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EX-32.2 - EXHIBIT 32.2 - UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.ex32_2.htm
EX-32.1 - EXHIBIT 32.1 - UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.ex31_1.htm
EX-21.1 - EXHIBIT 21.1 - UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.ex21_1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
 
For the fiscal year ended:   January 1, 2017
 
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
 
For the transition period from:
 
000-50081
(Commission File Number)
 
Uniroyal Global Engineered Products, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
(State or other jurisdiction of incorporation or organization)
 
65-1005398
(I.R.S. employer identification number)
 
1800 2nd Street Suite 970
Sarasota, Florida 34236
(Address of principal executive offices)
 
(941) 906-8580
(Registrant’s telephone number)
 
Securities registered under Section 12(b) of the Act:   None.
 
Securities registered under Section 12(g) of the Act:   Common Stock, $0.001 par value per share.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes   No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   
 
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  
 
1

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):   Yes   No
 
Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   
Accelerated filer   
Non-accelerated filer (Do not check if a smaller reporting company)   
Smaller reporting company   
 
As of July 3, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $34,223,508 

As of March 17, 2017, the registrant had 17,106,458 shares of ordinary common stock, $0.001 par value and 1,619,102 shares of Class B Common Stock, $0.001 par value, outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Uniroyal Global Engineered Products, Inc. definitive 2017 Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended January 1, 2017, are incorporated by reference into Part III of this Form 10-K.
 

 
2

 
TABLE OF CONTENTS
 
 
 
Page
Part I
 
4
9
9
9
10
10
 
 
Part II
 
11
12
12
20
21
53
53
54
 
 
Part III
 
54
55
55
55
55
 
 
 
Part IV
 
56
 
 
 
60
 
 
62
 
 
PART I
 
Note regarding forward-looking statements:

Except for statements of historical fact, certain information contained herein constitutes forward-looking statements including, without limitation, statements containing the words “believes,” “anticipates,”  “intends,” “expects,” and words of similar import, as well as all references to future results. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of Uniroyal Global Engineered Products, Inc. to be materially different from any future results or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: risks involved in implementing our business strategy, our ability to obtain financing on acceptable terms, competition, our ability to manage growth, risks of technological change, our dependence on key personnel, our ability to protect our intellectual property rights, risks of new technology and new products, and government regulation. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update any such forward-looking statements to reflect events, developments or circumstances after the date hereof.
 
ITEM 1.
BUSINESS
 
On November 10, 2014 Uniroyal Global Engineered Products, Inc. (“Uniroyal Global” or the “Company”) acquired all of the ownership interests in Uniroyal Engineered Products, LLC (“Uniroyal”), a U.S. manufacturer of textured coatings, and all of the ordinary common stock of Engineered Products Acquisition Limited (“EPAL, now known as Uniroyal Global (Europe) Limited), the holding company for Wardle Storeys (Group) Limited (“Wardle Storeys,” now known as Uniroyal Global Limited), a European manufacturer of textured coatings and polymer films. Management of the acquired entities was not altered in the acquisitions.
 
Uniroyal Global made the acquisition of Uniroyal through its newly formed subsidiary, UEP Holdings, LLC (“UEPH”), to which it contributed certain of its assets and liabilities as part of the organization of that subsidiary. The aggregate purchase consideration paid for 100% of the outstanding equity of Uniroyal was preferred ownership interests issued by UEPH having an aggregate face value of $35 million. In a separate transaction, Uniroyal Global also purchased EPAL for aggregate consideration of 100 shares of Uniroyal Global’s Common Stock and Uniroyal Global’s guaranty of outstanding EPAL preferred stock retained by the seller having a face value of £12,601,198 (approximately $20 million at closing).  Details of the acquisition are set forth in the Current Report on Form 8-K filed by the Company on November 10, 2014, which is incorporated herein by reference.
 
We are a manufacturer and seller of vinyl coated fabrics products that have various high performance characteristics and capabilities and derive our revenue principally through our subsidiaries Uniroyal and Uniroyal Global Limited.   Our coated fabrics products are durable, stain resistant, easily processed, cost-effective and better performing than traditional leather or fabric coverings.  Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment.   In the automotive industry our products are used primarily in seating, door panels, head and arm rests, security shades and trim components, including instrument panels, door casings, seating, gear lever and steering column gaiters, headliners and load space covers.  Non-automotive applications include outdoor seating for utility and sports vehicles, and sheeting used in medical, nuclear protection, personal protection, moisture barriers, pram and nursery, movie screen and decorative surface applications. Our primary brands names include Naugahyde®, BeautyGard®, Flameblocker™, Spirit Millennium®, Ambla®, Amblon®, Velbex®, Cirroflex®, Plastolene® and Vynide®.
 
We are the successor to a long line of businesses that have manufactured vinyl coated fabrics.  Our best known brand, Naugahyde, is the product of many improvements on a rubber-coated 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 Principal Products and Their Markets
 
Our vinyl coated fabrics products have undergone considerable evolution and today are distinguished by superior performance in a wide variety of applications as alternatives to leather, cloth and other synthetic fabric coverings. Our standard product lines consist of more than 600 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes, adhesive back coatings and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts character prints and non-registered prints, lamination and panel cutting.
 
Our vinyl coated fabrics products have various high performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment. 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.
 
The automotive sector represented approximately 64.9% of our total sales in 2016. Our products are used primarily in the following automotive applications:
 
·
Seating
·
Door panels
·
Head and arm rests
·
Security shades
·
Components
 
The non-automotive transportation sector represented 11.4% of our 2016 sales and primarily consisted of seating products for original equipment manufacturers of non-automotive and light truck vehicles in the following five categories:
 
·
Personal watercraft, ATV’s, snowmobiles, golf carts
·
Light and heavy industrial equipment and agricultural equipment (tractors, bulldozers)
·
Recreational vehicles, vans and motor homes
·
Heavy and medium trucks
·
Mass transit (trains, buses)
 
The distribution market sector represented approximately 10.8% of our 2016 sales and consists primarily of sales of the standard Naugahyde and Ambla product lines to local furniture shops, smaller furniture manufacturers and companies serving the hospitality and automotive and marine aftermarkets for refurbishing and replacement. The sales organization employed to service this market is a network of approximately 40 distributor locations.
 
 
The contract sector, which represented approximately 12.9% of our 2016 sales, includes contract furniture/upholstery, marine, healthcare, child care, and industrial equipment.
 
Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for durability and weatherability is used. We also manufacture a line of products called BeautyGard®, with water-based topcoats that contain agents to protect against bacterial and fungal microorganisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally friendlier than solvent-based topcoats. The line is widely used in hospitals and other healthcare facilities. Flame and smoke retardant vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and residential care centers and seats for school buses and aircraft.
 
We produce vinyl coated fabrics and laminated composites through a continuous cast manufacturing process. The continuous cast method yields a material with a soft finish, deep grain pattern, wide temperature tolerance range and high malleability factor for thermoforming. In addition, we possess plastisol-compounding capability, a variety of proprietary formulations and highly versatile finishing processes. We believe that our products are differentiated in the market by unique protective topcoat finishes and adhesive back coats, as well as rotogravure printing, which imparts multiple features, character prints and non-registered prints. We also have the in-house capability to perform transfer printing as well as micro-perforation, which provides product breathability.
 
We seek to ensure that every product fully meets customer requirements of specification, reliability and performance.
 
We believe that we maintain our market leadership position through a strong research and development effort that provides strong product development capability. This yields enhanced product characteristics, lower cost of material combinations and new proprietary product formulations. We estimate that approximately 12.1% of our sales relate to products developed to customer specifications.
 
 Our Stoughton, Wisconsin facility achieved ISO 9001:2008 status in 1999 and has renewed it annually since then.  Our UK facility achieved ISO TS 16949 status in 2004 and is approved to the European Council Directive 96/98 EX on Marine Equipment as amended for Module D Production Quality

We hold no patents but maintain certain of our process technologies as trade secrets.

Our Distribution Methods
 
 Products are developed and marketed based upon the performance characteristics required by end-users.  We currently serve customers world-wide with 18 full-time sales persons in offices in Sarasota, Florida, Nappanee, Indiana and Earby, Lancashire, two exclusive agents in Italy, and Turkey and an extensive distributor network in the U.S., the United Kingdom, Scandinavia, France, Germany and Hong Kong. 10.8% of our worldwide sales in 2016 were made through distributors. The industrial business is supported mainly from stock and via a catalogue.
 
We maintain websites for our principal U.S. non-automotive products at www.naugahyde.com and for our global products at www.uniroyalglobal.co.uk and www.ambla.com.
 
We sell our safety sensor products directly to manufacturers, dealers and end users.  We have attended trade shows and have continued our relationships with our customer list, which comprises manufacturers, dealers and end users.  We also receive unsolicited orders by telephone, fax or the internet.  In addition, we have sought relationships with architectural engineering firms and municipalities that are implementing projects requiring parking barrier gates, such as municipal parking lots and airport reconstruction.  Although we have not maintained a full-time sales force for this business, we have engaged an outside consultant.
 
 
Competition
 
We compete primarily on the basis of style, color, product breadth and quality, as well as price and customer service.
 
The global vinyl coated fabrics market is highly fragmented. The uses of vinyl coated fabrics include automotive, furniture, industrial, protective clothing, wall coverings, book coverings, non-automotive transportation and awnings and tents.
 
The following table sets forth product applications in the markets in which we actively compete domestically and our primary competitors in those markets.
 
 
 
Markets
Key Uses
Primary Competitors
Automotive
Interior components
Seating applications
Security shades
Canadian General-Tower Limited
Benecke-Kaliko AG
Hornschuch Group GmbH
Vulcaflex S.p.A.
Haartz Corporation
Morbern, Inc.
Transportation
and Contract
ATV/snowmobile/PWC/golf carts
Heavy/light equipment
RVs/motor homes
Canadian General-Tower Limited
Morbern, Inc.
Spradling International Inc.
Distribution
Approximately 40 distributor and
reseller locations
OMNOVA Solutions Inc.
Spradling International Inc.
Hornschuch Group GmbH
Morbern, Inc.
Contract
Office/contract/institutional furniture
Restaurant booth
Health care
Marine
OMNOVA Solutions Inc.
Morbern, Inc.
Hornschuch Group GmbH
Alcor
Gislaved Folie AB
Griffine Enduction
 
Other
Home furnishings/dinettes
Spradling International Inc.
 
 
Raw Materials
 
The principal raw materials for our coated fabrics are casting paper, knit fabric, PVC plastic resins, pigments and plasticizers.  We have multiple sources for most of these materials.  We believe that in the few instances where we have a sole supplier we can re-engineer around the sole-sourced materials if necessary with minimal effort and cost.

Concentration of Customers
 
The only customers that accounts for ten percent or more of our consolidated revenues are FXI, Inc. and Lear Corporation. Our top 25 customers account for approximately 65.0% of our total global sales. Our largest customer contributed 13.8% to our total sales in 2016.
 
 
Trademarks and Material Contracts

We own the following proprietary brands and trademarks among others:
 
·
All-American®
·
Ambla®
·
Amblon®
·
BeautyGard®
·
Chameá™
·
Cirroflex
·
Flame Blocker™
·
Naugaform®
·
Naugahyde®
·
NaugaSatin ™
·
NaugaSoft®
·
NaugaSylk™
·
Plastolene®
·
Spirit Millennium®
·
Velbex®
·
Vynide®
 
Employees
 
We believe that we maintain a stable, experienced and productive workforce, currently employing a total of 420 employees.

Most of our employees who are involved in the production process are located at manufacturing facilities in Stoughton, Wisconsin and Earby, England. The production employees at the Stoughton, Wisconsin facility are represented by Local 1207 of the United Steel Workers (formerly P.A.C.E.). The term of the pending collective bargaining agreement for Stoughton represented employees extends to March 2023. Most of the employees at our Earby facility are represented by UNITE.  The collective bargaining agreement with UNITE does not specify a termination date.

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

Effect of Existing or Probable Government Regulations on Our Business

Our manufacturing processes are subject to increasingly stringent regulation by environmental, health and safety authorities. It is difficult to predict future changes in environmental, health and safety regulations on our future financial results. Continued compliance could result in significant increases in capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities, arising out of a release of regulated material, discovery of previously unknown conditions, more aggressive enforcement actions or new requirements, could adversely affect our financial results.

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

We are actively engaged in research and development programs designed to develop new products, manufacturing processes, systems and technologies, while reducing costs to customers and enhancing existing product lines. We believe that investment in research and development has been an important factor in establishing and maintaining our competitive position in many of the specialized niche markets in which our products are sold. Product performance capabilities and characteristics are continually adjusted to meet customer needs.
 
In-house design and innovative product development are key features of our business.  Our in-house design studio enables us to develop new designs for customers and then deliver them in sample form or by computer-aided design (CAD).
 
We have access to a vast range of grain, prints and surface effects, which are constantly evolving and increasing. Further trends are captured and expressed in our own concept work and exclusive designs are developed from customer requests. Our CAD systems allow fast creation and display of design innovation. “Drape” software enables computer generated designs to be shown in situ in interiors of vehicles before the expense of production is incurred. A silicone cast surface-modeling system permits the transfer of material surface finishes, including leather and fabrics, onto vinyl foils for customer review before investment in tooling. Diverse production systems and equipment create an extensive automotive product range. Hi-Loft and anti-squeak finish (ASF) are examples of product developments providing customers with cost reduction and material performance enhancements.
 
We spent $1,727,616 in 2016 and $1,728,867 in 2015 for research and development.
 
Compliance with Environmental Laws
 
We believe that we are in compliance with all applicable environmental laws and regulations.  We have not needed to make any material expenditure to maintain such compliance during the past two fiscal years, nor do we anticipate having to make any material expenditure to maintain such compliance in the foreseeable future.

We aim to comply with all existing regulatory legislation at European, national and local levels and adopt a positive stance in anticipating future, more stringent regulatory requirements. We endeavor to minimize waste throughout the production facilities with better utilization of raw materials, energy and water and to prevent at the source the emission of pollutants into the environment. We are committed to continual improvements in environmental performance.
 
ITEM 1A.
RISK FACTORS
 
Not applicable.
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.
PROPERTIES
 
We lease our production facility in Stoughton, Wisconsin (near Madison).  The term of the lease extends to October 31, 2033 with an option to renew the lease for an additional five years. This facility consists of an approximately 230,000 square foot building with production, laboratory and administrative office space and a warehouse. Our lease includes several nearby buildings used for storage.  The plant achieved ISO 9001:2008 certification and renews this certification on an annual basis. Major equipment at the production facility includes two cast coating lines, five rotogravure printers, four paper reconditioning machines, one buffer, four standard embossers, one GAP embosser, two micro-perforators, nine inspection stations with automatic data collection, bulk material handling systems and warehouse bar coding and locator systems. Laboratory facilities at the Stoughton facility replicate the production floor capabilities and enhance our research and development capability.
 
 
We also lease our production facility in West Craven Business Park, Earby, Barnoldswick, Lancashire, England.  This facility consists of approximately 250,000 square feet. The term of the lease extends to March 2, 2029.  Major equipment at the production facility includes three coating lines, six inspection tables, four printers, one calender, three laminators, one embosser, and one perforating process.

Our executive and sales offices occupy approximately 9,010 square feet of premises in Sarasota, Florida under a lease that extends to May 31, 2018.
 
ITEM 3.
LEGAL PROCEEDINGS
 
From time to time we may be a party to or be involved with legal proceedings, governmental investigations or inquiries, claims or litigation that are related to our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business or financial condition.
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
Not applicable.
 
 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our Common Stock trades on the NASD OTC BB under the symbol UNIR.OB. The following table sets forth the range of high and low bids to purchase our Common Stock during the last two fiscal years. Such prices represent quotations between dealers, without dealer markup, markdown, or commissions, as reported on NASDAQ.com and may not represent actual transactions.
 
As of March 16, 2017 there were 856 stockholders of record of our Common Stock.
 
Quarter
 
High Bid
   
Low Bid
 
 
           
First Quarter 2015
 
$
3.67
   
$
2.10
 
Second Quarter 2015
 
$
3.72
   
$
2.18
 
Third Quarter 2015
 
$
3.25
   
$
1.35
 
Fourth Quarter 2015
 
$
3.35
   
$
2.00
 
First Quarter 2016
 
$
4.00
   
$
3.00
 
Second Quarter 2016
 
$
4.49
   
$
3.45
 
Third Quarter 2016
 
$
4.20
   
$
2.81
 
Fourth Quarter 2016
 
$
3.70
   
$
2.75
 
 

On March 16, 2017 the high and low prices for shares of our Common Stock in the over-the-counter market, as reported by NASD.OTC.BB   were $3.42 and $3.30 per share.
 
We believe that there are presently approximately nine market makers for our Common Stock. When stock is traded in the public market, characteristics of depth, liquidity and orderliness of the market may depend upon the existence of market makers as well as the presence of willing buyers and sellers. We do not know if these or other market makers will continue to make a market in our Common Stock. Further, the trading volume in our Common Stock has historically been both sporadic and light.
 
Currently, the payment by the Company of dividends on its Common Stock rests within the sole discretion of its Board of Directors. The payment of dividends will depend upon our earnings, our capital requirements and our financial condition, as well as other relevant factors. The Company has not been required to or declared any cash dividends since its inception, and has no present intention of paying any cash dividends on its Common Stock in the foreseeable future.
 
Transfer Agent
 
The Transfer Agent for the Common Stock of the Company is Continental Stock Transfer and Trust Company 17 Battery Place, New York, NY 10004.
 
Recent Sales of Unregistered Securities

During the years ended December 28, 2014 and January 3, 2016 a total of 310,000 shares of common stock were issued to an aggregate of four directors and officers for services rendered in 2013. The Company charged the fair value of these shares to operations in 2013. However, the par value of these shares was recorded at the time of issuance of these shares in the first quarter of 2014.
 
 
 The following table provides information on repurchases by the Company of its securities during the fourth quarter of fiscal 2016.

 
Fourth Quarter 2016
 
For the Period
 
Total number of
shares purchased
   
Average price
paid per share
   
Total number of
shares purchased
as part of
publicly
announced plans
or programs
   
Maximum
number (or
approximate
dollar value) of
shares that may
yet be purchased
under the plans
or programs
 
 
               
October 3, 2016 to October 30, 2016
   
4,100
   
$
3.04
     
     
 
October 31, 2016 to November 27, 2016
   
22,900
   
$
3.24
     
     
 
November 28, 2016 to January 1, 2017
   
58,198
   
$
3.26
     
     
 
Total
   
85,198
   
$
3.24
     
     
 

ITEM 6.
SELECTED FINANCIAL DATA
 
Not applicable.
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Description

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

Our products have undergone considerable evolution and today are distinguished by superior performance in a wide variety of applications as alternatives to leather, cloth and other synthetic fabric coverings. Our standard product lines consist of more than 600 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes, adhesive back coatings and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts character prints and non-registered prints, lamination and panel cutting.

Our vinyl coated fabrics products have various high performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, healthcare facilities and athletic equipment. Materials that we manufacture come in a wide range of colors and textures and can be hand or machine sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses. We are a long-established supplier to the global automotive industry and manufacture products for interior soft trim components from floor to headliner which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding processes. Materials can also be combined with polyurethane or polypropylene foam laminated with either flame or hot melt adhesive for seating, fascia and door applications.
 
 
Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for water-based durability and weatherability is used. We also manufacture a line of products with our proprietary BeautyGard topcoats that contain agents to protect against staining and bacterial and fungal micro-organisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally friendlier than solvent-based topcoats. The line is widely used in hospitals and other healthcare facilities. Flame and smoke retardant vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and residential care centers and seats for school busses and aircraft.

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

On April 29, 2015, the Board of Directors adopted an amendment to the Articles of Incorporation to change the Company’s name from Invisa, Inc. to Uniroyal Global Engineered Products, Inc. On June 25, 2015, the stockholders approved the amendment. On July 13, 2015, the Company filed Amended and Restated Articles of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Nevada to change its name. The Certificate of Amendment became effective on July 15, 2015.  The name change was approved by FINRA and became effective at the opening of trading on July 16, 2015 under our new ticker symbol “UNIR”. In addition to the Company’s new symbol, the Company’s CUSIP number changed to 90916U107, and the new address for the Company’s Web site changed to www.uniroyalglobal.com.


Overview

On November 10, 2014, the Company acquired through its subsidiary UEP Holdings LLC (“UEPH”) all of the ownership interests in Uniroyal Engineered Products, LLC (“Uniroyal”), and acquired directly all of the ordinary common stock of Engineered Products Acquisition Limited (“EPAL”) the holding company for Wardle Storeys (Group) Limited (“Wardle Storeys”). As further explained in the 2014 Annual Report on Form 10-K, this transaction was treated as a combination between entities under common control and was accounted for in a manner similar to the pooling-of-interests method.

The Company and its subsidiaries have adopted a 52/53-week fiscal year ending on the Sunday nearest to December 31. The years ended January 1, 2017 and January 3, 2016 were 52-week and 53-week years, respectively.

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 22% of the Company’s global revenues and 29% 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 11.4% lower and the average exchange rate for the Euro to the Pound Sterling was approximately 11.1% higher in 2016 compared to 2015. These exchange rate changes had the net effect of decreasing net sales by approximately $2.9 million for the year ended January 1, 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 $387,000 for the year ended January 1, 2017 compared to the year ended January 3, 2016.


 
Year Ended January 1, 2017 Compared to the Year Ended January 3, 2016
 
The following table sets forth, for the year-ended January 1, 2017 (“Year-end 2016”) and January 3, 2016 (“Year-end 2015”), certain operations data including their respective percentage of net sales:
 
   
Year Ended
 
   
January 1, 2017
   
January 3, 2016
   
Change
   
%
Change
 
                                     
Net Sales
 
$
100,377,278
     
100.0
%
 
$
99,761,973
     
100.0
%
 
$
615,305
     
0.6
%
Cost of Sales
   
77,515,316
     
77.2
%
   
77,813,354
     
78.0
%
   
(298,038
)
   
-0.4
%
Gross Profit
   
22,861,962
     
22.8
%
   
21,948,619
     
22.0
%
   
913,343
     
4.2
%
Other Expenses:
                                               
Selling
   
5,078,706
     
5.1
%
   
5,201,199
     
5.2
%
   
(122,493
)
   
-2.4
%
General and administrative
   
8,008,975
     
8.0
%
   
7,779,012
     
7.8
%
   
229,963
     
3.0
%
Research and development
   
1,727,616
     
1.7
%
   
1,728,867
     
1.7
%
   
(1,251
)
   
-0.1
%
Total operating expenses
   
14,815,297
     
14.8
%
   
14,709,078
     
14.7
%
   
106,219
     
0.7
%
Operating Income
   
8,046,665
     
8.0
%
   
7,239,541
     
7.3
%
   
807,124
     
11.1
%
Interest expense
   
(1,616,120
)
   
-1.6
%
   
(1,613,391
)
   
-1.6
%
   
(2,729
)
   
0.2
%
Other expense
   
(249,640
)
   
-0.2
%
   
(65,361
)
   
-0.1
%
   
(184,279
)
 
>100%
 
Income before taxes
   
6,180,905
     
6.2
%
   
5,560,789
     
5.6
%
   
620,116
     
11.2
%
Tax Benefit
   
(1,198,557
)
   
-1.2
%
   
(2,193,054
)
   
-2.2
%
   
994,497
     
-45.3
%
Net income
   
7,379,462
     
7.4
%
   
7,753,843
     
7.8
%
   
(374,381
)
   
-4.8
%
Preferred dividends
   
(2,879,798
)
   
-2.9
%
   
(2,801,687
)
   
-2.8
%
   
(78,111
)
   
2.8
%
Net income available to common
shareholders
 
$
4,499,664
     
4.5
%
 
$
4,952,156
     
5.0
%
 
$
(452,492
)
   
-9.1
%

 
Revenue

Total revenue for the year ended 2016 increased $615,305 or 0.6% to $100,377,278 from $99,761,973 for the year ended 2015. As a result of several new programs, automotive sales increased 6.0% versus last year with increases in both the domestic and European markets. Industrial sales declined 9.4% due to general weakness in the markets in which we compete. Also contributing to the offset was that the year ended 2015 was a 53-week period compared to the 52-week period for the year ended 2016. The extra week contributed approximately $500,000 to sales for 2015. The net currency effect of the exchange rate change in the amount of $2.9 million further offset the increased sales from new programs. Without the effect of the exchange rate change, total revenue would have increased by 3.6%.

Gross Profit

 Total gross profit for the year ended 2016 increased $913,343 or 4.2% to $22,861,962 from $21,948,619 for the year ended 2015. The increase in gross profit resulted from continued efficiency improvements at our facilities and favorable raw material pricing and was partially offset by a negative net currency effect of $196,000 due to the exchange rate changes.

Operating Expenses

Selling expenses for the year ended 2016 decreased $122,493 or 2.4% to $5,078,706 from $5,201,199 for the year ended 2015. Increases in commissions on increased revenue compared to 2015 were offset by the net currency effect of the exchange rate changes.

General and administrative expenses for the year ended 2016 increased by $229,963 or 3.0% to $8,008,975 from $7,779,012 for the year ended 2015. The increase was primarily due to the recognition of $381,262 for the year ended 2016 in compensation expense related to a stock-based compensation plan approved in July 2015 compared to $98,566 for the year ended 2015. Also contributing to the increase were higher professional fees and general business expenses due to increased activity. These increases were partially offset by the net currency effect of $352,000.
 

Research and development expenses for the year ended 2016 decreased by $1,251 or 0.1% to $1,727,616 from $1,728,867 for the year ended 2015. An increase from increased expenditures for new product development was offset by the net currency effect of $89,000.

Operating Income

Operating income for the year ended 2016 increased by $807,124 or 11.1% to $8,046,665 from $7,239,541 for the year ended 2015.  Operating income increased primarily from the gross margin increases resulting from continued efficiency improvements and favorable raw material pricing. Also contributing to the increase was approximately $392,000 from the net positive effect of the exchange rate change.

Interest Expense

Interest expense for the year ended 2016 increased by $2,729 or 0.2% to $1,616,120 from $1,613,391 for the year ended 2015. This increase was attributable to higher average debt and capital lease obligations and higher effective interest rates in 2016 compared to 2015 which was partially offset by a favorable currency effect.

Other Expense

Other expenses for the year ended 2016 increased $184,279 to $249,640 from $65,361 for the year ended 2015. The amount in other 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 Benefit

The tax benefits for 2016 and 2015 in the amounts of $1,198,557 and $2,193,054, respectively, are primarily related to tax benefits recognized from the reduction in the Company’s U.S. deferred tax asset valuation allowance. The Company had a deferred tax asset resulting from accumulated net operating losses but they had been fully reserved as of December 31, 2013 because the Company concluded that it was more likely than not that some portion or all of the deferred tax assets would not be realized. At January 3, 2016 and again at January 1, 2017, the Company concluded after an analysis at each period that it was now more likely than not that some or all of the asset would be realized and accordingly reduced the valuation allowance by $1,925,000 and $2,511,000 for the years ended January 1, 2017 and January 3, 2016, respectively, creating tax benefits which were recognized in the operating results. The benefits of these reductions were offset by the provisions on each period’s year pre-tax income.

Preferred Stock Dividend

The terms of the acquisitions in November 2014 resulted in the issuance of preferred ownership units/stock of UEPH and Uniroyal Global (Europe) Limited (formerly EPAL) to the sellers. These preferred units carried quarterly dividend requirements on a total value of $55,000,000 at rates ranging from 5% to 6.5%.
 
 
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 $16,799,592 at January 1, 2017, $13.1 million of the lines bears interest at LIBOR plus a range of 1.95% to 2.45%, depending on the underlying borrowing base, or, at our option, at the bank's prime or base lending rate and $3.7 million bears interest at the bank’s prime or base lending rate which was 3.75% at January 1, 2017.  At January 1, 2017 the lines provided an additional availability of approximately $3.4 million.  We plan to use this availability to help finance our cash needs for 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 1.17 at January 1, 2017 and 1.22 at January 1, 2016.

Cash balances decreased $588,526, after the negative effects of currency translation of $215,082, to $1,321,586 at January 1, 2017 from $1,910,112 at January 3, 2016.  Of the above noted amounts, $970,327 and $1,357,877 were held outside the U.S. by our foreign subsidiaries as of January 1, 2017 and January 3, 2016, respectively.

Cash provided by operations was $5,643,987 for the year ended 2016 compared to $5,301,256 for the year ended 2015. Cash provided by operations during 2016 was primarily due to operating income and by the increases in accounts payables and accrued expenses offset by increases in accounts receivable and inventory. Cash provided by operations during 2015 was primarily due to operating income which was offset by a net decrease in accounts payable and accrued expenses.

Cash used in investing activities was $2,356,518 for the year ended 2016 compared to $2,927,196 for the year ended 2015. Cash used for investing activities was principally for purchases of machinery and equipment at our manufacturing locations. Included in cash used for investing activities were $324,809 and $107,502 from increases in cash surrender values on company owned life insurance for the year ended 2016 and 2015, respectively.

For the year ended 2016, financing activities used $3,660,913 of cash as compared to $1,017,173 used in financing activities for the year ended 2015. Included in the proceeds from debt and capital lease obligations for the year ended 2015 was a financing lease for $1.7 million which was funded in March 2015. This was for a new production line that was funded by the Company and completed during the first quarter of 2015. The proceeds from this lease were used to reduce the Company’s U.K. line of credit. Also included in the years ended 2016 and 2015 were new financing arrangements which provided $350,000 and $410,922, respectively, on equipment previously owned by the Company not previously financed. In May 2016, the Company modified the terms of the secured promissory note in the amount of $1,285,593 related to the Wardle Storeys acquisition and paid the note in full on May 31, 2016. During the years ended 2016 and 2015 the Company paid $2,860,825 and $2,479,665, respectively, of preferred dividends.

Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as of January 1, 2017 and through the date of filing of this report.

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

We have no material off balance sheet arrangements.
 
 
Critical Accounting Policies, Judgments and Estimates
 
The U.S. Securities and Exchange Commission ("SEC") requires companies to provide additional disclosure and commentary on their most critical accounting policies. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and requires management to make its most significant estimates and judgments in the preparation of its consolidated financial statements. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. Our critical accounting policies are described below.

Revenue Recognition

Revenue is generally recognized from product sales upon shipment to the customer or upon receipt by the customer in accordance with the agreed upon customer terms when title and risk of ownership have passed, the price to the buyer is fixed or determinable and collectability is reasonably assured. Based on historical results and analysis, we estimate and calculate provisions for customer rebates and sales returns and allowances and record as an offset to revenue in the same period the related revenue is recognized.

Accounts Receivable

On an ongoing basis, we evaluate the accounts receivable based on individual customer circumstances, historical write-offs and collections, and current industry and customer credit conditions, and adjust the allowance for doubtful accounts accordingly. Our policy regarding write-offs and collection efforts varies based on individual customer circumstances. Past due accounts receivable are determined based on individual customer credit terms.

Inventories

We value inventory at the lower of cost using the first-in, first-out (FIFO) method, or market. We assess the recoverability of inventory and record a provision for obsolescence based upon specifically identified, discontinued, or obsolete items and a percentage of quantities on hand compared with historical and forecasted usage and sales levels. These assessments, which require management’s judgments and estimates, reduce inventories to their estimated net realizable value.

Goodwill, Intangible Assets, and Other Long-Lived Assets

Long-lived assets consist of goodwill, identifiable intangible assets, trademarks, and property and equipment. We have deemed that our trademarks have indefinite useful lives and are not amortized unless we determine their useful lives are no longer indefinite. Other intangible assets and property and equipment, excluding goodwill, are amortized using the straight-line method over their estimated useful life. We review long-lived assets, including property, equipment, and intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset.

Income Tax

The Company files income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. The Company’s subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits are allocated to its members. Prior to November 10, 2014, as the previous owners, the sellers were the sole members and reported the allocations on their personal tax returns. As a result, there was no tax provision on its income prior to November 10, 2014. 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 post-acquisition taxable income is allocated entirely to UEPH as its sole member and since it is a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on the Company’s tax return. The taxable income applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual tax returns.
 

We follow ASC 740 Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax asset to the amount that is more likely than not to be realized. Future changes in such valuation allowance would be included in the provision for deferred income taxes in the period of change. We have a federal net operating loss carryforward of approximately $17 million as of January 1, 2016, which expires in years beginning 2018 through 2033. We have deferred tax assets as a result of these loss carryforwards which had been reduced by a valuation allowances to $3,764,000 at January 3, 2016. Based on management’s review at January 1, 2017, it was determined that a valuation allowance was no longer required.

Foreign Currency Translation

The financial position and results of operations of our foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted average exchange rates during the year. The resulting translation gains and losses on assets and liabilities are recorded in Accumulated Other Comprehensive Income (Loss), and are excluded from net income until realized through a sale or liquidation of the investment.

Fair Value of Financial Instruments

Our short-term financial instruments consist primarily of the following: cash and cash equivalents, accounts receivable and accounts payable. We adjust the carrying value of financial assets denominated in other currencies such as cash, accounts receivable, accounts payable and the lines of credit using the appropriate exchange rates at the balance sheet date. We believe that the carrying values of these short-term financial instruments approximate their estimated fair values.

The fair value of our long-term debt is estimated based on current rates for similar instruments with the same remaining maturities. In determining the current interest rates for similar instruments, we take into account its risk of nonperformance. We believe that the carrying value of our long-term debt approximates its estimated fair value.

Postretirement and Postemployment Benefit Liabilities

We provide certain health care and life insurance benefits for substantially all employees (active or retired) who were employed prior to February 20, 1987. In calculating our plan obligations and related expense, we make various assumptions and estimates. These assumptions include discount rates, mortality rates, retirement rates, termination rates and other factors. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our obligations and future expense.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board issued a new standard ASU No. 2014-09, "Revenue from Contracts with Customers." Under ASU 2014-09 recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The new standard will be effective for the Company January 1, 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 February 18, 2015 the Financial Accounting Standards Board issued a new standard ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." The new standard affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. It was effective for the Company on January 4, 2016. Adoption of this ASU did not have a material impact on the Company’s financial position, results of operations and cash flows.
 

On April 7, 2015, the Financial Accounting Standards Board issued a new standard ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. It was effective for the Company on January 4, 2016. Adoption of this ASU did not have a material impact on the Company’s financial position, results of operations and cash flows.

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 was 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 was 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 other than to reclassify the current deferred tax asset as of January 1, 2017 in the amount of $1,301,280 to the non-current deferred tax assets.

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 was 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Not applicable
 
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of
Uniroyal Global Engineered Products, Inc.
Sarasota, Florida


We have audited the accompanying consolidated balance sheets of Uniroyal Global Engineered Products, Inc. and subsidiaries (the "Company") as of January 1, 2017 and January 3, 2016, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 1, 2017 and January 3, 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.


Tampa, FL
March 20, 2017
 
Uniroyal Global Engineered Products, Inc.
 
Consolidated Balance Sheets
 
             
             
ASSETS
 
January 1, 2017
   
January 3, 2016
 
CURRENT ASSETS
           
Cash and cash equivalents
 
$
1,321,586
   
$
1,910,112
 
Accounts receivable, net
   
14,555,463
     
14,209,056
 
Inventories, net
   
17,046,171
     
17,527,728
 
Other current assets
   
2,485,213
     
2,891,007
 
Related party receivable
   
25,456
     
23,298
 
Total Current Assets
   
35,433,889
     
36,561,201
 
PROPERTY AND EQUIPMENT, NET
   
13,611,494
     
14,003,276
 
                 
OTHER ASSETS
               
Intangible assets
   
3,133,564
     
3,534,936
 
Goodwill
   
1,079,175
     
1,079,175
 
Other long-term assets
   
5,410,375
     
3,095,414
 
Total Other Assets
   
9,623,114
     
7,709,525
 
TOTAL ASSETS
 
$
58,668,497
   
$
58,274,002
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Checks issued in excess of bank balance
 
$
679,494
   
$
322,307
 
Lines of credit
   
16,799,592
     
16,577,279
 
Current maturities of long-term debt
   
851,988
     
639,018
 
Current maturities of capital lease obligations
   
368,718
     
489,978
 
Accounts payable
   
7,331,213
     
7,592,510
 
Accrued expenses
   
3,645,526
     
3,941,296
 
Related party obligation
   
371,161
     
276,880
 
Current portion of postretirement benefit liability - health and life
   
158,527
     
136,725
 
Total Current Liabilities
   
30,206,219
     
29,975,993
 
                 
LONG-TERM LIABILITIES
               
Long-term debt, less current portion
   
1,994,910
     
2,134,243
 
Capital lease obligations, less current portion
   
856,171
     
1,469,317
 
Related party lease financing obligations
   
2,162,151
     
2,164,682
 
Long-term debt to related parties
   
2,826,907
     
4,449,243
 
Postretirement benefit liability - health and life, less current portion
   
2,883,684
     
2,836,638
 
Other long-term liabilities
   
838,308
     
975,781
 
Total Long-Term Liabilities
   
11,562,131
     
14,029,904
 
Total Liabilities
   
41,768,350
     
44,005,897
 
                 
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)
18,727,782 and 18,890,909 shares issued and outstanding as of
January 1, 2017 and January 3, 2016, respectively
   
18,728
     
18,892
 
Additional paid-in capital
   
34,653,894
     
34,823,886
 
Accumulated deficit
   
(17,174,814
)
   
(21,674,478
)
Accumulated other comprehensive income
   
(1,678,486
)
   
18,980
 
Total Stockholders' Equity
   
16,900,147
     
14,268,105
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
58,668,497
   
$
58,274,002
 
 
See accompanying notes to the consolidated financial statements
 
 
Uniroyal Global Engineered Products, Inc.
 
Consolidated Statements of Operations
 
             
   
Years Ended
 
   
January 1, 2017
   
January 3, 2016
 
             
NET SALES
 
$
100,377,278
   
$
99,761,973
 
                 
COST OF GOODS SOLD
   
77,515,316
     
77,813,354
 
                 
Gross Profit
   
22,861,962
     
21,948,619
 
                 
OPERATING EXPENSES:
               
Selling
   
5,078,706
     
5,201,199
 
General and administrative
   
8,008,975
     
7,779,012
 
Research and development
   
1,727,616
     
1,728,867
 
OPERATING EXPENSES
   
14,815,297
     
14,709,078
 
                 
Operating Income
   
8,046,665
     
7,239,541
 
                 
OTHER EXPENSE:
               
Interest and other debt related expense
   
(1,616,120
)
   
(1,613,391
)
Other expense
   
(249,640
)
   
(65,361
)
Other Expense
   
(1,865,760
)
   
(1,678,752
)
                 
INCOME BEFORE TAX BENEFIT
   
6,180,905
     
5,560,789
 
                 
TAX BENEFIT
   
(1,198,557
)
   
(2,193,054
)
                 
NET INCOME
   
7,379,462
     
7,753,843
 
                 
Preferred stock dividend
   
(2,879,798
)
   
(2,801,687
)
                 
NET INCOME AVAILABLE TO COMMON
  SHAREHOLDERS
 
$
4,499,664
   
$
4,952,156
 
                 
EARNINGS PER COMMON SHARE:
               
Basic
 
$
0.24
   
$
0.35
 
Diluted
 
$
0.24
   
$
0.26
 
WEIGHTED AVERAGE SHARES
OUTSTANDING:
               
Basic
   
18,828,378
     
14,334,485
 
Diluted
   
18,869,709
     
19,040,032
 
 
See accompanying notes to the consolidated financial statements
 
 
Uniroyal Global Engineered Products, Inc.
 
Consolidated Statements of Comprehensive Income
 
             
             
   
Years Ended
 
   

January 1, 2017
   
January 3, 2016
 
             
NET INCOME
 
$
7,379,462
   
$
7,753,843
 
                 
OTHER COMPREHENSIVE LOSS:
               
Minimum benefit liability adjustment
   
(76,405
)
   
(391,785
)
Foreign currency translation adjustment
   
(1,621,061
)
   
(380,197
)
OTHER COMPREHENSIVE LOSS
   
(1,697,466
)
   
(771,982
)
                 
COMPREHENSIVE INCOME
   
5,681,996
     
6,981,861
 
                 
Preferred stock dividend
   
(2,879,798
)
   
(2,801,687
)
                 
COMPREHENSIVE INCOME TO
   COMMON SHAREHOLDERS
 
$
2,802,198
   
$
4,180,174
 
 
See accompanying notes to the consolidated financial statements
 
 
Uniroyal Global Engineered Products, Inc.
 
Consolidated Statement of Changes in Stockholders' Equity
 
For the Years Ended January 1, 2017 and January 3, 2016
 
                                                                                                             
                                                                                                             
   
Preferred A
   
Preferred B
   
Preferred C
   
UEPH Series A
   
UEPH Series B
   
EPAL Preferred
   
Common Stock
               
Accumu-
lated Other
Compre-
hensive
Income
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Units
   
Amount
   
Units
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Additional
Paid In
Capital
   
Accumulated
Deficit
       
Total
Equity
 
Balance December 28,
2014
   
9,715
   
$
798,500
     
2,702
   
$
270,160
     
16,124
   
$
1,600,467
     
200,000
   
$
617,571
     
150,000
   
$
463,179
     
50
   
$
75
     
14,351,398
   
$
14,352
   
$
32,549,585
   
$
(26,626,634
)
 
$
790,962
   
$
10,478,217
 
Net Income
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
7,753,843
     
-
     
7,753,843
 
Conversion of Preferred
Stock
   
(9,715
)
   
(798,500
)
   
(2,702
)
   
(270,160
)
   
(16,124
)
   
(1,600,467
)
   
-
     
-
     
-
     
-
     
-
     
-
     
4,756,814
     
4,757
     
2,664,370
     
-
     
-
     
-
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(771,982
)
   
(771,982
)
Preferred stock dividend
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(2,801,687
)
   
-
     
(2,801,687
)
Purchase treasury shares
at cost
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(217,303
)
   
(217
)
   
(488,635
)
   
-
     
-
     
(488,852
)
Stock-based compensation
expense
                                                                                                                   
98,566
                     
98,566
 
Balance January 3, 2016
   
-
     
-
     
-
     
-
     
-
     
-
     
200,000
   
$
617,571
     
150,000
   
$
463,179
     
50
   
$
75
     
18,890,909
   
$
18,892
   
$
34,823,886
   
$
(21,674,478
)
 
$
18,980
   
$
14,268,105
 
                                                                                                                                                 
Net Income
                                                                                                                           
7,379,462
             
7,379,462
 
Other comprehensive loss
           
-
             
-
             
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(1,697,466
)
   
(1,697,466
)
Issuance of common stock
                                                   
-
     
-
     
-
     
-
     
-
     
-
     
3,576
     
3
     
(3
)
   
-
     
-
     
-
 
Stock-based compensation
expense
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
381,262
     
-
     
-
     
381,262
 
Purchase treasury shares
at cost
                                                   
-
     
-
     
-
     
-
     
-
     
-
     
(166,703
)
   
(167
)
   
(551,251
)
   
-
     
-
     
(551,418
)
Preferred stock dividend
                                                                                                                           
(2,879,798
)
           
(2,879,798
)
Balance January 1, 2017
   
-
   
$
-
     
-
   
$
-
     
-
   
$
-
     
200,000
   
$
617,571
     
150,000
   
$
463,179
     
50
   
$
75
     
18,727,782
   
$
18,728
   
$
34,653,894
   
$
(17,174,814
)
 
$
(1,678,486
)
 
$
16,900,147
 
 
See accompanying notes to the consolidated financial statements
 
 
Uniroyal Global Engineered Products, Inc.
 
Consolidated Statements of Cash Flows
 
             
             
   
Years Ended
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
January 1, 2017
   
January 3, 2016
 
             
Net income
 
$
7,379,462
   
$
7,753,843
 
Adjustments to reconcile net income to net cash flows from operating
  activities:
               
Depreciation
   
1,706,996
     
1,551,295
 
Stock-based compensation expense
   
381,262
     
98,566
 
Deferred tax benefit
   
(1,925,000
)
   
(2,511,000
)
Amortization of intangible assets
   
20,004
     
20,004
 
Loss on disposal of property and equipment
   
76,432
     
47,468
 
Noncash postemployment health and life benefit
   
(76,405
)
   
(180,915
)
Changes in assets and liabilities:
               
Accounts receivable
   
(1,997,110
)
   
(37,619
)
Inventories
   
(834,706
)
   
(472,499
)
Other current assets
   
178,050
     
5,278
 
Related party receivable
   
29,301
     
31,372
 
Other long-term assets
   
(72,697
)
   
19,222
 
Accounts payable
   
619,464
     
(1,565,291
)
Accrued expenses
   
69,390
     
332,056
 
Postretirement benefit liability - health and life
   
68,848
     
(15,116
)
Other long-term liabilities
   
20,696
     
224,592
 
Cash Flows provided by Operating Activities
   
5,643,987
     
5,301,256
 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures
   
(2,031,709
)
   
(2,782,525
)
Net payments on life insurance policies
   
(324,809
)
   
(107,502
)
Cash paid for lease deposit
   
-
     
(37,169
)
Cash Flows used in Investing Activities
   
(2,356,518
)
   
(2,927,196
)
CASH FLOWS FROM FINANCING ACTIVITIES
               
Checks issued in excess of bank balance, net
   
357,187
     
(115,838
)
Net advances on lines of credit
   
1,225,943
     
508,038
 
Payments on long-term debt
   
(318,064
)
   
(256,176
)
Proceeds from issuance of long-term debt and capital lease obligations
   
350,000
     
2,149,010
 
Payments on capital lease obligations
   
(441,689
)
   
(337,223
)
Proceeds from (payments on) related party obligation
   
(1,422,047
)
   
3,533
 
Payment of preferred stock dividends
   
(2,860,825
)
   
(2,479,665
)
Purchase of treasury stock
   
(551,418
)
   
(488,852
)
Cash Flows used in Financing Activities
   
(3,660,913
)
   
(1,017,173
)
Net Change in Cash and Cash Equivalents
   
(373,444
)
   
1,356,887
 
Cash And Cash Equivalents - Beginning Of Period
   
1,910,112
     
604,234
 
Effects of currency translation on cash and cash equivalents
   
(215,082
)
   
(51,009
)
                 
CASH AND CASH EQUIVALENTS - END OF PERIOD
 
$
1,321,586
   
$
1,910,112
 
 
For noncash transactions and supplement disclosure of cash flow information see Note 2
 
See accompanying notes to the consolidated financial statements
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016
 

NOTE 1 - Summary of Significant Accounting Policies

Description of the Business

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC. (the “Company”) is primarily engaged in the development, manufacturing and distribution of vinyl coated fabrics primarily for use in transportation, residential, hospitality, health care, office furniture and automotive applications. The Company’s customers are located primarily throughout North America and Europe.

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

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

The Company made the acquisition of Uniroyal through its newly formed subsidiary, UEP Holdings, LLC (“UEPH”). The aggregate purchase consideration paid for 100% of the outstanding equity of Uniroyal was preferred ownership interests issued by UEPH having a liquidation preference of $35 million. See Note 14 for a description of the preferred units issued. In a separate transaction, the Company purchased EPAL for 100 shares of the Company’s Common Stock and the Company’s guaranty of outstanding EPAL preferred stock retained by the seller, having a liquidation preference of £12,518,240 (approximately $20 million at closing).

The principal owner of Uniroyal and EPAL also owned all of the Company’s outstanding shares of Series A preferred stock and Series B preferred stock; a substantial portion of the Company’s outstanding Series C preferred stock; and approximately 6.8 million shares of Invisa common stock. As a result of this beneficial ownership, the seller controls in excess of 80% of the Company’s voting rights in all matters to come before the Company’s shareholders. As a result of this common ownership, the November 10, 2014 transaction was treated as a combination between entities under common control and was accounted for in a manner similar to the pooling-of-interest method. The recognized assets and liabilities were transferred at their carrying amounts at the date of the transaction. Further, the companies were also combined retrospectively for prior year comparative information to the extent permitted.

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

The Company and its subsidiaries have adopted a 52/53-week fiscal year ending on the Sunday nearest to December 31. The years ended January 1, 2017 and January 3, 2016 were 52-week and 53-week years, respectively.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries and are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). All intercompany balances have been eliminated. The Company manages its operations on a consolidated, integrated basis in order to optimize its equipment and facilities and to effectively service its global customer base, and concludes that it operates in a single business segment.
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

Cash and Cash Equivalents

The Company defines cash and cash equivalents as highly liquid, short‑term investments with a maturity at the date of acquisition of three months or less.

The Company maintains cash in bank accounts which, at times, exceeds federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks.

Accounts Receivable

Accounts receivable are recorded net of an allowance for doubtful accounts, returns and discounts of $328,427 and $282,152 as of January 1, 2017 and January 3, 2016, respectively.

On an ongoing basis, the Company evaluates its accounts receivable based on individual customer circumstances, historical write‑offs and collections, and current industry and customer credit conditions, and adjusts its allowance for doubtful accounts accordingly. The Company’s policy regarding write‑offs and collection efforts varies based on individual customer circumstances. Past due accounts receivable are determined based on individual customer credit terms.

Customer Rebates

The Company records customer rebates as a reduction of net sales and accounts receivable. Accounts receivable are recorded net of an allowance for customer rebates of $137,141 and $207,551 as of January 1, 2017 and January 3, 2016.

Inventories

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

Property and Equipment

Property and equipment are stated at cost. Major expenditures for property and equipment are capitalized. Maintenance, repairs, and minor refurbishments are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income.

Property and equipment are depreciated using the straight‑line method over their estimated useful lives. For income tax reporting purposes, depreciation is calculated using both applicable straight‑line methods and accelerated methods or capital allowances based on the various taxing jurisdictions’ approved methods.
   
Cash Surrender Value of Insurance Policies

Cash surrender value of insurance policies is valued at the cash surrender value of the contract as determined by the life insurance company. The gross cash value of the insurance policies totaled $468,998 and $144,189 as of January 1, 2017 and January 3, 2016, respectively. The cash value of the insurance policies are included in other long‑term assets on the accompanying Consolidated Balance Sheets.
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

Impairment of Finite-Lived Long‑Lived Assets

The Company reviews long‑lived assets, including property, equipment, and intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset. To date, there have been no such losses.

Goodwill and Intangible Indefinite-Lived Assets

Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired. Trademarks are recorded at estimated fair value at the date they were acquired in certain business acquisitions. To the extent it has been determined that the carrying value of goodwill or trademarks is not recoverable and is in excess of its fair value, an impairment loss is recognized. Impairment is reviewed annually. No impairment loss was deemed necessary as of January 1, 2017 or January 3, 2016.

Income Taxes

The Company follows ASC 740 Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax asset to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

The tax effects from an uncertain tax position are recognized in the financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company does not believe there is any uncertainty with respect to its tax positions which would result in a material change to the financial statements.

The Company files income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. The Company’s subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits are allocated to its members. Prior to November 10, 2014, as the previous owners, the sellers were the sole members and reported the allocations on their personal tax returns. As a result, there was no tax provision on its income prior to November 10, 2014.  After this date, Uniroyal’s income is allocated entirely to UEPH, a limited liability corporation, as its sole member.  The Company then receives this income allocation as the sole member of UEPH less the dividends paid on the preferred units held by the former members of Uniroyal.

The Company's tax returns for tax years 2012 and thereafter are subject to examination by taxing authorities. The Company records interest and penalties associated with uncertain tax positions related to these tax filings as interest expense. For the years ended January 1, 2017 and January 3, 2016, the Company has recorded no expense for interest or penalties.
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

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.

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 value of the contracts at January 1, 2017 was an asset in the amount of $9,718 and was included in other current assets. At January 3, 2016, the fair value was a liability in the amount of $36,676 and was included in accrued expense. The fair values of the currency exchange contracts are based upon observable market transactions of spot and forward rates.

For the fiscal year ended January 1, 2017, there have been no changes in the application of valuation methods applied to similar assets and liabilities.

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

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Assets and liabilities measured, reported and/or disclosed at fair value will be classified and disclosed in one of the following three categories:
 
  Level 1 ‑
Inputs to the valuation methodology are unadjusted quoted market prices for identical assets in active markets that the Company has the ability to access.
 
  Level 2 ‑
Observable market based inputs or unobservable inputs that are corroborated by market data. Inputs to the valuation methodology include:
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016
 
>
quoted prices for similar assets or liabilities in active markets;
>
quoted prices for identical or similar assets or liabilities in inactive markets;
>
inputs other than quoted prices that are observable for the asset or liability;
>
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
 
  Level 3 ‑
Unobservable inputs that are unobservable and not corroborated by market data.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.


Foreign Currency Translation

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

Estimates

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

Revenue Recognition

Revenue is generally recognized from product sales upon shipment to the customer or upon receipt by the customer in accordance with the agreed upon customer terms when title and risk of ownership have passed, the price to the buyer is fixed or determinable and collectability is reasonably assured. Based on historical results and analysis, we estimate and calculate provisions for customer rebates and sales returns and allowances and record these estimated amounts as an offset to revenue in the same period the related revenue is recognized.

Shipping and Handling Costs

Shipping and handling costs charged to customers and the costs incurred by the Company are netted. Shipping and handling costs incurred by the Company are included in cost of goods sold.

Warranties

The Company warrants that the materials and workmanship of its products will meet customer specifications. The Company estimates its accrued warranty expenses based upon prior warranty claims experience. Accrued warranty expenses were not material as of January 1, 2017 and January 3, 2016.
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

Advertising

Advertising costs, other than promotional materials, are charged to expense as incurred. Promotional materials are expensed as they are distributed. Advertising expense was $191,688 and $360,429 for the years ended January 1, 2017 and January 3, 2016, respectively. As of January 1, 2017 and January 3, 2016, $116,428 and $135,436, respectively, of promotional materials were included in other long‑term assets in the accompanying consolidated financial statements.

Research and Development

Research and development costs are charged to expense as incurred. Research and development expense was $1,727,616 and $1,728,867 for the years ended January 1, 2017 and January 3, 2016, respectively.

Earnings Per Share

The Company calculates basic net income per common share by dividing net income after the deduction of preferred stock or preference dividends by the weighted average number of common shares outstanding. The calculation of diluted net income per share is consistent with that of basic net income per common share but gives effect to all potential common shares (that is, securities underlying options, warrants or convertible securities) that were outstanding during the period, unless the effect is anti-dilutive. For the year ended January 1, 2017, there were 41,331 dilutive common stock equivalents related to stock options included in the calculation of diluted earnings per common share. There were no dilutive common stock equivalents related to stock options for the year ended January 3, 2016. The Company’s 28,541 shares of convertible preferred stock Series A, Series B and Series C which were outstanding at December 28, 2014, were converted into 4,756,814 common shares on December 30, 2015. As a result of this conversion, for the year ended January 1, 2017 there were no dilutive preferred shares outstanding.

Future Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued a new standard ASU No. 2014-09, "Revenue from Contracts with Customers." Under ASU 2014-09 recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The new standard will be effective for the Company January 1, 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 February 18, 2015 the Financial Accounting Standards Board issued a new standard ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." The new standard affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. It was effective for the Company on January 4, 2016. Adoption of this ASU did not have a material impact on the Company’s financial position, results of operations and cash flows.

On April 7, 2015, the Financial Accounting Standards Board issued a new standard ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. It was effective for the Company on January 4, 2016. Adoption of this ASU did not have a material impact on the Company’s financial position, results of operations and cash flows.
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

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 will be 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 will be 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 other than to reclassify the current deferred tax asset as of January 1, 2017 in the amount of $1,301,280 to the non-current deferred tax assets.

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 will be 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.
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

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 January 1, 2017 financial statements. There were no material events or transactions occurring during this period requiring recognition or disclosure.
 

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

During the year January 3, 2016, the Company reduced its borrowings on its lines of credit with additional borrowings on its term loan with Wells Fargo Capital Finance, LLC of $359,002. During the years ended January 1, 2017 and January 3, 2016, the Company paid down its term loans using available borrowings on its various lines of credit of $389,339 and $417,705, respectively.

During the years ended January 1, 2017 and January 3, 2016, the Company entered into several new equipment leases and financing obligations with fair values of $619,921 and $1,130,609, 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.

The Company’s 28,541 shares of convertible preferred stock Series A, Series B and Series C which were outstanding at December 28, 2014, were converted into 4,756,814 common shares on December 30, 2015. See Note 14.


Supplemental disclosure of cash paid for the years ended:
   
January 1,
2017
   
January 3,
2016
 
                 
Interest expense
 
$
1,592,550
   
$
1,542,749
 
                 
Income taxes
 
$
273,477
   
$
28,069
 


NOTE 3 - Inventories

Inventories consist of the following:

   
January 1,
2017
   
January 3,
2016
 
                 
Raw materials
 
$
5,199,632
   
$
5,066,589
 
Work‑in‑process
   
4,491,250
     
4,293,892
 
Finished goods
   
8,669,625
     
9,348,495
 
     
18,360,507
     
18,708,976
 
Less:  Allowance for inventory obsolescence
   
(1,314,336
)
   
(1,181,248
)
                 
Total Inventories
 
$
17,046,171
   
$
17,527,728
 
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016
 

NOTE 4 – Other Current Assets

Other current assets consist of the following:
   
January 1,
2017
   
January 3,
2016
 
                 
Current deferred tax asset, net of valuation
allowance at January 3, 2016
 
$
1,301,280
   
$
1,872,417
 
Other
   
1,183,933
     
1,018,590
 
                 
Total Other Current Assets
 
$
2,485,213
   
$
2,891,007
 
 

NOTE 5 - Property and Equipment

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

Depreciable
Lives
 
January 1,
2017
   
January 3,
2016
 
Building and building improvements
8 – 25 yrs.
 
$
422,910
   
$
226,873
 
Machinery and equipment
8 ‑ 10 yrs.
   
22,097,617
     
21,780,293
 
Computer equipment
3 ‑ 10 yrs.
   
1,263,127
     
1,223,229
 
Furniture and fixtures
7 ‑ 10 yrs.
   
164,322
     
172,945
 
Real estate under lease
20 yrs.
   
2,165,914
     
2,165,914
 
Construction‑in‑progress
   
57,530
     
52,316
 
                   
Total Property and Equipment
     
26,171,420
     
25,621,570
 
                   
Less: Accumulated depreciation
     
(12,559,926
)
   
(11,618,294
)
                   
Net Property and Equipment
   
$
13,611,494
   
$
14,003,276
 

 

NOTE 6 - Intangible Assets

Intangible assets are summarized as follows:

Amortizable
Lives
 
January 1,
2017
   
January 3,
2016
 
                   
Trademarks and trade names
Indefinite
 
$
3,091,889
   
$
3,473,257
 
Other
5 years
   
41,675
     
61,679
 
                   
     Total Intangible Assets
   
$
3,133,564
   
$
3,534,936
 
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016


NOTE 7 – Other Long-term Assets

Other long-term assets consist of the following:
   
January 1,
2017
   
January 3,
2016
 
                 
Non-current deferred tax asset, net of valuation
allowance at January 3, 2016
 
$
4,434,000
   
$
2,509,000
 
Other
   
976,375
     
586,414
 
                 
Total Other Long-term Assets
 
$
5,410,375
   
$
3,095,414
 

 

NOTE 8 – Other Long-term Liabilities

Other long-term liabilities consist of the following:
   
January 1,
2017
   
January 3,
2016
 
                 
Non-current deferred tax liability
 
$
790,252
   
$
909,376
 
Other
   
48,056
     
66,405
 
                 
Total Other Long-term Liabilities
 
$
838,308
   
$
975,781
 
 

NOTE 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, which matures on October 17, 2019. Interest is payable monthly at the Eurodollar rate plus 2.25% or Wells Fargo Capital Finance, LLC's prime rate at the Company's election on outstanding balances up to $6,000,000 and prime rate on amounts in excess of $6,000,000. The line of credit weighted average interest rate including unused facility fees was approximately 3.81% as of January 1, 2017. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable, inventories and equipment. The line of credit is secured by substantially all of Uniroyal's assets and includes certain financial and restrictive covenants.

The outstanding balance on the line of credit (“Uniroyal Line of Credit”) was $9,668,388 and $8,768,140 as of January 1, 2017 and January 3, 2016, 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 a to 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. The line of credit weighted average interest rate was approximately 2.44% as of January 1, 2017. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable and inventories. The line of credit is secured by substantially all of the subsidiary's assets and includes certain financial and restrictive covenants.
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

The outstanding balance on the UK Line of Credit was £5,792,236 and £5,264,550 ($7,131,204 and $7,809,139) as of January 1, 2017 and January 3, 2016, respectively. The Company has classified the outstanding balance on this line of credit within current liabilities in the accompanying Consolidated Balance Sheets.
NOTE 10 - Long‑Term Debt


Long‑term debt consists of the following:
 
   
January 1,
2017
   
January 3,
2016
 
                 
Uniroyal term loans with Wells Fargo Capital
Finance, LLC, monthly interest only payments at the
Eurodollar rate plus 2.25% or Wells Fargo Bank,
National Association's prime rate. The term loans'
weighted average interest rate was approximately
3.51% as of January 1, 2017. Monthly principal
balances are reduced by $24,766 each month,
resulting in a conversion, or increase, of the same
amount in the line of credit each month (see Note 2).
Term loans mature in October 2019 and are secured
by substantially all of the Company's assets and
include certain financial and restrictive covenants.
   
1,089,721
     
1,386,917
 
                 
Term loan with Lloyds Bank Commercial Finance
Limited; issued to the Company’s U.K. subsidiary, at
£340,000 (approximately $420,000; payable in 60
monthly payments of £5,667 (approximately $6,977);
Interest is payable monthly at the rate of 3.15%
above the base rate (UK LIBOR); monthly, the
principal is reduced by required payment resulting in
an increase of the same amount in the line of credit
(see Note 9). The loan matures in February 2019 and
is secured by substantially all of the subsidiaries’
assets and includes certain financial and restrictive
covenants.
   
181,392
     
319,413
 
                 
Financing obligation to Kennet Equipment Leasing;
upon completion, payable in monthly installments of
£16,636 ($20,482) including interest and principal at
a rate of 10.9%. The loan matures in May 2021 and
is secured by certain equipment.
   
801,153
     
721,354
 
                 
Note payable to Balboa Capital Corporation;
assigned to Wells Fargo, payable in quarterly
installments of $37,169 including interest and
principal at a rate of 5.72% with the remaining
principal due May 2018. The note is secured by
certain equipment.
 
 
213,230
     
345,577
 
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

Note payable to Regents Capital Corporation;
payable in monthly installments of $10,805
including interest and principal at a rate of 7.41%
with the remaining principal due December 2019.
The note is secured by certain equipment.
   
350,000
     
-
 
                 
Note payable to De Lage Landen Financial
Services payable in monthly installments of $2,658
including interest and principal at a rate of 7.35%
with the remaining principal due May 2021. The
note is secured by certain equipment.
   
118,073
     
-
 
                 
Note payable to Ford Motor Credit payable in
monthly installments of $849 including interest and
principal at a rate of 4.31% with the remaining
principal due November 2021. The note is secured
by certain equipment.
   
44,387
     
-
 
                 
Note payable to Byline Financial Group, payable in
monthly installments of $1,999 including interest
and principal at a rate of 8.55% with the remaining
principal due March 2019. The note is secured by
certain equipment.
   
48,942
     
-
 
 
               
Totals
   
2,846,898
     
2,773,261
 
                 
Less: Current portion
   
(851,988
)
   
(639,018
)
                 
Long‑Term Portion
 
$
1,994,910
   
$
2,134,243
 

Principal requirements on long‑term debt for years ending after January 1, 2017 are as follows:
 
   
Totals
 
         
2017
 
$
851,988
 
2018
   
819,008
 
2019
   
890,255
 
2020
   
242,256
 
2021
   
43,391
 
         
Total
 
$
2,846,898
 

In June 2015, the Company signed a pre-lease agreement with Kennet Equipment Leasing Limited (“Kennet”) whereby Kennet would advance funds in various tranches to finance the purchase, refurbishing and installation of certain equipment to be used in its UK manufacturing facility. The total financing obligation was £828,000 or approximately $1.02 million. Monthly payments are £16,636 ($20,482) over a 61-month period at 10.9% interest. At January 3, 2016, Kennet had incurred £549,560 or approximately $840,000 based on the exchange rate at that time. This amount was included in property and equipment and a corresponding amount less preliminary payments totaling £71,321 was recorded as a financing obligation. During the year ended January 1, 2017, the remaining amount of £278,440 was incurred and included in property and equipment and financing obligations.
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016
 

NOTE 11 - Related Party Obligations

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

   
January 1,
2017
   
January 3,
2016
 
                 
Senior subordinated promissory notes issued to the
Company’s majority shareholder; monthly interest
only payments at 9.25%; principal payment of
$2,000,000 due on October 17, 2018. The senior
subordinated promissory notes are secured by
substantially all assets of the Company subject to the
notes' subordination to the line of credit and term
loans with Wells Fargo Capital Finance, LLC.
 
$
2,000,000
   
$
2,000,000
 
                 
Secured promissory note issued to the Company’s
majority shareholder related to UGEL’s acquisition of
UGL (Wardle Storeys) on March 4, 2013; quarterly
interest only payments at 6.25%; principal payment of
10% of original principal amount due on December
31, 2020; a 20% payment due on December 31,
2021, a 30% payment on December 31, 2022 and
the final 40% due on December 31, 2023. The note
was secured by UGEL’s investment in UGL.
   
-
     
1,254,822
 
                 
Senior secured promissory note issued to Centurian
Investors, Inc., an entity controlled by the Company’s
majority shareholder; quarterly interest payments at
10% which started due April 1, 2015; quarterly
principal payments of $91,879 started April 1, 2016;
the note is secured by substantially all the assets of
the Company.
   
1,194,421
     
1,470,057
 
                 
Totals
   
3,194,421
     
4,724,879
 
                 
Less: Current portion
   
(367,514
)
   
(275,636
)
                 
Total Long-term Debt to Related Parties
 
$
2,826,907
   
$
4,449,243
 

On November 24, 2015, the Company amended its secured promissory note related to the Wardle Storeys acquisition to convert the principal and interest to Euros rather than British Pounds Sterling. No other terms of the note were changed at that time. The change became effective November 24, 2015. On May 27, 2016, the Company amended the note to change the maturity date from December 31, 2023 to May 31, 2016, effective on that date. The principal of the note in the amount of €1,152,585 or $1,285,593 and accrued interest were paid on May 31, 2016.
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016
 
During 2013, the Company sold real estate to a related party owned by the Company's majority owners and as part of the transaction the Company leased real estate it sold, plus additional land owned by the related party. Due to the terms of the lease, it qualified for treatment as a capital lease and accordingly a lease financing obligation with the related party for $2,165,914 was recognized in addition to a corresponding capital lease asset of the same amount. The lease financing obligation, under which the Company leases its main manufacturing facility and certain other property from the 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 during October 2033. The Company made a security deposit of $267,500 with the lessor entity at the inception of the lease financing arrangement. This amount is included in other long-term assets in the accompanying Consolidated Balance Sheets.

For the years 2014 through 2016 the amount of interest owed exceeded the amount of payments made, resulting in a net increase to the outstanding principal balance of the lease financing obligation. This obligation is shown in the accompanying Consolidated Balance Sheets as Related Party Lease Financing Obligation which has a balance of the following as of January 1, 2017 and January 3, 2016.
 

 
   
January 1,
2017
   
January 3,
2016
 
                 
Related party lease financing obligation
 
$
2,165,798
   
$
2,165,926
 
                 
Less: Current portion
   
(3,647
)
   
(1,244
)
                 
Long‑Term Portion
 
$
2,162,151
   
$
2,164,682
 
 

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.

   
January 1,
2017
   
January 3,
2016
 
                 
Current portion of long-term debt to related parties
 
$
367,514
   
$
275,636
 
                 
Current portion related party lease financing
obligation
   
3,647
     
1,244
 
                 
Related Party Obligation
 
$
371,161
   
$
276,880
 
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

Principal payments on this obligation and the aforementioned long-term debt to related parties for years ending after January 1, 2017, are as follows:
 
 
   
Totals
 
2017
 
$
371,161
 
2018
   
2,376,337
 
2019
   
382,221
 
2020
   
113,645
 
2021
   
30,231
 
Thereafter
   
2,086,624
 
         
Total
 
$
5,360,219
 


NOTE 12 – Income Taxes

The Company files income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. The Company’s subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits are allocated to its members. Prior to November 10, 2014, as the previous owners, the sellers were the sole members and reported the allocations on their personal tax returns. As a result, there was no tax provision on its income prior to November 10, 2014. The Company made the acquisition of Uniroyal through UEPH, a limited liability corporation, which issued preferred ownership interests to the sellers that provide for quarterly dividends. Uniroyal’s post-acquisition 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.

The (benefit) provision for income taxes for the years ended January 1, 2017 and January 3, 2016 were:

   
January 1,
2017
   
January 3,
2016
 
Current
           
Federal
 
$
-
   
$
-
 
State
   
174,323
     
100,231
 
Foreign
   
-
     
-
 
Total current income tax provision
   
174,323
     
100,231
 
Deferred
               
Federal
   
(1,925,000
)
   
(2,511,000
)
Foreign
   
552,120
     
217,715
 
Total deferred income tax benefit
   
(1,372,880
)
   
(2,293,285
)
Total income tax benefit
 
$
(1,198,557
)
 
$
(2,193,054
)
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

The benefit for income taxes differs from the amount computed by applying the federal statutory income tax rate to income before income taxes. The Company’s combined federal, state and foreign effective tax rate as a percentage before taxes for the years ended January 1, 2017 and January 3, 2016, was a negative 19.4%, and 39.4%, respectively. The following is a reconciliation of the income tax at the effective tax rate with the income tax at the U.S. federal statutory tax rate for the years ended January 1, 2017 and January 3, 2016:

   
January 1,
2017
   
January 3,
2016
 
             
Income tax at statutory rates
 
$
2,101,508
   
$
1,890,668
 
                 
Change in deferred tax valuation
   
(1,904,665
)
   
(2,739,379
)
Foreign tax rate differential
   
(587,609
)
   
(395,328
)
UEPH preference dividend
   
(646,000
)
   
(624,104
)
Research and development credit
   
(198,539
)
   
(406,884
)
Effect of change in tax rate on deferred items
   
(115,420
)
   
(85,249
)
Other
   
(22,155
)
   
66,991
 
State tax provisions
   
174,323
     
100,231
 
Income tax benefit
   
(1,198,557
)
   
(2,193,054
)
                 
Effective income tax rate
   
(19.4
)%
   
(39.4
)%



The following table summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities:
   
January 1,
2017
   
January 3,
2016
 
Current:
           
Deferred tax assets:
           
Net operating loss carryforward
 
$
1,301,280
   
$
1,872,417
 
  Total current deferred tax assets
   
1,301,280
     
1,872,417
 
Noncurrent:
               
Deferred tax assets:
               
Net operating loss carryforward
   
4,493,877
     
2,585,067
 
  Total noncurrent deferred tax assets
   
4,493,877
     
2,585,067
 
Deferred tax liabilities:
               
Trademarks
   
(316,521
)
   
(403,786
)
Deferred gain
   
(205,949
)
   
(262,835
)
Capital allowances
   
(327,659
)
   
(318,822
)
  Total noncurrent deferred tax liabilities
   
(850,129
)
   
(985,443
)
  Total noncurrent deferred tax asset (liabilities),
net
   
3,643,748
     
1,599,624
 
Net deferred tax assets
 
$
4,945,028
   
$
3,472,041
 
 
 
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016

Noncurrent deferred tax asset as of January 1, 2017 and January 3, 2016 are $4,434,000 and $2,509,000, respectively, resulting from carryforwards related to US net operating losses and $59,877 and $76,067, respectively, of carryforwards resulting from U.K. losses. The $4,434,000 and $2,509,000 of deferred assets for U.S. losses are shown separately in the accompanying financial statements as noncurrent deferred tax assets. The $59,877 and $76,067 deferred assets for U.K. losses are netted with the noncurrent deferred tax liabilities, which are all related to U.K. tax, and shown as net deferred tax liabilities of $790,252 and $909,376.

The Company has a federal net operating loss carryforward of approximately $17 million as of January 3, 2016, which expires in years beginning 2020 through 2034.  The Company has deferred tax assets as a result of these loss carryforwards which had been reduced by a valuation allowances to $3,764,000 at January 3, 2016. Based on evidence available at January 1, 2017, it was determined that a valuation allowance was no longer required.

 

NOTE 13 - Postretirement and Postemployment Benefit Liabilities

Postretirement Benefit Liability ‑ Health and Life

The Company provides certain health care and life insurance benefits for substantially all employees (active or retired) who were employed prior to February 20, 1987. Accounting standards for postretirement benefits require an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity.

The accumulated postretirement benefit obligation, plan assets and accrued postretirement liability as of the plan's measurement date are as follows:

 
 
January 1,
2017
   
January 3,
2016
 
 
               
Postretirement Benefit Liability ‑ Health and Life
 
$
3,276,088
   
$
3,283,645
 
Less: Plan assets
   
-
     
-
 
 
               
Accrued postretirement benefit cost
   
3,276,088
     
3,283,645
 
Less: Unrecognized net gain
   
(233,877
)
   
(310,282
)