Principal requirements on long‑term debt for years ending after January 1, 2017 are as follows:
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
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated postretirement benefit obligation
|
|
|
3,042,211
|
|
|
|
2,973,363
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
|
(158,527
|
)
|
|
|
(136,725
|
)
|
|
|
|
|
|
|
|
|
|
Long‑Term Portion
|
|
$
|
2,883,684
|
|
|
$
|
2,836,638
|
|
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016
Net pension benefit for the plan is comprised of the following:
|
|
January 1,
2017
|
|
|
January 3,
2016
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
-
|
|
|
$
|
2,651
|
|
Interest cost on projected benefit obligation
|
|
|
111,263
|
|
|
|
107,399
|
|
Amortization of prior service cost
|
|
|
-
|
|
|
|
(74,631
|
)
|
Amortization of net gain
|
|
|
(4,692
|
)
|
|
|
(106,284
|
)
|
|
|
|
|
|
|
|
|
|
Net pension expense (benefit)
|
|
$
|
106,571
|
|
|
$
|
(70,865
|
)
|
Reconciliation of losses in other comprehensive income (loss) is as follows:
|
|
January 1,
2017
|
|
|
January 3,
2016
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
(71,713
|
)
|
|
$
|
(210,870
|
)
|
Amortization of prior service credit and actuarial gain
|
|
|
(4,692
|
)
|
|
|
(180,915
|
)
|
|
|
|
|
|
|
|
|
|
Pension adjustment in other comprehensive loss
|
|
$
|
(76,405
|
)
|
|
$
|
(391,785
|
)
|
The amount in accumulated other comprehensive income at January 1, 2017 that has not yet been recognized as a component of net periodic benefit costs is $233,877 and consists of unrecognized net actuarial gains.
The significant assumptions used in determining the accumulated postretirement benefit obligation and net periodic benefit cost are as follows:
|
January 1, 2017
|
|
January 3, 2016
|
Health Care Cost Trend Rates:
|
|
|
|
2016
|
4.00%
|
|
4.00%
|
Thereafter
|
4.00%
|
|
4.00%
|
Discount rate
|
3.67%
|
|
3.83%
|
Measurement Date
|
December 31, 2016
|
|
December 31, 2015
|
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 1, 2017 and January 3, 2016
Employer and employee contributions to the plan were $121,052 and $6,924, respectively, during the year ended January 1, 2017 and $136,645 and $5,429, respectively, during the year ended January 3, 2016. 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:
2017
|
|
$
|
158,527
|
|
2018
|
|
|
171,831
|
|
2019
|
|
|
188,306
|
|
2020
|
|
|
186,468
|
|
2021
|
|
|
187,588
|
|
2022 ‑ 2026
|
|
|
892,170
|
|
|
|
|
|
|
Total
|
|
$
|
1,784,890
|
|
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 1, 2017 and January 3, 2016 was $43,462 and $58,309, respectively, and is included in other long-term liabilities. The accrued postemployment benefit liability was determined using discount rates of 3.67% and 3.85% as of January 1, 2017 and January 3, 2016, respectively.
Postemployment Benefit Liability ‑ Other
Under the terms of the union contract, the Company provides monthly payments of $300 to the spouses of employees who died prior to retirement from the Company. The payments cease upon the earlier of the spouse’s remarrying, the spouse's death or the spouse attaining age 62. The spouses of two former employees are currently receiving benefit payments under this provision of the union contract as of January 1, 2017 and January 3, 2016. The Company has recorded a long‑term liability of $4,594 and $8,096 as of January 1, 2017 and January 3, 2016, respectively, which is included in other long‑term liabilities in the accompanying Consolidated Balance Sheets, related to the estimated future benefit payments to the two former employees' spouses.
The Company has authorized 5,000,000 shares of convertible preferred stock with a $100 face value per share. At December 28, 2014 the Company had the following outstanding:
|
Issued and
|
Series
|
Outstanding
|
Series A
|
9,715
|
Series B
|
2,702
|
Series C
|
16,124
|
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 November 17, 2015, the Board of Directors took action which was subsequently amended on December 10, 2015 to create a new class of the Company’s common stock to be known as Class B Common Stock (“Class B”). The Board of Directors authorized 3,666,520 shares of such class with a par value of $0.001. The class had the same entitlement to dividends as may be declared for the ordinary common stock. The class did 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 Board of Directors also adopted a resolution to amend and restate the Designation of Preferences and Rights of Series A Convertible Preferred Stock which was approved by the holders of the Company’s Series A, Series B and Series C convertible preferred stock. The amendment gave the right for each share of Series A Preferred Stock to be converted into 166.66 shares of Class B Common Stock at any time. The shares of Class B Common Stock are not registered and do not trade in the open market.
On December 30, 2015, all of shares of the Company’s outstanding Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock were converted to common stock in accordance with the following schedule
|
|
Number
of
Preferred
Shares
|
|
Shares of
Common
Issued
|
|
Class of Common
|
Series of Convertible Preferred Stock
|
|
|
|
|
|
|
Series A
|
|
9,715
|
|
1,619,102
|
|
Class B Common Stock
|
Series B
|
|
2,702
|
|
450,315
|
|
Ordinary Common Stock
|
Series C
|
|
16,124
|
|
2,687,397
|
|
Ordinary Common Stock
|
|
|
|
|
4,756,814
|
|
|
The following table summarizes the Company’s common stock outstanding by class:
|
|
January 1, 2017
|
|
January 3, 2016
|
Ordinary Common Stock
|
|
17,108,680
|
|
17,271,807
|
Class B Common Stock
|
|
1,619,102
|
|
1,619,102
|
Total
|
|
18,727,782
|
|
18,890,909
|
Acquisition
On November 10, 2014, the Company acquired Uniroyal and UGEL (previously EPAL), the holding company for UGL (previously Wardle Storeys). Pursuant to the acquisition of Uniroyal, 200,000 units of Series A preferred units and 150,000 units of Series B preferred units of UEPH Holding 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 Series UEPH 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 1, 2017, the preferred return percentage of the Series UEPH B preferred units is 6.5%.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016
In a separate transaction, the Company also purchased all the outstanding 50 common shares of UGEL, a UK 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 £12,518,240 (approximately $20 million at the date of the transaction). 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 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 Company amended the Articles of Association of UGEL to change the liquidation preference of the 50 shares of preferred stock from £12,518,240 to €17,699,314 (approximately $18,656,837) and the payment of the quarterly dividend from £156,478 to €221,241 (approximately $233,210). These conversions were based on the exchange rate of British Pounds Sterling to the Euro on November 24, 2015.
NOTE 15 – Stock Options or Stock Based Compensation
|
On June 25, 2015 the Company’s stockholders approved the adoption of the 2015 Stock Option Plan. This plan provides for the granting of options to purchase the Company’s common stock to employees and directors. The options granted are subject to a vesting schedule as set forth in each individual option agreement. Each option expires on the tenth anniversary of its date of grant unless an earlier termination date is provided in the grant agreement. The maximum aggregate number of shares of common stock that may be optioned and sold under the plan shall be 6% of the shares outstanding on the date of grant. The shares that may be optioned under the plan may be authorized but unissued or may be treasury shares.
On July 30, 2015 the Company’s Board of Directors approved the granting of options to purchase 665,000 shares of the Company’s common stock to certain key employees and Company directors. The exercise price was $2.37 per share. The options will vest in three annual installments beginning on July 30, 2016. All options will expire on July 30, 2025.
On April 7, 2016, the Company’s Board of Directors approved the granting of options to purchase 360,250 shares of the Company’s common stock to certain key employees and Company directors. The exercise price was $3.57 per share. The options will vest in three annual installments beginning April 7, 2017. All options will expire on April 7, 2026.
Compensation expense is recognized on a straight-line basis over a three-year vesting period from date of grant.
The Company utilizes the Black-Scholes option pricing model to estimate the fair value of its option awards. The following table summarizes the significant assumptions used in the model for the grants:
|
|
April 7,
2016
|
|
July 30,
2015
|
|
Exercise price
|
|
$3.57
|
|
$2.37
|
|
Expected volatility
|
|
45%
|
|
45%
|
|
Risk free interest rate
|
|
1.30%
|
|
1.82%
|
|
Expected term
|
|
6 years
|
|
6 years
|
|
Expected dividends
|
|
0%
|
|
0%
|
|
We based the expected volatility on comparable companies’ volatility because we determined that this was more reflective and a better indicator of the Company’s expected volatility than our historical volatility. The historical stock price and volatility have been significantly different from the expected business activities over what will be the service period
.
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 a quarterly basis, we assess changes to our estimate of expected option award forfeitures based on our review of recent forfeiture activity and expected future employee turnover. We recognize the effect of adjustments made to the forfeiture rates, if any, in the period that we change the forfeiture estimate. For the year ended January 1, 2017 there were no forfeiture rate adjustments and future adjustments are not expected to be significant.
Stock option activity for the year ended January 1, 2017 is as follows:
|
|
Stock Options
|
|
|
|
Total
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Non-
Vested
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 28, 2014
|
|
|
-
|
|
|
$-
|
|
|
|
|
|
$-
|
|
|
|
|
|
$
|
-
|
|
Granted - July 30, 2015
|
|
|
665,000
|
|
|
$2.37
|
|
|
|
-
|
|
|
-
|
|
|
|
665,000
|
|
|
$
|
2.37
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at
January 3, 2016
|
|
|
665,000
|
|
|
$2.37
|
|
|
|
-
|
|
|
|
|
|
|
665,000
|
|
|
$
|
2.37
|
|
Granted - April 7, 2016
|
|
|
360,250
|
|
|
$3.57
|
|
|
|
-
|
|
|
|
|
|
|
360,250
|
|
|
$
|
3.57
|
|
Vested
|
|
|
|
|
|
|
|
|
|
230,001
|
|
|
$2.37
|
|
|
|
(230,001
|
)
|
|
$
|
2.37
|
|
Exercised
|
|
|
(3,576
|
)
|
|
$2.37
|
|
|
|
(3,576
|
)
|
|
$2.37
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
(23,924
|
)
|
|
$2.
62
|
|
|
|
(8,924
|
)
|
|
$2.37
|
|
|
|
(15,000
|
)
|
|
$
|
2.77
|
|
Outstanding at January 1, 2017
|
|
|
997,750
|
|
|
$2.
80
|
|
|
|
217,501
|
|
|
$2.37
|
|
|
|
780,249
|
|
|
$
|
2.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Intrinsic Value
January 3, 2016
|
|
$
|
551,950
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
$
|
551,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Intrinsic Value
January 1, 2017
|
|
$
|
597,525
|
|
|
|
|
|
$
|
202,276
|
|
|
|
|
|
$
|
395,249
|
|
|
|
|
|
Option expense recognized was $381,262 and $98,566 for the years ended January 1, 2017 and January 3, 2016, respectively. As of January 1, 2017, there was $781,524 in unrecognized compensation cost related to the options granted under the 2015 Stock Option Plan. We expect to recognize those costs over the remaining 27 months of the vesting term.
NOTE 16 – Earnings Per Share
|
The following table sets for the computation of earnings per common share - basic and earnings per common share - diluted:
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016
|
|
January 1,
2017
|
|
|
January 3,
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
4,499,664
|
|
|
$
|
4,952,156
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings
per share - weighted average
shares outstanding
|
|
|
18,828,378
|
|
|
|
14,334,485
|
|
Weighted average effect of
dilutive securities
|
|
|
41,331
|
|
|
|
4,705,547
|
|
Denominator for dilutive earnings
per share - weighted average
shares outstanding
|
|
|
18,869,709
|
|
|
|
19,040,032
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Income Per
Share
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
0.24
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
(0.00
|
)
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
0.24
|
|
|
$
|
0.26
|
|
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.
The Company has several equipment capital leases which expire from January 2017 through January 2021 with monthly lease payments ranging from approximately $1,119 to $31,120 per month. The capital lease obligations are secured by the related equipment. As of January 1, 2017 and January 3, 2016, assets recorded under capital leases are included in property and equipment in the accompanying Consolidated Balance Sheets. Amortization of items under capital lease obligations has been included with depreciation expense on owned property and equipment in the accompanying Consolidated Statements of Operations.
The principal balances of the capital lease obligations are $1,224,889 and $1,959,295 as of January 1, 2017 and January 3, 2016, respectively, with interest rates ranging from 3.84% to 19.15%.
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 requirements on capital leases for years ending after January 1, 2017, are as follows:
|
|
|
|
2017
|
|
$
|
425,440
|
|
2018
|
|
|
407,939
|
|
2019
|
|
|
392,676
|
|
2020
|
|
|
104,268
|
|
2021
|
|
|
6,106
|
|
|
|
|
1,336,429
|
|
Less interest
|
|
|
(111,540
|
)
|
|
|
|
1,224,889
|
|
Less current portion
|
|
|
(368,718
|
)
|
|
|
|
|
|
Total
|
|
$
|
856,171
|
|
NOTE 18 – Operating Leases
|
The Company leases office facilities and equipment under various lease agreements which expire from January 2017 through March 2029. The agreements include payments ranging from approximately $31 to $31,421 per month. Total operating lease expense was approximately $1,071,018 and $1,223,242 for the years ended January 1, 2017 and January 3, 2016, respectively.
Aggregate minimum rental expense under operating lease obligations for years ending after 2016 are as follows:
2017
|
|
$
|
885,805
|
|
2018
|
|
|
701,504
|
|
2019
|
|
|
590,827
|
|
2020
|
|
|
477,329
|
|
2021
|
|
|
378,548
|
|
2022 and thereafter
|
|
|
2,733,547
|
|
|
|
|
|
|
Total
|
|
$
|
5,767,560
|
|
NOTE 19 – Accumulated Other Comprehensive Income
|
The changes in accumulated other comprehensive income (loss) were as follows:
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016
|
|
Minimum
Benefit Liability
Adjustments
|
|
|
Foreign Currency
Translation
Adjustment
|
|
|
Total
|
|
Balance at December 28, 2014
|
|
$
|
702,067
|
|
|
$
|
88,895
|
|
|
$
|
790,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive losses
before reclassifications
|
|
|
(210,870
|
)
|
|
|
(380,197
|
)
|
|
|
(591,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
gains included in net income
|
|
|
(180,915
|
)
|
|
|
|
|
|
|
(180,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2016
|
|
|
310,282
|
|
|
|
(291,302
|
)
|
|
|
18,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive losses
before reclassifications
|
|
|
(71,713
|
)
|
|
|
(1,621,061
|
)
|
|
|
(1,692,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
gain included in net income
|
|
|
(4,692
|
)
|
|
|
|
|
|
|
(4,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
$
|
233,877
|
|
|
$
|
(1,912,363
|
)
|
|
$
|
(1,678,486
|
)
|
The gain (loss) reclassified from accumulated other comprehensive income (loss) into income is recorded to the following income statement line items:
Other Comprehensive Income Component
|
Income Statement Line Item
|
Minimum Benefit Liability Adjustments
|
General and administrative expense
|
NOTE 20 - Retirement Plans
|
Effective February 3, 2004, the Company established a 401(k) plan which covers substantially all non‑union U.S. employees. The Company did not make any contributions to the plan during the years ended January 1, 2017 and January 3, 2016.
The U.K. wage employees are covered by a statutory mandated defined contribution plan which initially provides that the Company will contribute 1% of the employee’s compensation when the employee contributes 1%. The statutory plan increases the Company’s percentage to 2% when the employee contributes 2% in 2017 and to 3% when the employee contributes 5% in 2018. The employees can opt out of the pension scheme which allows the Company to discontinue its contribution.
The UK salaried employees are covered by a separate plan which meets the statutory minimum requirements and provides that the Company will contribute a percentage of the employee’s compensation based on the percentage contributed to the plan by the employee. For employees hired prior to July 2015, the schedule of contribution is as follows:
Employee
|
|
Company
|
2%
|
|
|
6%
|
|
3%
|
|
|
7%
|
|
4%
|
|
|
7 ½%
|
|
5%
|
|
|
8%
|
|
For employees hired after June 2015, the schedule of contribution follows the statutory minimum requirements which are being phased in over time. This schedule is as follows:
Phase in Period
|
Employee
|
Company
|
Prior April 2018
|
1%
|
1%
|
April 2018 to April 2019
|
2%
|
3%
|
After April 2019
|
3%
|
5%
|
The Company made contributions of £361,447 and £339,419 to the U.K. plans for the years ended January 1, 2017 and January 3, 2016, respectively.
UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended January 1, 2017 and January 3, 2016
Labor Union
The Company relies on United Steel Workers International Union AFL-CIO, CLC Local #1207 for its U.S. manufacturing employees. The current pending union contract expires on March 12, 2023. The contract will continue from year‑to‑year thereafter, unless notice terminating the agreement is given by either party sixty days prior to March 12th in any year after March 12, 2023. Employees at the U.K. facility can be represented by UNITE although participation is not required
.
The collective bargaining agreement with UNITE does not specify a termination date.
Major Customers
Sales to eight automotive industry suppliers accounted for 46% and 43% of total Company sales during the years ended January 1, 2017 and January 3, 2016, respectively. Accounts receivables from these customers totaled 63% and 58% of total receivables as of January 1, 2017 and January 3, 2016, respectively.
Major Suppliers
The Company purchases a significant quantity of its raw materials from certain major suppliers. Management believes this concentration does not pose a significant risk to the Company's operations as other suppliers are readily available.
NOTE 22 - Related Party Transactions
|
During 2013, the Company entered into a lease arrangement and obtained a lease financing obligation with a related party lessor entity (see Note 11).
Related party receivable of $25,456 and $23,298 at January 1, 2017 and January 3, 2016, respectively, were short-term advances to employees that were repaid after January 1, 2017 and January 3, 2016, respectively.
The Company’s chief financial officer, who is also on the Company’s Board of Directors, does not have a written employment agreement and works on a part-time basis for the Company. The Company paid $24,000 and $2000 to a company controlled by him as a consulting fee during for the years ended January 1, 2017 and January 3, 2016, respectively.
NOTE 23 - Employment Agreements
|
The Company has employment agreements with three management employees as of January 1, 2017. The initial term of the employment agreements is three years. The term can be renewed or extended as provided for in the employment agreements. The agreements include various benefits to be provided to the employees including salary, bonus, life insurance and severance benefits.