UNIR Uniroyal Global Engineered Products Inc (CE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

Description of the Business

Uniroyal Global Engineered Products, Inc. (the “Company”) is primarily engaged in the development, manufacturing and distribution of vinyl coated fabrics mainly for use in transportation, residential, hospitality, health care, office furniture and automotive applications. The Company’s customers are located primarily throughout North America and Europe.

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

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

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

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

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

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

The Company and its subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest to December 31. The year ended January 3, 2021 was a 53-week year whereas the year ended December 29, 2019 was a 52-week year. The Company’s U.K. subsidiaries use the calendar year end of December 31. The activity of the U.K. subsidiaries that occurs on the days that do not coincide with the Company’s year-end is not material.

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 transactions 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 3, 2021 and December 29, 2019

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

One-for-Five Reverse Stock Split

On January 27, 2020, the Company announced a one-for-five reverse stock split (“reverse stock split”) on its common stock that became effective on February 24, 2020. All share and per share amounts reflect the effect of the reverse stock split. The amounts in common stock and additional paid-in capital were adjusted as of the effective date of the reverse stock split.

Coronavirus (COVID-19)

During the first quarter of 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) outbreak a public health emergency. There have been mandates from international, federal, state and local authorities requiring forced closures of various schools, businesses and other facilities and organizations. These forced closures have negatively impacted the Company’s business. Primarily due to the negative impact that COVID-19 is having on the global economy, the Company began to experience a decline in sales during the latter part of March 2020. In order to mitigate the effect of the decrease in revenue, the Company is managing its costs, which included initially reducing staff at its U.S. manufacturing facility and furloughing the entire production staff at the U.K. facility beginning in late March. During June 2020, the Company had some employees return to work as its U.K. facility started limited production of vinyl products based on orders it was receiving from its customers. The Company brought back additional production workers as incoming orders increased during the third quarter of 2020. All employees returned to work as demand for the Company’s products continued to improve in the fourth quarter although it was well below normalized levels.

As described below, the Company has applied for loans under programs offered by the governmental agencies in the United States and in the United Kingdom and has found other supplementary cash flow opportunities to provide further liquidity.

For the U.S. operations, during the second quarter of 2020 the Company received $2,217,500 in funds from One Community Bank (formerly Oregon Community Bank) through the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”) under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”). The loan matures on April 13, 2022 and bears an interest rate of 1.0%. Monthly payments of principal and interest were required to begin on November 13, 2020 based on the amount that was outstanding on October 13, 2020 in order to fully amortize the loan by April 13, 2022. The loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Loan payments have been deferred pending loan forgiveness from the SBA.

All or a portion of the loan may be forgiven by the SBA for costs the Company incurred for payroll, rent, utilities and all other allowable expenses during the 24-week period that began April 13, 2020. The Company used all proceeds from the loan to maintain payroll and make payments for lease, utility and other allowable expenses. As a result, management believes that the Company has met the PPP eligibility criteria for forgiveness and has concluded that the loan represents, in substance, a government grant that is expected to be forgiven. As such, in accordance with International Accounting Standards (“IAS”) 20, “Accounting for Government Grants and Disclosure of Government Assistance,” the Company has recognized the entire loan amount as grant income, which is included in net other income (expense) in the consolidated statement of operations for the year ended January 3, 2021. The Company submitted its application for loan forgiveness to One Community Bank in November 2020.

Also for the U.S. operations, in December 2020 the Company received $2,432,353 in funds from Wells Fargo Capital Finance, LLC through the Main Street Lending Program established by the Federal Reserve Board. The loan matures in November 2025 and bears an interest rate of 3.00% above LIBOR. The Company is required to make monthly interest payments beginning in December 2021 with any deferred interest from the first year of the loan added to principal. In addition, the Company is required to make annual principal payments in November 2023, 2024 and 2025 in increments of 15%, 15% and 70% of the principal, respectively. The loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

Additionally for the U.S. operations, during the first quarter of 2021 the Company received a $2.0 million Second Draw PPP loan. This loan has the same general terms as the Company’s first PPP loan.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

For the U.K. operations, during the year ended January 3, 2021 the Company recorded reimbursed costs of approximately $1,569,000 under the Coronavirus Job Retention Scheme (“CJRS”) set up by the U.K. government to help employers pay the wages of those employees who would otherwise have been laid off during the coronavirus outbreak but under the CJRS were furloughed instead. This program reimbursed the Company for up to 80% of the compensation expense plus national insurance and certain benefits paid to the furloughed employees, resulting in lower salary expense for the Company. While the employees were on furlough, the compensation paid to them was limited to the amount reimbursed by the CJRS. The Company recorded the reimbursed amounts as reductions to the associated expenses.

Additionally for the U.K. operations, during the second half of 2020 the Company received $1,225,911 in loans from its principal shareholder and $3,268,664 in loans from automotive lenders. These funds provided additional working capital to meet various short-term cash needs.

While the closures and limitations on movement, domestically and internationally, are expected to be temporary due to the COVID-19 outbreak, the duration of the supply chain disruption and related financial impact cannot be estimated at this time. Should the closures continue for a more extended period of time or should the effects of the coronavirus continue to spread, the impact could have a material adverse effect on the Company’s financial position, results of operations and cash flows which may require that the Company obtain additional financing.

The payment of dividends for the year ended January 3, 2021 and the three months ended December 29, 2019 was deferred to preserve cash and provide additional liquidity. As of January 3, 2021 and December 29, 2019, accrued dividends of $4,019,905 and $788,599, respectively, were included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

Legal Proceedings

From time to time, the Company may be a party to claims, proceedings, and lawsuits related to products, services, contracts, employment, environmental, safety, intellectual property, and other matters. The ultimate resolution of such claims, proceedings, and lawsuits is inherently unpredictable and, as a result, the Company’s estimates of liability, if any, are subject to change. Actual results could differ materially from the Company’s estimates, and an unfavorable resolution of any matter could have a material adverse effect on the financial condition, results of operations and/or cash flows of the Company. The Company does not believe, based on the information currently available to it, that the ultimate resolution of any currently pending matters will have a material effect on the consolidated financial condition, results of operations, or cash flows of the Company other than the following:

On October 1, 2020, the Health and Safety Executive (“HSE”), the government agency responsible for the enforcement of health and safety law in the U.K., charged our U.K. subsidiary, Uniroyal Global Limited, with an offense under the Health and Safety at Work etc. Act 1974 arising from an August 2019 incident in which an employee was injured in the course of his employment.

The Company fully cooperated with the HSE investigation and, at this time, intends to negotiate a plea based on the legal advice provided to it to date. Based on this legal advice, the Company believes that £150,000 ($193,000) is a reasonable estimate of the fine to be imposed and, accordingly, recorded an accrual for this charge. The related expense was recorded in general and administrative expenses in the accompanying Consolidated Statement of Operations for the year ended January 3, 2021.

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.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

Accounts Receivable

Accounts receivable are recorded net of an allowance for doubtful accounts, returns and discounts of $940,474 and $693,265 as of January 3, 2021 and December 29, 2019, respectively. Accounts receivable are recorded when obligations under the terms of a contract with a customer are satisfied, which includes the control of products transferring to the customer. See Note 22 for further discussion.

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

Customer Rebates

The Company records customer rebates as a reduction of net sales. Accounts receivable are recorded net of an allowance for customer rebates of $131,868 and $77,337 as of January 3, 2021 and December 29, 2019, respectively.

Inventories

Inventories are valued at the lower of cost using the first-in, first-out (FIFO) method, or market. To determine the cost of inventory, the Company allocates fixed expense to the costs of production based on the normal capacity, which refers to a range of production levels and is considered the production expected to be achieved over a number of periods under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Fixed overhead costs allocated to each unit of production should not increase due to abnormally low production. Those excess costs are recognized as a current period expense.

The Company and its subsidiaries have policies which are consistently applied to maintain reserves for obsolescence based on specific identification, discontinued or obsolete items, or a percentage of the amount on hand based on inventory aging compared with historical and forecasted usage and sales levels. These inventory recoverability assessments reduce inventories to their estimated net realizable value.

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 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.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, accrued expenses and other liabilities, and operating lease liabilities in the accompanying consolidated balance sheets. Finance leases are included in property and equipment, current maturities of finance lease liabilities, and finance lease liabilities, less current portion in the accompanying consolidated balance sheets while related party finance leases are included in property and equipment, related party obligation, and related party finance lease liabilities in the accompanying consolidated balance sheets.

Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, lease right-of-use assets and liabilities are recognized at the beginning date of a lease based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on information that is available at the beginning date of a lease to determine the present value of lease payments, since its leases generally do not provide an implicit rate. The implicit rate is used when readily determinable. The Company excludes leases with terms of 12 months or less. The terms of the Company’s leases may include options to extend or terminate a lease when it is reasonably certain that the Company will exercise that option. The Company’s lease agreements with lease and non-lease components are generally accounted for on a combined basis. See Notes 10 and 16 for further discussion.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

Cash Surrender Value of Insurance Policies

Cash surrender value of insurance policies is valued at the cash surrender value of the contract as determined by the life insurance company. The cash value of the insurance policies totaled $776,323 and $597,551 as of January 3, 2021 and December 29, 2019, respectively. The Company has obtained loans against the cash value of certain of these insurance policies. At January 3, 2021 and December 29, 2019, these insurance policy loans totaled $590,841 and $460,841, respectively, and had a weighted average interest rate of 3.63%. The increase in the amount of insurance policy loans was due to $130,000 in loans obtained by the Company during the third quarter of 2020. Interest is accrued quarterly. Each loan (and applicable accrued interest) can be repaid at any time. Any loan (or interest) outstanding at the time of settlement will reduce the proceeds payable under the policies. The cash value of the insurance policies, net of policy loans, is included in other long-term assets in the accompanying consolidated balance sheets.

Impairment of Finite-Lived Long-Lived Assets

The Company reviews long-lived assets, including property, equipment, and intangible assets, for impairment at least annually or 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. There were no impairment losses recognized in the years ended January 3, 2021 or December 29, 2019.

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 the assets associated with goodwill or trademarks is not recoverable and is in excess of its fair value, an impairment loss is recognized. Impairment is reviewed at least annually. No impairment loss was deemed necessary as of January 3, 2021 or December 29, 2019.

Income Taxes

The Company follows ASC 740 Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax bases of assets and liabilities (temporary differences) using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. The Company reduces its deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making its valuation allowance determinations, the Company considers all available positive and negative evidence affecting specific deferred tax assets, including past and anticipated future performance, the reversal of deferred tax liabilities, the length of carryback and carryforward periods, and the implementation of tax planning strategies.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

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 U.S. operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits pass through to its members. Uniroyal’s taxable income is allocated entirely to UEPH, a limited liability corporation, as its sole member.  As the sole member of UEPH, the Company then receives this income allocation less the dividends paid on the preferred ownership interests held by the former owners of Uniroyal.

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

The Company's tax returns for tax years 2017 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. No such expense was recorded for the years ended January 3, 2021 and December 29, 2019, since the Company does not believe it has any uncertain tax positions.

Fair Value of Financial Instruments

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

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

The Company uses foreign currency exchange contracts which are recorded at their estimated fair values in the accompanying consolidated balance sheets. The fair values of the currency exchange contracts are based upon observable market transactions of spot and forward rates.

For the fiscal year ended January 3, 2021, there have been no changes in the application of valuation methods applied to similar assets and liabilities.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

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:

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 applied need to maximize the use of observable inputs and minimize the use of unobservable inputs.

Foreign Currency Translation

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

Estimates

The preparation of the consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that the estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

Revenue Recognition

We derive our revenues primarily from the manufacture and sale of vinyl coated fabrics. Revenues are recognized when control of these products is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products.

The Company has identified customer purchase orders as contracts. The contract specifies the transaction price which is based on the amount of consideration the Company expects to receive in exchange for transferring control of a product to the customer. The Company does not have multiple performance obligations requiring it to allocate a transaction price. The performance obligation under the contract is the delivery of products. The performance obligation is satisfied and revenue is recognized when the Company transfers control of the products to its customers. For Uniroyal, this generally occurs when products are shipped and, for UGL, this generally occurs when the customer accepts delivery either at the Company’s U.K. facility or at a mutually agreed upon location.

However, if the Company has an enforceable right to payment when the customer is contractually required to accept delivery of any remaining product at the end of a contract, but collectability of the revenue is uncertain, revenue recognition would occur upon agreement even if the product is not delivered to the customer.

See Note 22 for further discussion.

Variable Consideration

The nature of our business gives rise to variable consideration, including rebates, allowances and returns that generally decrease the transaction price, which reduces revenue. These various amounts are generally credited to the customer, based on achieving certain levels of sales activity and product returns.

Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal will not occur or when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends and recorded in the same period in which the related revenue is recognized.

Customer Claims and Implied Warranties

The Company does not have any formal warranty programs. We generally will provide product warranties related to manufacturing defects and specific performance standards for our products. We estimate the potential returns based upon historical experience and record an allowance for potential returns as contra revenue and within accounts receivable. The allowance for potential customer returns was $774,674 and $401,808 as of January 3, 2021 and December 29, 2019, respectively.

Shipping and Handling Costs

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

Advertising

Advertising costs, other than promotional materials, are charged to expense as incurred. Promotional materials are expensed as they are distributed. Advertising expense was $80,523 and $136,161 for the years ended January 3, 2021 and December 29, 2019, respectively. As of January 3, 2021 and December 29, 2019, $92,820 and $87,707, 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 $980,695 and $1,634,385 for the years ended January 3, 2021 and December 29, 2019, respectively.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

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.

Environmental Matters

The Company’s policy is to conduct its businesses with due regard for the preservation and protection of the environment. Management is not aware of any environmental matters relating to its operations that could materially affect liquidity, capital resources, or the financial condition of the Company.

Recent Accounting Standards

On August 28, 2018, the Financial Accounting Standards Board issued a new standard, ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The new standard modifies the disclosure requirements on fair value measurements in Topic 820, “Fair Value Measurement.” Certain requirements were removed such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, certain requirements were modified and certain disclosures were added such as the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. The Company adopted this standard on December 30, 2019. Since this standard only revises disclosure requirements, the adoption of this standard for the year ending January 3, 2021 did not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.

On December 18, 2019, the Financial Accounting Standards Board issued a new standard, ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This new guidance simplifies the accounting for income taxes by removing certain exceptions such as the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income/gain from other items; and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The new guidance also simplifies the accounting for income taxes under certain circumstances such as requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of a business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted this standard on January 4, 2021. Management believes that the adoption of this standard for the year ending January 2, 2022 will not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.

In June 2020, the American Institute of Certified Public Accountants in conjunction with the Financial Accounting Standards Board developed Technical Question and Answer (“TQA”) 3200.18, “Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program”, which is intended to provide clarification on how to account for loans received from the PPP. TQA 3200.18 states that an entity may account for PPP loans under ASC 470, “Debt” or, if the entity is expected to meet PPP eligibility criteria and the PPP loan is expected to be forgiven, the entity may account for the loans under IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance”. The Company has elected to account for PPP loan proceeds under IAS 20 as allowed by TQA 3200.18. Although the Company anticipates forgiveness of the entire amount of the PPP loan, no assurances can be provided that the Company will obtain forgiveness of the PPP loan in whole or in part.

Subsequent Events

The Company has evaluated subsequent events occurring through the date that the financial statements were available to be issued, for events requiring recording or disclosure in the January 3, 2021 consolidated financial statements. There were no material events or transactions occurring during this period requiring recognition or disclosure other than the following:

As previously stated, during the first quarter of 2021 the Company received a $2.0 million Second Draw PPP loan. This loan has the same general terms as the Company’s first PPP loan.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

During the year ended January 3, 2021, the Company recorded funding from the Paycheck Protection Program of $2,217,500, which is the amount of debt forgiveness that it expects to receive for the loan it made through the Paycheck Protection Program. Although the Company has not been legally released from this amount of the loan, management concluded that there was reasonable assurance that the Company had substantially met the terms for forgiveness, including using all proceeds from the loan for eligible costs (as defined under the Paycheck Protection Program). The Company submitted its application for loan forgiveness in November 2020.

During the year ended December 29, 2019, the Company entered into several equipment financing obligations with an aggregate fair value of $379,126, which are accounted for as capital assets. The fair value was added to property and equipment and a corresponding amount to related party finance lease liabilities or long-term debt.

The Company adopted ASU No. 2016-02, “Leases” on December 31, 2018. Under this new standard, the Company was required to record on its balance sheet previously unrecorded operating leases based on the present value of remaining lease payments. Per this new standard, the Company recorded operating lease right-of-use (“ROU”) assets and operating lease liabilities of $6,799,271 on its consolidated balance sheet as of December 31, 2018.

During the third quarter of 2020 and 2019, the Company obtained $130,000 and $249,051, respectively, in loans against the cash value of its company owned life insurance policies and are shown net of payments of $178,771 and $177,147, respectively, on the life insurance policies in the consolidated statements of cash flows. These loans have a weighted average interest rate of 3.65% and 3.66%, respectively, and can be repaid at any time.

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

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

The Company’s Uniroyal subsidiary has available a $30,000,000 revolving line of credit financing agreement with Wells Fargo Capital Finance, LLC (“Uniroyal Line of Credit”), which matures on June 15, 2023. 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 3.85% as of January 3, 2021. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable, inventories and equipment. The line of credit is secured by substantially all of Uniroyal's assets and includes certain financial and restrictive covenants. The Company was in compliance with these covenants as of January 3, 2021.

The outstanding balance on the Uniroyal Line of Credit was $9,204,572 and $10,328,913 as of January 3, 2021 and December 29, 2019, respectively. The Company has classified the outstanding balance on this line of credit within current liabilities in the accompanying consolidated balance sheets. Based upon eligible accounts receivable, inventories and equipment at January 3, 2021, the Uniroyal Line of Credit provided additional availability of approximately $2,691,000 as of January 3, 2021.

The Company’s UGL subsidiary has available a £10,500,000 (approximately $14.3 million) revolving line of credit financing agreement with Lloyds Bank Commercial Finance Limited (“UGL Line of Credit”), which is subject to a six-month notice by either party. The line has several tranches based on currency or underlying security. Interest is payable monthly at the base rate (U.K. LIBOR or Lloyds Bank Base Rate as published) plus 1.95% to 2.45% depending on the tranche. The line of credit weighted average interest rate was approximately 2.32% as of January 3, 2021. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable and inventories. The line of credit is secured by substantially all of the subsidiary's assets and includes certain financial and restrictive covenants. The Company was in compliance with these covenants as of January 3, 2021.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

The outstanding balance on the UGL Line of Credit was £6,268,526 and £7,787,002 ($8,556,011 and $10,201,860) as of January 3, 2021 and December 29, 2019, respectively. The Company has classified the outstanding balance on this line of credit within current liabilities in the accompanying consolidated balance sheets. Based upon eligible accounts receivable and inventories at January 3, 2021, the UGL Line of Credit provided additional availability of approximately $1.4 million and, combined with its total cash balance of $1,621,692, UGL had liquidity of approximately $3.0 million as of January 3, 2021.

Long-term debt consists of the following:

Principal requirements on long-term debt for years ending after January 3, 2021 are as follows:

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

Principal requirements on long-term debt to related parties for years ending after January 3, 2021 are as follows:

The Company has finance leases under which it leases its main U.S. manufacturing facility and certain other property from a related party lessor entity, owned by the Company’s majority shareholder. These related party finance leases expire at various dates from October 2023 through October 2033. The Company has security deposits aggregating $267,500 held by the lessor entity.

The components of lease expense for the related party finance leases for the years ended January 3, 2021 and December 29, 2019 are as follows:

Cash paid for amounts included in the measurement of related party finance lease liabilities for the years ended January 3, 2021 and December 29, 2019 are as follows:

Right-of-use assets obtained in exchange for related party finance lease obligations for the years ended January 3, 2021 and December 29, 2019 are as follows:

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

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

Maturities of related party finance lease liabilities as of January 3, 2021 are as follows:

The current portion of the related party finance lease liabilities and related party short-term subordinated secured promissory notes are combined and are shown in current liabilities as related party obligation which consists of the following:

In January 2020, the Company’s majority shareholder advanced $200,000 to the Company. This advance was repaid in February 2020. During 2019, the Company issued $1,150,000 of short-term subordinated secured promissory notes to the Company’s majority shareholder of which $675,000 was repaid in 2019 and the remainder of $475,000 in 2020. The notes were at a rate of 10%.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

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 U.S. operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits pass through to its members. 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 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.

Under the CARES Act, the Internal Revenue Code was amended to provide relief and supportive measures for taxpayers impacted by COVID-19. The key components of these amendments are as follows: eliminating taxable income limitation for certain net operating losses and permitting carryback net operating losses arising in 2018, 2019 and 2020 to five prior tax years; accelerating refunds of previously generated Alternative Minimum Tax credit; increasing business interest limitation from 30% to 50% of adjusted taxable income; and amending depreciation for qualified improvement property (“QIP”) to 15-year property for QIP placed in service after December 31, 2017. The Company considered the various potential income tax provisions and deemed that there were no material impacts to the income tax provisions for the year ended January 3, 2021.

Additionally, in December 2020, Congress passed the Consolidated Appropriations Act which provides that loans received and subsequently forgiven under the PPP would not be taxable and that PPP-funded expenses are also deductible. Some states have not conformed to the Federal treatment. Since the Company expects that the $2,217,500 million loan it received under the PPP to be forgiven, it recorded the funds as grant income under IAS 20, and excluded this income for tax purposes for the year ended January 3, 2021. 

The following is information on the benefit for income taxes for the years ended January 3, 2021 and December 29, 2019:

The state provisions of $199,978 and $51,012 for the years ended January 3, 2021 and December 29, 2019, respectively, were reduced by a change in the valuation allowance in the amounts of $10,248 and $44,114, respectively. 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 effective income tax rate, computed as the total of federal, state and foreign taxes as a percentage of income before taxes, was negative 51.0% and negative 12.0% for the years ended January 3, 2021 and December 29, 2019, respectively.

The following table summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities:

Deferred tax assets as of January 3, 2021 and December 29, 2019 include $4,900,595 and $3,435,368, respectively, of carryforwards related to U.S. net operating losses and $696,955 and $437,069, respectively, of carryforwards resulting from U.K. losses. The $4,900,595 and $3,435,368 of deferred tax assets for U.S. losses, net of valuation allowances of $828,411 and $740,818 as of January 3, 2021 and December 29, 2019, respectively, are included in other long-term assets. The $696,955 and $437,069 of deferred tax assets for U.K. losses are netted with deferred tax liabilities, which are all related to U.K. tax. Total net deferred tax liabilities of $801,136 and $709,945 are included in other long-term liabilities in the accompanying consolidated balance sheets as of January 3, 2021 and December 29, 2019, respectively.

The Company has federal net operating loss carryforwards of approximately $15.7 million as of January 3, 2021, of which $11.7 million expire in years beginning 2022 through 2034 and $4.0 million may be carried forward indefinitely. The Company has state net operating loss carryforwards of approximately $14.1 million as of January 3, 2021, which also expire in years beginning 2022 through 2034. Additionally, the Company has foreign net operating loss carryforwards of approximately $2.8 million as of January 3, 2021, which have no expiration date.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

The Company reduces its deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making its valuation allowance determinations, the Company considers all available positive and negative evidence affecting specific deferred tax assets, including past and anticipated future performance, the reversal of deferred tax liabilities, the length of carryback and carryforward periods, and the implementation of tax planning strategies. Management has determined that there is uncertainty as to the realization of a portion of the state net operating loss carryforward and has established a valuation allowance against a portion of the state net operating loss carryforward.

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:

Net postretirement benefit income for the plan is comprised of the following:

At January 3, 2021, there is $154,662 of unrecognized net actuarial losses in accumulated other comprehensive loss that has not yet been recognized as a component of net periodic benefit costs. At January 3, 2021, there is no amount of net actuarial losses in accumulated other comprehensive loss that is expected to be recognized as a component of net periodic benefit costs during 2021.

The significant assumptions used in determining the accumulated postretirement benefit obligation and net periodic benefit cost are as follows:

In addition to the significant assumptions listed above, other assumptions used in determining the accumulated postretirement benefit obligation and net periodic benefit cost are retirement and termination probabilities and mortality estimates. The Company assumes that employees participating in the plan will continue to participate during retirement. The Company also assumes that employees not participating in the plan will not participate in the plan prior to or during retirement.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

Employer and employee contributions to the plan were $106,377 and $7,777, respectively, during the year ended January 3, 2021 and $116,928 and $10,071, respectively, during the year ended December 29, 2019. Contributions to the plan are made each year based on estimated benefit payments to be paid out of the plan. Estimated benefit payments from the plan for each of the next five years, and in the aggregate for the five years thereafter, are as follows:

Postemployment Benefit Liability - Severance

The Company provides certain severance benefits for substantially all union employees who began their employment prior to 1986. Accounting standards for postemployment benefits require the Company to accrue the estimated cost of future severance payments during the years the employees provide services. The accrued postemployment benefit liability as of January 3, 2021 and December 29, 2019 was $6,054 and $5,363, respectively, and is included in other long-term liabilities in the accompanying consolidated balance sheets. The accrued postemployment benefit liability was determined using discount rates of 1.95% and 2.80% as of January 3, 2021 and December 29, 2019, respectively.

The Company’s Class B Common Stock (“Class B”) has the same entitlement to dividends as they may be declared for the ordinary common stock. The holder of Class B was the holder of UGEP preferred stock that was converted to Class B on December 30, 2015. The Class B does not have any preference with respect to holders of other equity interests in the Company in the event of any liquidation, dissolution or winding up of the Company. Each share of Class B has the right to 22 votes on matters that come before the shareholders. Each share of Class B is convertible into one share of ordinary common stock at any time. The shares of Class B are not registered and do not trade in the open market.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended January 3, 2021 and December 29, 2019

 Acquisition

On November 10, 2014, the Company acquired Uniroyal and UGEL, the holding company for UGL. Pursuant to the acquisition of Uniroyal, 200,000 units of Series A preferred units and 150,000 units of Series B preferred units of UEP Holdings LLC, a wholly-owned subsidiary of the Company, were issued to the former owners of Uniroyal.  Each of the UEP Holdings Series A and Series B preferred units have an issue price of $100 per unit or a total face value of $20,000,000 and $15,000,000, respectively. The UEPH Series A preferred units are entitled to a preferred return of an amount per annum equal to five percent (5.00%) of the issue price of such UEPH Series A preferred unit. The UEPH Series B preferred units are entitled to a preferred return of an amount per annum equal to five and one half percent (5.50%) of the issue price of such UEPH Series B preferred unit, increasing by one half percent (0.50%) on the first anniversary of the effective date and by an additional one half percent (0.50%) on each successive anniversary of the effective date thereafter, up to a maximum of eight percent (8.00%) on the fifth anniversary of the effective date. As of January 3, 2021, the preferred return percentage of the UEPH Series B preferred units is 8.0%. The UEPH Series A and B preferred units are primarily owned by the Company’s majority shareholder.

In a separate transaction, the Company also purchased all of the outstanding 50 common shares of UGEL, a U.K. limited company, for 100 shares of its common stock and its guaranty of outstanding UGEL preferred stock retained by the seller, having a liquidation preference of €17,699,314 (approximately $21,718,828). As part of the transaction, 50 shares of the UGEL common stock held by the seller had been converted and reclassified as preferred shares. These preferred shares are entitled to a quarterly dividend payment of €221,241 (approximately $271,485). These preferred shares are primarily owned by the Company’s majority shareholder.

The payment of dividends for the year ended January 3, 2021 and the three months ended December 29, 2019 was deferred to preserve cash and provide additional liquidity. As of January 3, 2021 and December 29, 2019, accrued dividends of $4,019,905 and $788,599, respectively, were included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.