liabilities of $(152,167) and $(1,359,166) for the three months 2017 and 2016, respectively. Collections from accounts receivable and other receivables and timing of payments to vendors in 2017 contributed to the increase compared to 2016.
Cash used in investing activities was $622,881 for the three months 2017 compared to $483,820 for the three months 2016. During 2017 and 2016, cash used in investing activities was principally for purchases of machinery and equipment at our manufacturing locations.
For the three months 2017, cash used in financing activities was $761,323 as compared to $30,161 used in financing activities for the three months 2016. The Company paid $720,121 and $699,165 of preferred dividends for the three months 2017 and 2016, respectively. The Company had net advances on its lines of credit of $188,894 and $855,402 for the three months 2017 and 2016, respectively.
Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as of April 2, 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.
| Quantitative and Qualitative Disclosures About Market Risk |
None.
| Controls and Procedures |
The Company maintains “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer, and Board of Directors, as appropriate, to allow timely decisions regarding required 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 2, 2017 and concluded that our disclosure controls and procedures were effective as of April 2, 2017.
Changes in Internal Controls over Financial Reporting
During the three months ended April 2, 2017, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| PART II. | OTHER INFORMATION |
| Legal Proceedings |
None.
| Risk Factors |
There have been no material changes from the risk factors as previously disclosed in our annual report on Form 10-K/A for the fiscal year ended January 1, 2017.
| Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
On April 29, 2015, the Board of Directors of the Registrant authorized the Chief Executive Officer to cause the Company to repurchase shares of the Company’s common stock in the open market or in private transactions at such times as cash of the Company is available and the Chief Executive Officer deems such purchases to be in the long-term interests of the Company. The Chief Executive Officer is required to report such purchases at the next meeting of the Board of Directors. The authorization has no expiration date.
| First 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 | ||||
| January 2, 2017 to January 29, 2017 | 2,102 | $3.29 | - | - | ||||
| January 30, 2017 to February 26, 2017 | 860 | $3.60 | - | - | ||||
| February 27, 2017 to April 2, 2017 | 10,678 | $3.32 | - | - | ||||
| Total | 13,640 | $3.33 | - | - | ||||
| Defaults Upon Senior Securities |
None.
| Mine Safety Disclosures |
Not applicable.
| Other Information |
None.
| Exhibits |
| (a) | Exhibits. |
| Exhibit No. | Description | |
| 31.1 * | Chief Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14(a) | |
| 31.2 * | Chief Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14(a) | |
| 32.1 * | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 | |
| 32.2 * | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 | |
| 101.INS * + | XBRL Instance Document | |
| 101.CAL * + | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF * + | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB * + | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE * + | XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.SCH * + | XBRL Taxonomy Extension Schema Document |
_______________
| * | Filed herewith. |
| + | In accordance with Rule 406T of Regulation S-T, this information is deemed not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
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.
| UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC. | |||
| Dated: May 15, 2017 | By: | /s/ Howard R. Curd | |
Howard R. Curd Chief Executive Officer | |||
| Dated: May 15, 2017 | By: | /s/ Edmund C. King | |
Edmund C. King Chief Financial Officer |
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