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 1, 2018 | ||
| ☐ | 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 ☐ (Do not check if smaller reporting company) | 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 1, 2018, the issuer had 17,070,928 shares of ordinary Common Stock, $0.001 par value, and 1,619,102 shares of Class B Common Stock, $0.001 par value, outstanding.
1
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
Form 10-Q
| Page | |||
| Cautionary Note Regarding Forward-Looking Statements | |||
| PART I. FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements | ||
| 4 | |||
| 5 | |||
| 6 | |||
| 7 | |||
| 8 | |||
| 9 | |||
| Item 2. | 17 | ||
| Item 3. | 21 | ||
| Item 4. | 21 | ||
| PART II. OTHER INFORMATION | |||
| Item 1. | 22 | ||
| Item 1A. | 22 | ||
| Item 2. | 22 | ||
| Item 3. | 22 | ||
| Item 4. | 22 | ||
| Item 5. | 22 | ||
| Item 6. | 23 | ||
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. | ||||||||
| (Unaudited) | ||||||||
| ASSETS | April 1, 2018 | December 31, 2017 | ||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 820,723 | $ | 1,267,319 | ||||
| Accounts receivable, net | 16,599,946 | 15,167,468 | ||||||
| Inventories, net | 19,972,809 | 19,769,662 | ||||||
| Other current assets | 796,255 | 846,362 | ||||||
| Related party receivable | 21,180 | 37,116 | ||||||
| Total Current Assets | 38,210,913 | 37,087,927 | ||||||
| PROPERTY AND EQUIPMENT, NET | 17,733,381 | 17,289,058 | ||||||
| OTHER ASSETS | ||||||||
| Intangible assets | 3,376,400 | 3,295,896 | ||||||
| Goodwill | 1,079,175 | 1,079,175 | ||||||
| Other long-term assets | 3,976,314 | 3,902,246 | ||||||
| Total Other Assets | 8,431,889 | 8,277,317 | ||||||
| TOTAL ASSETS | $ | 64,376,183 | $ | 62,654,302 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Checks issued in excess of bank balance | $ | 328,742 | $ | 686,640 | ||||
| Lines of credit | 19,857,378 | 19,340,468 | ||||||
| Current maturities of long-term debt | 1,195,332 | 1,155,490 | ||||||
| Current maturities of capital lease obligations | 431,377 | 408,425 | ||||||
| Accounts payable | 10,806,363 | 10,358,761 | ||||||
| Accrued expenses and other liabilities | 3,956,040 | 3,594,684 | ||||||
| Related party obligation | 588,460 | 286,955 | ||||||
| Current portion of postretirement benefit liability - health and life | 143,287 | 143,287 | ||||||
| Total Current Liabilities | 37,306,979 | 35,974,710 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Long-term debt, less current portion | 2,828,168 | 2,467,433 | ||||||
| Capital lease obligations, less current portion | 443,281 | 531,218 | ||||||
| Related party lease financing obligation | 2,149,960 | 2,153,327 | ||||||
| Long-term debt to related parties | 2,612,524 | 2,765,655 | ||||||
| Postretirement benefit liability - health and life, less current portion | 2,532,536 | 2,547,076 | ||||||
| Other long-term liabilities | 851,166 | 822,492 | ||||||
| Total Long-Term Liabilities | 11,417,635 | 11,287,201 | ||||||
| Total Liabilities | 48,724,614 | 47,261,911 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
Preferred units, Series A UEP Holdings, LLC, 200,000 units issued and outstanding ($100 issue price) | 617,571 | 617,571 | ||||||
Preferred units, Series B UEP Holdings, LLC, 150,000 units issued and outstanding ($100 issue price) | 463,179 | 463,179 | ||||||
Preferred stock, Uniroyal Global (Europe) Limited, 50 shares issued and outstanding ($1.51 stated value) | 75 | 75 | ||||||
Common stock, 95,000,000 shares authorized ($.001 par value) 18,690,030 shares issued and outstanding as of both April 1, 2018 and December 31, 2017 | 18,690 | 18,690 | ||||||
| Additional paid-in capital | 35,044,933 | 34,944,972 | ||||||
| Accumulated deficit | (20,571,764 | ) | (20,276,944 | ) | ||||
| Accumulated other comprehensive income (loss) | 78,885 | (375,152 | ) | |||||
| Total Stockholders' Equity | 15,651,569 | 15,392,391 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 64,376,183 | $ | 62,654,302 | ||||
See accompanying notes to the consolidated financial statements.
| Uniroyal Global Engineered Products, Inc. | ||||||||
| (Unaudited) | ||||||||
| Three Months Ended | ||||||||
| April 1, 2018 | April 2, 2017 | |||||||
| NET SALES | $ | 26,429,687 | $ | 25,758,429 | ||||
| COST OF GOODS SOLD | 21,812,193 | 20,382,282 | ||||||
| Gross Profit | 4,617,494 | 5,376,147 | ||||||
| OPERATING EXPENSES: | ||||||||
| Selling | 1,349,030 | 1,284,947 | ||||||
| General and administrative | 1,948,301 | 1,821,466 | ||||||
| Research and development | 421,963 | 533,854 | ||||||
| OPERATING EXPENSES | 3,719,294 | 3,640,267 | ||||||
| Operating Income | 898,200 | 1,735,880 | ||||||
| OTHER INCOME (EXPENSE): | ||||||||
| Interest and other debt related expense | (456,364 | ) | (389,856 | ) | ||||
| Other income | 33,282 | 99,254 | ||||||
| Net Other Expense | (423,082 | ) | (290,602 | ) | ||||
| INCOME BEFORE TAX PROVISION | 475,118 | 1,445,278 | ||||||
| TAX PROVISION (BENEFIT) | (14,521 | ) | 234,586 | |||||
| NET INCOME | 489,639 | 1,210,692 | ||||||
| Preferred stock dividend | (784,459 | ) | (739,916 | ) | ||||
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS | $ | (294,820 | ) | $ | 470,776 | |||
| EARNINGS (LOSS) PER COMMON SHARE: | ||||||||
| Basic | $ | (0.02 | ) | $ | 0.03 | |||
| Diluted | $ | (0.02 | ) | $ | 0.03 | |||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||
| Basic | 18,690,030 | 18,723,226 | ||||||
| Diluted | 18,690,030 | 18,813,333 | ||||||
| See accompanying notes to the consolidated financial statements. | ||||||||
| Uniroyal Global Engineered Products, Inc. | ||||||||
| (Unaudited) | ||||||||
| Three Months Ended | ||||||||
| April 1, 2018 | April 2, 2017 | |||||||
| NET INCOME | $ | 489,639 | $ | 1,210,692 | ||||
| OTHER COMPREHENSIVE INCOME: | ||||||||
| Minimum benefit liability adjustment | (29,531 | ) | - | |||||
| Foreign currency translation adjustment | 483,568 | 145,119 | ||||||
| OTHER COMPREHENSIVE INCOME | 454,037 | 145,119 | ||||||
| COMPREHENSIVE INCOME | 943,676 | 1,355,811 | ||||||
| Preferred stock dividend | (784,459 | ) | (739,916 | ) | ||||
| COMPREHENSIVE INCOME TO COMMON SHAREHOLDERS | $ | 159,217 | $ | 615,895 | ||||
| See accompanying notes to the consolidated financial statements. | ||||||||
| Uniroyal Global Engineered Products, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||
| For the Three Months Ended April 1, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||
| UEPH Series A | UEPH Series B | UGEL Preferred | Common Stock | Additional Paid In Capital | Accumulated Deficit | Accumu- lated Other Compre- hensive Income (Loss) | Total Equity | |||||||||||||||||||||||||||||||||||||||||
| Units | Amount | Units | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2017 | 200,000 | $ | 617,571 | 150,000 | $ | 463,179 | 50 | $ | 75 | 18,690,030 | $ | 18,690 | $ | 34,944,972 | $ | (20,276,944 | ) | $ | (375,152 | ) | $ | 15,392,391 | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | - | - | 489,639 | - | 489,639 | ||||||||||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | - | - | - | - | 454,037 | 454,037 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | - | - | - | - | - | - | 99,961 | - | - | 99,961 | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividend | - | - | - | - | - | - | - | - | - | (784,459 | ) | - | (784,459 | ) | ||||||||||||||||||||||||||||||||||
| Balance April 1, 2018 | 200,000 | $ | 617,571 | 150,000 | $ | 463,179 | 50 | $ | 75 | 18,690,030 | $ | 18,690 | $ | 35,044,933 | $ | (20,571,764 | ) | $ | 78,885 | $ | 15,651,569 | |||||||||||||||||||||||||||
| See accompanying notes to the consolidated financial statements. | ||||||||||||||||||||||||||||||||||||||||||||||||
| Uniroyal Global Engineered Products, Inc. | ||||||||
| (Unaudited) | ||||||||
| Three Months Ended | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | April 1, 2018 | April 2, 2017 | ||||||
| Net income | $ | 489,639 | $ | 1,210,692 | ||||
| Adjustments to reconcile net income to net cash flows from operating activities: | ||||||||
| Depreciation | 529,025 | 420,247 | ||||||
| Stock-based compensation expense | 99,961 | 103,322 | ||||||
| Amortization of intangible assets | 5,001 | 5,001 | ||||||
| Loss on disposal of property and equipment | 1,310 | - | ||||||
| Noncash postemployment health and life benefit | (29,531 | ) | - | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (958,701 | ) | (1,631,870 | ) | ||||
| Inventories | 168,456 | (1,799,860 | ) | |||||
| Other current assets | 77,099 | 477,648 | ||||||
| Related party receivable | 15,936 | - | ||||||
| Other long-term assets | (132,147 | ) | (23,098 | ) | ||||
| Accounts payable | 144,921 | 2,319,928 | ||||||
| Accrued expenses and other liabilities | 256,615 | 527,891 | ||||||
| Postretirement benefit liability - health and life | (14,540 | ) | (3,034 | ) | ||||
| Other long-term liabilities | (4,458 | ) | (19,772 | ) | ||||
| Cash provided by operating activities | 648,586 | 1,587,095 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Capital expenditures | (364,231 | ) | (482,959 | ) | ||||
| Payments on life insurance policies, net of proceeds from sale of life insurance policy | (63,713 | ) | (139,922 | ) | ||||
| Cash used in investing activities | (427,944 | ) | (622,881 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net change in checks issued in excess of bank balance | (357,898 | ) | 121,138 | |||||
| Net advances on lines of credit | 37,163 | 188,894 | ||||||
| Payments on long-term debt | (212,595 | ) | (120,287 | ) | ||||
| Proceeds from issuance of long-term debt and capital lease obligations | 433,223 | - | ||||||
| Payments on capital lease obligations | (103,053 | ) | (99,424 | ) | ||||
| Net change in related party obligation | 270,007 | (86,037 | ) | |||||
| Payment of preferred stock dividends | (774,346 | ) | (720,121 | ) | ||||
| Purchase and retirement of treasury stock | - | (45,486 | ) | |||||
| Cash used in financing activities | (707,499 | ) | (761,323 | ) | ||||
| Net change in cash and cash equivalents | (486,857 | ) | 202,891 | |||||
| Cash and cash equivalents - beginning of period | 1,267,319 | 1,321,586 | ||||||
| Effects of currency translation on cash and cash equivalents | 40,261 | 13,239 | ||||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 820,723 | $ | 1,537,716 | ||||
| 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.
April 1, 2018
(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 December 31, 2017 and January 1, 2017 which included all information and notes necessary for such complete presentation in conjunction with its 2017 Annual Report on Form 10-K.
The results of operations for the interim period ended April 1, 2018 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 December 31, 2017, which are contained in the Company’s 2017 Annual Report on Form 10-K.
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 (Earby) 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 30, 2018 and the prior year ended December 31, 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 1, 2018 and the results of operations, comprehensive income and cash flows for the interim periods ended April 1, 2018 and April 2, 2017.
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 5, Foreign Currency Translation.
| 2. | Noncash Transactions and Supplemental Disclosure of Cash Flow Information |
During the three months ended April 1, 2018 and April 2, 2017, the Company paid down $105,842 and $102,363, respectively, of its term loans using available borrowings on its various lines of credit.
During the three months ended April 1, 2018 and April 2, 2017, the Company entered into several equipment financing obligations with fair values of $247,479 and $335,251, respectively, which are accounted for as capital assets. The fair values were added to property and equipment and a corresponding amount to capital lease or financing obligations.
On April 1, 2018, the Company’s majority shareholder purchased the company owned life insurance policy on his life. The policy had a net value of $128,399 based on the cash surrender value of $578,490 and a policy loan outstanding in the amount of $450,091. After his assumption of a related party demand note payable in the amount of $125,000, the balance due of $3,399 was paid on April 17, 2018.
Supplemental disclosure of cash paid for the three months ended:
| April 1, 2018 | April 2, 2017 | |||||||
| Interest expense | $ | 433,131 | $ | 373,134 | ||||
| Income taxes | $ | - | $ | - |
| 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 expense.
| 4. | Fair Value of Financial Instruments |
The Company’s short-term financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and lines of credit. The Company adjusts the carrying value of financial instruments denominated in other currencies such as cash, receivables, 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.
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 1, 2018 and December 31, 2017 were net assets of $10,181 and $13,292, 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 1, 2018, 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 in the accompanying Consolidated Statements of Operations.
| 6. | Inventories |
Inventories consist of the following:
| April 1, 2018 | December 31, 2017 | |||||||
| Raw materials | $ | 6,022,869 | $ | 5,572,253 | ||||
| Work-in-process | 4,937,065 | 5,342,359 | ||||||
| Finished goods | 10,581,821 | 10,377,480 | ||||||
| 21,541,755 | 21,292,092 | |||||||
| Less: Allowance for inventory obsolescence | (1,568,946 | ) | (1,522,430 | ) | ||||
| Total Inventories | $ | 19,972,809 | $ | 19,769,662 | ||||
| 7. | Other Long-term Assets |
Other long-term assets consist of the following:
| April 1, 2018 | December 31, 2017 | |||||||
| Deferred tax asset | $ | 3,238,687 | $ | 3,167,092 | ||||
| Other | 737,627 | 735,154 | ||||||
| Total Other Long-term Assets | $ | 3,976,314 | $ | 3,902,246 | ||||
| 8. | Other Long-term Liabilities |
Other long-term liabilities consist of the following:
| April 1, 2018 | December 31, 2017 | |||||||
| Deferred tax liability | $ | 822,706 | $ | 793,145 | ||||
| Other | 28,460 | 29,347 | ||||||
| Total Other Long-term Liabilities | $ | 851,166 | $ | 822,492 | ||||
| 9. | Lines of Credit |
The Company’s Uniroyal subsidiary has available a $30,000,000 revolving line of credit financing agreement with Wells Fargo Capital Finance, LLC (“Uniroyal Line of Credit”), 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 Uniroyal Line of Credit was $10,605,307 and $10,376,881 as of April 1, 2018 and December 31, 2017, respectively. The Company has classified the outstanding balance on this line of credit within current liabilities in the accompanying Consolidated Balance Sheets.
The Company’s U.K. subsidiary has available a £10,000,000 (approximately $14.1 million) revolving line of credit financing agreement with Lloyds Bank Commercial Finance Limited (“U.K. Line of Credit”), which is subject to a six-month notice by either party. The line has several tranches based on currency or underlying security. Interest is payable monthly at the base rate (U.K. LIBOR or Lloyds Bank Base Rate as published) plus 1.95% to 2.45% depending on the tranche. 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 U.K. Line of Credit was £6,569,790 and £6,631,172 ($9,252,071 and $8,963,587) as of April 1, 2018 and December 31, 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 1, 2018 | December 31, 2017 | |||||||||
| Wells Fargo Capital Finance LLC | Prime | $ | 718,226 | $ | 792,525 | ||||||
| Lloyds Bank Commercial Finance Limited | LIBOR + 3.15% | 79,802 | 107,238 | ||||||||
| Kennet Equipment Leasing Limited | 10.90% | 668,050 | 691,830 | ||||||||
| Balboa Capital Corporation | 5.72% | 36,817 | 73,113 | ||||||||
| Regents Capital Corporation | 7.41% | 212,211 | 240,350 | ||||||||
| De Lage Landen Financial Services | 7.35% | 89,876 | 96,123 | ||||||||
| Ford Motor Credit | 4.31% | 34,502 | 36,662 | ||||||||
| Byline Financial Group | 8.55% | 22,914 | 28,344 | ||||||||
| Regents Capital Corporation | 6.20% | 269,753 | 284,852 | ||||||||
| Regents Capital Corporation | 6.47% | 291,578 | 306,702 | ||||||||
| Regents Capital Corporation | 6.50% | 144,825 | 152,169 | ||||||||
| BB&T Equipment Finance Corporation | 4.02% | 774,714 | 813,015 | ||||||||
| Regents Capital Corporation | 6.99% | 182,695 | - | ||||||||
| Lloyds Bank Commercial Finance Limited | LIBOR + 3.50% | 497,537 | - | ||||||||
| 4,023,500 | 3,622,923 | ||||||||||
| Less: Current portion | (1,195,332 | ) | (1,155,490 | ) | |||||||
| Long-term Portion | $ | 2,828,168 | $ | 2,467,433 | |||||||
In January 2018, the Company signed an agreement with Lloyds Bank Commercial Finance Limited (“Lloyds”) whereby Lloyds will advance funds in three tranches to finance the purchase of a regenerative thermal oxidizer to be used in the Company’s U.K. manufacturing facility. The maximum amount of this financing obligation is £1,177,650 or approximately $1,658,500. The balance of this financing obligation at April 1, 2018 is £353,295 ($497,537), which reflects the first tranche of funds advanced. The final tranche will be in November 2018. Monthly payments will begin in December 2018 and continue over a 60-month period at 3.50% above the base rate (LIBOR).
| 11. | Related Party Obligations |
Long-term debt to related parties consists of the following:
| Interest Rate | April 1, 2018 | December 31, 2017 | |||||||||
| Senior subordinated promissory note | 9.25% | $ | 2,000,000 | $ | 2,000,000 | ||||||
| Senior secured promissory note | 10.00% | 918,786 | 918,786 | ||||||||
| 2,918,786 | 2,918,786 | ||||||||||
| Less: Current portion | (306,262 | ) | (153,131 | ) | |||||||
| Long-term Portion | $ | 2,612,524 | $ | 2,765,655 | |||||||
The Company has a lease financing obligation under which it leases its main U.S. manufacturing facility and certain other property from a related party lessor entity, accrues interest at 18.20% and currently requires monthly principal and interest payments of $32,764, which are adjusted annually based on the consumer price index. The lease financing obligation matures on October 31, 2033. The Company has security deposits aggregating $267,500 held by the lessor entity. The lease financing obligation is shown in the accompanying Consolidated Balance Sheets as Related Party Lease Financing Obligation which consists of the following:
| April 1, 2018 | December 31, 2017 | |||||||
| Related party lease financing obligation | $ | 2,160,158 | $ | 2,162,151 | ||||
| Less: Current portion | (10,198 | ) | (8,824 | ) | ||||
| Long-term Portion | $ | 2,149,960 | $ | 2,153,327 | ||||
The current portions of the long-term debt to related parties and the related party lease financing obligation are combined and are shown in current liabilities as related party obligation. Also included in current liabilities as a related party obligation is a $225,000 subordinated secured promissory note issued to the Company’s majority shareholder on January 9, 2018 and a $47,000 subordinated secured promissory note issued to the Company’s majority shareholder on February 14, 2018. These promissory notes, which are payable on demand, are at a rate of 8%. The $125,000 subordinated secured promissory note that was outstanding at December 31, 2018 was paid during the first quarter of 2018.
| April 1, 2018 | December 31, 2017 | |||||||
| Current portion of long-term debt to related parties | $ | 306,262 | $ | 153,131 | ||||
| Current portion of related party lease financing obligation | 10,198 | 8,824 | ||||||
| Related party subordinated secured promissory note | 225,000 | - | ||||||
| Related party subordinated secured promissory note | 47,000 | - | ||||||
| Related party subordinated secured promissory note | - | 125,000 | ||||||
| Related Party Obligation | $ | 588,460 | $ | 286,955 | ||||
| 12. | Capital Leases |
The Company has several capital leases on equipment which expire from April 2, 2018 through March 2021 with monthly lease payments ranging from approximately $1,687 to $29,545 per month. The capital lease obligations are secured by the related equipment. 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 1, 2018 | December 31, 2017 | |||||||
| Capital lease obligations | $ | 874,658 | $ | 939,643 | ||||
| Less: Current portion | (431,377 | ) | (408,425 | ) | ||||
| Long-term Portion | $ | 443,281 | $ | 531,218 | ||||
| 13. | Accumulated Other Comprehensive Income (Loss) |
The changes in accumulated other comprehensive income (loss) were as follows:
Minimum Benefit Liability Adjustments | Foreign Currency Translation Adjustment | Total | ||||||||||
| Balance at December 31, 2017 | $ | 564,757 | $ | (939,909 | ) | $ | (375,152 | ) | ||||
Other comprehensive gains before reclassifications | - | 483,568 | 483,568 | |||||||||
Reclassification adjustment for gains included in net income | (29,531 | ) | - | (29,531 | ) | |||||||
| Balance at April 1, 2018 | $ | 535,226 | $ | (456,341 | ) | $ | 78,885 | |||||
The gains reclassified from accumulated other comprehensive income into income are recorded to the following income statement line items:
Other Comprehensive Income (Loss) Component | Income Statement Line Item | |
| Minimum Benefit Liability Adjustments | General and administrative expense |
| 14. | Stock Based Compensation |
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 1, 2018 and April 2, 2017 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 1, 2017 | 997,750 | $ | 2.80 | 217,501 | $ | 2.37 | 780,249 | $ | 2.92 | |||||||||||||||
| Granted | - | - | - | - | - | - | ||||||||||||||||||
| Vested | - | - | - | - | - | - | ||||||||||||||||||
| Exercised | - | - | - | - | - | - | ||||||||||||||||||
| Forfeited or cancelled | - | - | - | - | - | - | ||||||||||||||||||
| Outstanding at April 2, 2017 | 997,750 | $ | 2.80 | 217,501 | $ | 2.37 | 780,249 | $ | 2.92 | |||||||||||||||
| Outstanding at December 31, 2017 | 961,500 | $ | 2.80 | 527,165 | $ | 2.63 | 434,335 | $ | 3.00 | |||||||||||||||
| Granted | - | - | - | - | - | - | ||||||||||||||||||
| Vested | - | - | - | - | - | - | ||||||||||||||||||
| Exercised | - | - | - | - | - | - | ||||||||||||||||||
| Forfeited or cancelled | - | - | - | - | - | - | ||||||||||||||||||
| Outstanding at April 1, 2018 | 961,500 | $ | 2.80 | 527,165 | $ | 2.63 | 434,335 | $ | 3.00 | |||||||||||||||
| Aggregate Intrinsic Value | $ | 758,150 | $ | 256,651 | $ | 501,499 | ||||||||||||||||||
| April 2, 2017 | ||||||||||||||||||||||||
| Aggregate Intrinsic Value | $ | - | $ | - | $ | - | ||||||||||||||||||
| April 1, 2018 | ||||||||||||||||||||||||
Option expense recognized was $99,961 and $103,322 for the three months ended April 1, 2018 and April 2, 2017, respectively. As of April 1, 2018, there was $252,811 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 12 months.
| 15. | Recent Accounting Standards |
In May 2014, the Financial Accounting Standards Board issued a new standard, Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers." Under ASU 2014-09, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the new standard on January 1, 2018 using the modified retrospective method. This requires an adjustment to the opening balance of retained earnings to reflect the cumulative effect of initially applying the new standard to contracts that were not complete as of the adoption date. A contract that was not complete is defined as one for which all of the revenue was not recognized as of the adoption date. The Company did not record an adjustment to retained earnings since all of its contracts were considered complete before the adoption date. The adoption of this standard for the year ending December 30, 2018 will not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.
On February 25, 2016, the Financial Accounting Standards Board issued a new standard, ASU No. 2016-02, “Leases”. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. This standard will be effective for the Company on December 31, 2018. The Company is currently evaluating the effects this standard will have on its consolidated financial position, results of operations and cash flows together with evaluating the adoption date.
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. The Company adopted the new standard on January 1, 2018. The adoption of this standard for the year ending December 30, 2018 will not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.
On January 26, 2017, the Financial Accounting Standards Board issued a new standard, ASU No. 2017-04, “Intangibles – Goodwill and Other – Simplifying the Test for Goodwill Impairment.” The new standard modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. It will be effective for the Company on December 30, 2019. The Company is currently evaluating the effects this standard will have, if any, on its consolidated financial position, results of operations and cash flows together with evaluating the adoption date.
On May 10, 2017, the Financial Accounting Standards Board issued a new standard, ASU No. 2017-09, “Compensation – Stock Compensation – Scope of Modification Accounting.” The new standard clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. The Company adopted this standard on January 1, 2018. The adoption of this standard for the year ending December 30, 2018 will not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.
On August 28, 2017, the Financial Accounting Standards Board issued a new standard, ASU No. 2017-12, “Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities.” The objective of this new standard is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities and to simplify the application of the hedge accounting guidance in current GAAP. It will be effective for the Company on December 31, 2018. The Company is currently evaluating the effects this standard will have, if any, on its consolidated financial position, results of operations and cash flows together with evaluating the adoption date.
| 16. | Earnings per Common Share |
The following table sets forth the computation of earnings per common share - basic and earnings per common share – diluted for the three months ended April 1, 2018 and April 2, 2017:
| Three Months Ended | ||||||||
| April 1, 2018 | April 2, 2017 | |||||||
| Numerator | ||||||||
| Net income (loss) available to common shareholders | $ | (294,820 | ) | $ | 470,776 | |||
| Denominator | ||||||||
Denominator for basic earnings per share - weighted average shares outstanding | 18,690,030 | 18,723,226 | ||||||
| Weighted average effect of dilutive securities | - | 90,107 | ||||||
Denominator for dilutive earnings per share - weighted average shares outstanding | 18,690,030 | 18,813,333 | ||||||
| Basic and Diluted Net Income (Loss) Per Share | ||||||||
Net income (loss) available to common shareholders | $ | (0.02 | ) | $ | 0.03 | |||
| Effect of dilutive securities | - | - | ||||||
Net income (loss) available to common shareholders | $ | (0.02 | ) | $ | 0.03 | |||
Due to the net loss for the three months ended April 1, 2018, the calculations of basic and diluted loss per share were the same since including options to purchase shares of common stock in the calculation of diluted loss per share would have been anti-dilutive. The calculation of diluted earnings per share for the three months ended April 1, 2018 and April 2, 2017 excluded options to purchase 961,500 and 355,250 shares of common stock, respectively, because the options’ exercise prices of $2.37 and $3.57 per share were greater than the average market price of the common shares.
| 17. | Revenue |
The Company recognizes revenue 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 its 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 Company does not have contract assets or contract liabilities, and has no remaining performance obligations since it does not recognize revenue until a contract is complete.
Total revenue of $26,429,687 for the three months ended April 1, 2018 included $17,232,116 from the automotive sector and $9,197,571 from the industrial sector. Total revenue of $25,758,429 for the three months ended April 2, 2017 included $17,416,541 from the automotive sector and $8,341,888 from the industrial sector.
| 18. | 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 1, 2018 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 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, healthcare facilities and athletic equipment. We manufacture materials in a wide range of colors and textures. They can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior soft trim components from floor to headliner, which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene foam laminated 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 healthcare facilities. Flame and smoke retardant vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and residential care centers and seats for school buses, trains and aircraft.
We currently conduct our operations in manufacturing facilities that are located in Stoughton, Wisconsin and Earby, England.
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 – “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 December 31, 2017.
Recent Accounting Pronouncements
See Note 15 – “Recent Accounting Standards” 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 30, 2018 and the prior year ended December 31, 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 the Pound Sterling, principally the Euro. Approximately 31% of the Company’s global revenues and 35% of its global raw material purchases are derived from these Euro transactions.
The average year-to-date exchange rate for the Pound Sterling to the U.S. Dollar was approximately 12.4% higher and the average exchange rate for the Euro to the Pound Sterling was approximately 2.6% higher in 2018 compared to 2017. These exchange rate changes had the effect of increasing net sales by approximately $1.8 million for the three months ended April 1, 2018. The overall effect on the Company’s net loss was a positive amount of approximately $13,000 for the three months ended April 1, 2018 compared to the corresponding period of 2017.
Three Months Ended April 1, 2018 Compared to the Three Months Ended April 2, 2017
The following table sets forth, for the three months ended April 1, 2018 (“three months 2018”) and April 2, 2017 (“three months 2017”), certain operations data including their respective percentage of net sales:
| Three Months Ended | ||||||||||||||||||||||||
| April 1, 2018 | April 2, 2017 | Change | % Change | |||||||||||||||||||||
| Net Sales | $ | 26,429,687 | 100.0 | % | $ | 25,758,429 | 100.0 | % | $ | 671,258 | 2.6 | % | ||||||||||||
| Cost of Sales | 21,812,193 | 82.5 | % | 20,382,282 | 79.1 | % | 1,429,911 | 7.0 | % | |||||||||||||||
| Gross Profit | 4,617,494 | 17.5 | % | 5,376,147 | 20.9 | % | (758,653 | ) | -14.1 | % | ||||||||||||||
| Other Expenses: | ||||||||||||||||||||||||
| Selling | 1,349,030 | 5.1 | % | 1,284,947 | 5.0 | % | 64,083 | 5.0 | % | |||||||||||||||
| General and administrative | 1,948,301 | 7.4 | % | 1,821,466 | 7.1 | % | 126,835 | 7.0 | % | |||||||||||||||
| Research and development | 421,963 | 1.6 | % | 533,854 | 2.1 | % | (111,891 | ) | -21.0 | % | ||||||||||||||
| Total Operating Expenses | 3,719,294 | 14.1 | % | 3,640,267 | 14.1 | % | 79,027 | 2.2 | % | |||||||||||||||
| Operating Income | 898,200 | 3.4 | % | 1,735,880 | 6.7 | % | (837,680 | ) | -48.3 | % | ||||||||||||||
| Interest expense | (456,364 | ) | -1.7 | % | (389,856 | ) | -1.5 | % | (66,508 | ) | 17.1 | % | ||||||||||||
| Other income | 33,282 | 0.1 | % | 99,254 | 0.4 | % | (65,972 | ) | -66.5 | % | ||||||||||||||
| Income before Taxes | 475,118 | 1.8 | % | 1,445,278 | 5.6 | % | (970,160 | ) | -67.1 | % | ||||||||||||||
| Tax provision (benefit) | (14,521 | ) | -0.1 | % | 234,586 | 0.9 | % | (249,107 | ) | <-100 | % | |||||||||||||
| Net Income | 489,639 | 1.9 | % | 1,210,692 | 4.7 | % | (721,053 | ) | -59.6 | % | ||||||||||||||
| Preferred dividends | (784,459 | ) | -3.0 | % | (739,916 | ) | -2.9 | % | (44,543 | ) | 6.0 | % | ||||||||||||
Net (Loss) Income Available to Common Shareholders | $ | (294,820 | ) | -1.1 | % | $ | 470,776 | 1.8 | % | $ | (765,596 | ) | <-100% | |||||||||||
Revenue:
Total revenue for the three months 2018 increased $671,258 or 2.6% to $26,429,687 from $25,758,429 for the three months 2017. Excluding the positive currency effect of the exchange rates, total revenue would have decreased by approximately $1.1 million or 4.4%. U.S. automotive sales for the three months 2018 decreased 14.4% compared to the three months 2017 but is in line with the three months ended December 31, 2017. The decline for the current quarter over the same quarter of the prior year was caused by production adjustments implemented by the U.S. automotive manufacturers last year to reduce inventories caused by the softening in the U.S. automotive market. European automotive sales declined by 6.4%, excluding the currency adjustment, as the European automotive market also saw a general decline versus the prior year quarter. Sales for the industrial sector increased 10.3% (4.4% before currency effect) as sales from the non-automotive transportation in both the U.S and European markets saw a general market improvement over 2017 in addition to new program awards. The contract market also had increased sales activities in 2018.
Gross Profit:
Total gross profit for the three months 2018 decreased $758,653 or 14.1% to $4,617,494 from $5,376,147 for the three months 2017. The gross profit percentage was 17.5% of sales for the three months 2018 compared to 20.9% for the three months 2017. Gross profit amount and percentage were negatively impacted by rising raw material prices, unfavorable material usage variances and operating inefficiencies resulting from newly awarded automotive platforms ramping up in Europe. The decrease was partially offset by a positive net currency effect of $318,000. To offset raw material price increases, the Company increased prices in December 2017 in several of its markets.
Operating Expenses:
Selling expenses for the three months 2018 increased $64,083 or 5.0% to $1,349,030 from $1,284,947 for the three months 2017. The increase was principally attributable to the net currency effect of $107,000. Increased commissions related to non-automotive transportation sales were offset by the decreased commissions on automotive sales in 2018.
General and administrative expenses for the three months 2018 increased $126,835 or 7.0% to $1,948,301 from $1,821,466 for the three months 2017. The increase was principally attributable to the currency effect of $113,000. Increases in insurance costs were offset by cost savings as a result of cost reduction programs which lowered employee costs, professional fees and other administrative expenses for the three months 2018 compared to the three months 2017.
Research and development expenses for the three months 2018 decreased $111,891 or 21.0% to $421,963 from $533,854 for the three months 2017. The decrease is principally attributable to a reduction in staffing to coincide with current production levels. Partially offsetting the decrease was the currency effect of the exchange rate change of $22,000.
Operating Income:
Operating income for the three months 2018 decreased $837,680 or 48.3% to $898,200 from $1,735,880 for the three months 2017. The operating income percentage was 3.4% of sales for the three months 2018 compared to 6.7% for the three months 2017. Operating income decreased primarily from the decrease in gross profit.
Interest Expense:
Interest expense for the three months 2018 increased $66,508 or 17.1% to $456,364 from $389,856 for the three months 2017. The increase was primarily due to new capital leases for equipment purchases and higher interest rates on LIBOR and prime during the three months 2018 partially offset by debt repayments compared to the three months 2017.
Other Income:
Other income for the three months 2018 decreased $65,972 or 66.5% to $33,282 from $99,254 for the three months 2017. The amounts in other income principally are the currency gains and losses recognized by the U.K. operations on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros and U.S. Dollars. The Company recognizes gains and losses from the change in fair values on its foreign currency exchange contracts. Also included are other non-operating income and expenses including dividends received on insurance policies. The decrease is principally due to losses realized when our financial assets and liabilities denominated in the Euro currency were adjusted to their fair value at April 1, 2018.
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 members. The Company made the acquisition of Uniroyal through UEPH, a limited liability company, which issued preferred ownership interests to the sellers that provide for quarterly dividends. Uniroyal’s taxable income is allocated entirely to UEPH as its sole member and since it is a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on the Company’s tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual tax returns.
For the three months 2018, the tax benefit was $14,521 as compared to a tax provision of $234,586 for the three months 2017. The tax provision for 2017 was principally from the taxes on the operating results of the U.K. operations. The tax benefit for the three months 2018 was attributable to the net operating results of the U.S. operations after the deduction of the preferred distribution. This benefit was partially offset by the U.K. tax provision in the amount of $23,778.
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 7.0%. 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 $44,000,000 subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of $19,857,378 at April 1, 2018, $15.3 million of the lines bears interest at LIBOR plus a range of 1.95% to 2.45%, depending on the underlying borrowing base and $4.6 million bears interest at the bank’s prime or base lending rate which was 4.75 % at April 1, 2018. At April 1, 2018, the lines provided an additional availability of approximately $2.4 million. The Company also has commitments from several lending institutions for capital expenditure lines of credit totaling approximately $3.0 million. We plan to use this availability to help finance our cash needs for the remaining months of fiscal 2018 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 did not have a history of repatriating a significant portion of our foreign cash. Accordingly, we had not recognized a deferred tax liability for these unremitted earnings. However, the Tax Cuts and Jobs Act of 2017 imposed a one-time transition tax on deemed repatriation of deferred foreign income. For the year ended 2017, the Company recorded $941,960 in tax expense related to this repatriation tax. In the event that we decide to repatriate these foreign amounts to fund U.S. operations, the Company will not be required to pay any additional U.S. tax related to these amounts.
The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 1.02 at April 1, 2018 and 1.03 at December 31, 2017.
Cash balances decreased $446,596, after the effects of currency translation of $40,261, to $820,723 at April 1, 2018 from $1,267,319 at December 31, 2017. Of the above noted amounts, $530,856 and $1,152,039 were held outside the U.S. by our foreign subsidiaries as of April 1, 2018 and December 31, 2017, respectively.
Cash provided by operations was $648,586 for the three months 2018 compared to $1,587,095 for the three months 2017. For the three months 2018, cash provided by operations was primarily due to net income of $489,639 and adjustments for non-cash items of $605,766. For the three months 2017, cash provided by operations was primarily due to net income of $1,210,692 and adjustments for non-cash items of $528,570. The non-cash items were principally depreciation expense and stock-based compensation. These amounts were further adjusted by cash flows related to changes in working capital of $(295,674) and $(106,263) for the three months 2018 and 2017, respectively, and changes in other assets and liabilities of $(151,145) and $(45,904) for the three months 2018 and 2017, respectively.
Cash used in investing activities was $427,944 for the three months 2018 compared to $622,881 for the three months 2017. During 2018 and 2017, cash used in investing activities was principally for purchases of machinery and equipment at our manufacturing locations.
For the three months 2018, cash used in financing activities was $707,499 as compared to $761,323 used in financing activities for the three months 2017. Included in cash used in financing activities were preferred dividend payments of $774,346 and $720,121 during the three months 2018 and 2017, respectively. During the three months 2018, we drew $433,223 on an equipment financing commitment from our bank to finance asset purchases made by us in the prior year. During the three months 2018 our majority shareholder provided $272,000 in financing in the form of demand notes. Also impacting cash used in financing activities for the three months 2018 and 2017 were net advances on lines of credit of $37,163 and $188,894, respectively.
Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as of April 1, 2018 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 |
Not applicable.
| 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 1, 2018 and concluded that our disclosure controls and procedures were effective as of April 1, 2018.
Changes in Internal Controls over Financial Reporting
During the three months ended April 1, 2018, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| PART II. | OTHER INFORMATION |
| Legal Proceedings |
None.
| Risk Factors |
Not applicable.
| Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
None.
| Defaults Upon Senior Securities |
None.
| Mine Safety Disclosures |
Not applicable.
| Other Information |
None.
| Exhibits |
| (a) | Exhibits. |
| Exhibit No. | Description | |
| 31.1 * | ||
| 31.2 * | ||
| 32.1 * | ||
| 32.2 * | ||
| 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 7, 2018 | By: | /s/ Howard R. Curd | |
Howard R. Curd Chief Executive Officer | |||
| Dated: May 7, 2018 | By: | /s/ Edmund C. King | |
Edmund C. King Chief Financial Officer |
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