|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Business Description
We are a leading provider of manufactured vinyl
coated fabrics. Our best-known brand, Naugahyde, is the product of many improvements on a rubber-coated fabric developed a century ago
in Naugatuck, Connecticut. We design, manufacture and market a wide selection of vinyl coated fabric products under a portfolio of recognized
brand names. We believe that our business has continued to be a leading supplier in its marketplace because of our ability to provide
specialized materials with performance characteristics customized to the end-user specifications, complemented by technical and customer
support for the use of our products in manufacturing.
Our vinyl coated fabric products have undergone
considerable evolution and today are distinguished by superior performance in a wide variety of applications as alternatives to leather,
cloth and other synthetic fabric coverings. Our standard product lines consist of more than 525 SKUs with combinations of colors, textures,
patterns and other properties. Our products are differentiated by unique protective top finishes and transfer print capabilities. Additional
process capabilities include embossing grains and patterns, and rotogravure printing, which imparts five color character prints and non-registered
prints, lamination and panel cutting.
Our vinyl coated fabric products have various
high-performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better
performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance
characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating,
health care facilities and athletic equipment. We manufacture materials in a wide range of colors and textures. They can be hand or machine
sewn, laminated to an underlying structure, thermoformed to cover various substrates or made into a variety of shapes for diverse end-uses.
We are a long-established supplier to the global automotive industry and manufacture products for interior soft trim components from floor
to headliner, which are produced to meet specific component production requirements such as cut and sew, vacuum forming/covering, compression
molding, and high frequency welding. Some products are supplied with micro perforations, which are necessary on most compression molding
processes. Materials can also be combined with polyurethane or polypropylene foam laminated by either flame or hot melt adhesive for seating,
fascia and door applications.
Products are developed and marketed based upon
the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft,
golf carts and snowmobiles, a product designed primarily for water-based durability and weatherability is used. We also manufacture a
line of products called BeautyGard®, with water-based topcoats that contain agents to protect against bacterial and fungal
micro-organisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally
friendlier than solvent-based topcoats. The line is widely used in hospitals and other health care facilities. Flame and smoke retardant
vinyl coated fabrics are used for a variety of commercial and institutional furniture applications, including hospitals, restaurants and
residential care centers and seats for school buses, trains and aircraft.
We currently conduct our operations in manufacturing
facilities that are located in Stoughton, Wisconsin and Earby, England.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial
statements and related disclosures in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires
management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical
experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances;
however, actual results may vary from these estimates and assumptions under different future circumstances. For further discussion of
our significant accounting policies, refer to Note 1 – “Basis of Presentation and Summary of Significant Accounting Policies”
to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations
– Critical Accounting Policies, Judgments and Estimates” in our Annual Report on Form 10-K for the fiscal year ended January
3, 2021.
Overview:
We and our subsidiaries use a 52/53-week
fiscal year ending on the Sunday nearest to December 31. The current year ending January 2, 2022 is a 52-week year whereas the prior year
ended January 3, 2021 was a 53-week year. Our 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 our year-end is not material. Both the three months ended July 4, 2021 and July 5, 2020
were 13-week periods while the six months ended July 4, 2021 was a 26-week period and the six months ended July 5, 2020 was a 27-week
period.
Our Earby, England operation’s functional
currency is the British Pound Sterling (“Pound Sterling”) and has sales and purchases transactions that are denominated in
currencies other than the Pound Sterling, principally the Euro. Approximately 31% of our global revenues and 34% of our global raw material
purchases are derived from these Euro transactions.
The average year-to-date exchange rate for the
Pound Sterling to the U.S. Dollar was approximately 9.9% higher and the average exchange rate for the Euro to the Pound Sterling was approximately
0.7% lower in 2021 compared to 2020. These exchange rate changes had the effect of increasing net sales by approximately $1,740,000 for
the six months ended July 4, 2021. The overall currency effect on our net income was a negative amount of approximately $24,000 for the
six months ended July 4, 2021.
Through the first quarter of 2021,
demand for our products continued to improve since the initial impact of COVID-19 on the global economy, which began for us in the latter
part of March 2020. However, sales in the second quarter of 2021 declined compared to the first quarter of 2021 as supply chain issues
experienced by the OEM’s that use our automotive products lead to temporary shutdowns of their production lines. As this supply
chain problem exemplifies, COVID-19 is a continually evolving situation and we cannot predict the long-term impact the coronavirus will
have on the economy or our business. The impact could have a material adverse effect on our financial position, results of operations
and cash flows, which may require us to obtain additional financing. We continue to pursue supplementary cash flow opportunities to provide
further liquidity, as described below.
In March 2021 and in April 2020, our U.S. operations
received $2,000,000 and $2,217,500, respectively, in funds from One 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 $2,000,000 loan (“Second Draw PPP Loan”) matures in March 2026 and the $2,217,500 loan
(“First Draw PPP Loan”) matures in April 2022, and each bears an interest rate of 1.0%. The loans may be prepaid at any time
prior to maturity with no prepayment penalties.
All or a portion of the loans may be forgiven
by the SBA for costs we incurred for payroll, rent, utilities and all other allowable expenses during the 24-week period that began March
1, 2021 for the Second Draw PPP Loan and April 13, 2020 for the First Draw PPP Loan. We used all proceeds from the loans to maintain payroll
and make payments for lease, utility and other allowable expenses. As a result, management believes that we have met the PPP eligibility
criteria for forgiveness and has concluded that the loans represent, in substance, government grants that are expected to be forgiven.
As such, in accordance with International Accounting Standards (“IAS”) 20, “Accounting for Government Grants and Disclosure
of Government Assistance,” we recognized the funding from the PPP as grant income of $1,161,136 and $2,000,000 for the three and
six months ended July 4, 2021, respectively, and $2,183,676 for the three and six months ended July 5, 2020. The remaining $33,824 of
the First Draw PPP Loan was recognized as grant income during the third quarter of 2020. These amounts are included as a component of
net other income in the consolidated statements of operations.
In June 2021 and August 2021, One Community Bank
received payment from the SBA for forgiveness of our First and Second Draw PPP Loans, respectively.
For the U.K. operations, during the second quarter
of 2021 and 2020, we recorded reimbursed costs of approximately $101,000 and $1,086,000,
respectively, under the Coronavirus Job Retention Scheme (“CJRS”) set up by the U.K. government to help employers pay the
salaries of those employees who would otherwise have been laid off during the coronavirus outbreak but under the CJRS were furloughed
instead. The much lower reimbursed costs for the second quarter of 2021 reflected that employees were furloughed significantly less than
in the second quarter of 2020. This program reimbursed us 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 us. While the employees were on furlough, the compensation
paid to them was limited to the amount reimbursed by the CJRS. We recorded the reimbursed amounts as reductions to the associated expenses.
Additionally for the U.K. operations, in June
2021 its bank lending facilities with Lloyds Bank Commercial Finance Limited (“Lloyds”) were refinanced with PNC Business
Credit (“PNC”). PNC provided us additional availability by expanding our borrowing base to include eligible equipment. This
transaction was accounted for as a debt extinguishment per Accounting Standards Codification (“ASC”) 470, “Debt”,
under which the existing Lloyds debt was derecognized and the new PNC debt was recorded at fair value. A loss of £46,813 ($64,911)
was recognized on this transaction and recorded in general and administrative expenses in the consolidated statements of operations for
the three and six months ended July 4, 2021. The loss was due to fees that were charged by Lloyds relating to the debt extinguishment.
Debt issuance costs of £247,114 ($339,712) were capitalized and recorded in other long-term assets in the consolidated balance sheet
as of July 4, 2021. These capitalized costs will be amortized over 36 months. See Notes 8 and 9 to the consolidated financial statements
for further discussion.
Three Months Ended July 4, 2021 Compared to the Three Months Ended
July 5, 2020
The following table sets forth, for the three
months ended July 4, 2021 (“three months 2021”) and July 5, 2020 (“three months 2020”), certain operational data
including their respective percentage of net sales:
|
|
|
Three Months Ended
|
|
|
|
|
July 4, 2021
|
|
|
July 5, 2020
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
17,749,235
|
|
|
|
100.0
|
%
|
|
$
|
7,216,371
|
|
|
|
100.0
|
%
|
|
$
|
10,532,864
|
|
|
|
>100
|
%
|
|
Cost of Goods Sold
|
|
|
15,927,442
|
|
|
|
89.7
|
%
|
|
|
7,506,718
|
|
|
|
104.0
|
%
|
|
|
8,420,724
|
|
|
|
>100
|
%
|
|
Gross Profit (Loss)
|
|
|
1,821,793
|
|
|
|
10.3
|
%
|
|
|
(290,347
|
)
|
|
|
-4.0
|
%
|
|
|
2,112,140
|
|
|
|
<-100
|
%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
834,738
|
|
|
|
4.7
|
%
|
|
|
507,133
|
|
|
|
7.0
|
%
|
|
|
327,605
|
|
|
|
64.6
|
%
|
|
General and administrative
|
|
|
1,439,488
|
|
|
|
8.1
|
%
|
|
|
1,272,808
|
|
|
|
17.6
|
%
|
|
|
166,680
|
|
|
|
13.1
|
%
|
|
Research and development
|
|
|
331,965
|
|
|
|
1.9
|
%
|
|
|
157,655
|
|
|
|
2.2
|
%
|
|
|
174,310
|
|
|
|
>100
|
%
|
|
Total Operating Expenses
|
|
|
2,606,191
|
|
|
|
14.7
|
%
|
|
|
1,937,596
|
|
|
|
26.9
|
%
|
|
|
668,595
|
|
|
|
34.5
|
%
|
|
Operating Loss
|
|
|
(784,398
|
)
|
|
|
-4.4
|
%
|
|
|
(2,227,943
|
)
|
|
|
-30.9
|
%
|
|
|
1,443,545
|
|
|
|
-64.8
|
%
|
|
Interest expense
|
|
|
(383,938
|
)
|
|
|
-2.2
|
%
|
|
|
(380,834
|
)
|
|
|
-5.3
|
%
|
|
|
(3,104
|
)
|
|
|
0.8
|
%
|
|
Funding from Paycheck Protection Program
|
|
|
1,161,136
|
|
|
|
6.5
|
%
|
|
|
2,183,676
|
|
|
|
30.3
|
%
|
|
|
(1,022,540
|
)
|
|
|
-46.8
|
%
|
|
Other expense
|
|
|
(40,945
|
)
|
|
|
-0.2
|
%
|
|
|
(80,281
|
)
|
|
|
-1.1
|
%
|
|
|
39,336
|
|
|
|
-49.0
|
%
|
|
Loss before Tax Benefit
|
|
|
(48,145
|
)
|
|
|
-0.3
|
%
|
|
|
(505,382
|
)
|
|
|
-7.0
|
%
|
|
|
457,237
|
|
|
|
-90.5
|
%
|
|
Tax benefit
|
|
|
(244,184
|
)
|
|
|
-1.4
|
%
|
|
|
(240,193
|
)
|
|
|
-3.3
|
%
|
|
|
(3,991
|
)
|
|
|
1.7
|
%
|
|
Net Income (Loss)
|
|
|
196,039
|
|
|
|
1.1
|
%
|
|
|
(265,189
|
)
|
|
|
-3.7
|
%
|
|
|
461,228
|
|
|
|
<-100
|
%
|
|
Preferred stock dividend
|
|
|
(815,973
|
)
|
|
|
-4.6
|
%
|
|
|
(795,006
|
)
|
|
|
-11.0
|
%
|
|
|
(20,967
|
)
|
|
|
2.6
|
%
|
|
Net Loss Allocable to Common
Shareholders
|
|
$
|
(619,934
|
)
|
|
|
-3.50
|
%
|
|
$
|
(1,060,195
|
)
|
|
|
-14.7
|
%
|
|
$
|
440,261
|
|
|
|
-41.5
|
%
|
Revenue:
Total revenue for the three months 2021 increased
$10,532,864 to $17,749,235 compared to $7,216,371 for the three months 2020. The much lower amount for the three months 2020 reflected
the negative effect of COVID-19, which impacted our sales the most during the second quarter of 2020. The increase in revenue included
a favorable currency effect of approximately $743,000.
For the three months 2021 compared to the three
months 2020, automotive sales for both our U.S. operations and U.K. operations (excluding the currency adjustment) grew more than 200%
due to the negative effect of COVID-19 during the second quarter of 2020. However, when comparing the second quarter of 2021 with the
first quarter of 2021, automotive sales declined 27.7% primarily due to a decline in sales for our U.K. operations, which was partially
offset by a 1.7% increase in automotive sales for our U.S. operations. As previously stated, supply chain issues experienced by the OEM’s
that use our automotive products lead to temporary shutdowns of their production lines, which negatively impacted our sales.
Additionally for the three months 2021 compared
to the three months 2020, sales for the industrial sector increased 61.6% (58.8% before the currency effect) mostly due to an increase
in our U.S. operations (primarily in the contract market) as well as in our U.K. operations. As discussed above, COVID-19 had a negative
effect on our operations during the second quarter of 2020. When comparing the second quarter of 2021 with the first quarter of 2021,
sales for the industrial sector decreased 3.3% primarily due to a decline in the technical market of our U.S. operations as the plant
experienced difficulties in fulfilling orders. Production changes have been implemented to resolve these issues.
Gross Profit:
Total gross profit for the three months 2021 was
$1,821,793 compared to $(290,347) for the three months 2020. The gross profit percentage was 10.3% of sales for the three months 2021
compared to -4.0% for the three months 2020. Both the gross profit amount and percentage for the three months 2020 reflected the negative
impact of COVID-19. Manufacturing costs were reduced $83,000 and $934,000 for the three months
2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in gross profit included
an unfavorable currency effect of approximately $19,000.
Total gross profit amount and percentage for the
first quarter of 2021 were $3,237,337 and 14.8%, respectively. When comparing the second quarter of 2021 with the first quarter of 2021,
the decline in both the gross profit amount and percentage were due to lower sales and higher costs of raw materials. To offset raw material
price increases, we increased prices during the first quarter of 2021 in several of our markets and announced an additional price increase
effective July 1, 2021.
Operating Expenses:
Selling expenses for the three months 2021 increased
$327,605 or 64.6% to $834,738 from $507,133 for the three months 2020. The lower amount for the three months 2020 reflected reduced selling-related
expenses due to lower sales activity from the negative effect of COVID-19. Selling expenses were reduced $7,000
and $56,000 for the three months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees.
The increase in selling expenses was partially offset by a $50,000 favorable currency effect. When comparing the second quarter of 2021
with the first quarter of 2021, selling expenses decreased $63,974 or 7.1% primarily due to lower employment costs.
General and administrative expenses for the three
months 2021 increased $166,680 or 13.1% to $1,439,488 from $1,272,808 for the three months 2020. The increase was primarily due to higher
employment related costs and the loss associated with the debt extinguishment. General and administrative expenses were reduced $4,000
and $20,000 for the three months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees.
The increase in general and administrative expenses was partially offset by a $38,000 favorable currency effect.
Research and development expenses for the three
months 2021 increased $174,310 or more than 100% to $331,965 from $157,655 for the three months 2020. The lower amount for the three months
2020 reflected reduced activities including fewer new trials due to the negative effect of COVID-19. Research and development expenses
were reduced $7,000 and $76,000 for the three months 2021 and 2020, respectively, from reimbursement
through the CJRS for salaries of furloughed employees. The increase in research and development expenses was partially offset by a $17,000
favorable currency effect. When comparing the second quarter of 2021 with the first quarter of 2021, research and development expenses
increased $4,507 or 1.4% as higher costs of more activity in our U.S. operations was mainly offset by lower costs of less activity in
our U.K. operations.
Operating Loss:
Operating loss for the three months 2021 was $784,398
compared to $2,227,943 for the three months 2020. Operating losses in both periods were due to gross profit being less than operating
expenses with the much greater loss in the three months 2020 reflecting the negative impact of COVID-19. The operating loss percentage
was -4.4% of sales for the three months 2021 compared to -30.9% for the three months 2020. The $1,216,538 lower amount when comparing
the second quarter of 2021 operating loss with the first quarter of 2021 operating income was due to the decline in gross profit, which
was partially offset by the decrease in operating expenses.
Interest Expense:
Interest expense for the three months 2021 increased
less than 1.0% compared to the three months 2020. When comparing the second quarter of 2021 with the first quarter of 2021, interest expense
decreased $19,808 or 4.9% due to debt repayments.
Funding from Paycheck Protection Program:
Funding from the PPP of $1,161,136 (from the Second
Draw PPP Loan) for the three months 2021 and $2,183,676 (from the First Draw PPP Loan) for the three months 2020, were the proceeds from
the PPP loans that we used during those periods for allowable expenses under the PPP. As previously discussed, the First and Second Draw
PPP Loans were forgiven in June 2021 and August 2021, respectively.
Other Expense:
Other expense for the three months 2021 was $40,945
compared to $80,281 for the three months 2020. Included in other expense are the currency gains and losses recognized on foreign currency
transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros as these currencies fluctuated
during the period.
Income Taxes:
We file income tax returns in the United States
as a C-Corporation, and in several state jurisdictions and in the United Kingdom. Our 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.
We made the acquisition of Uniroyal through UEPH, a limited liability company, which issued preferred ownership interests to the sellers
that provide for quarterly dividends. Uniroyal’s taxable income is allocated entirely to UEPH as its sole member and since it is
a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on our tax return. The taxable income
applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual
tax returns.
We do not have a history of repatriating a significant
portion of our foreign cash. However, if we decided to repatriate these foreign amounts to fund U.S. operations, we would not be required
to pay any additional U.S. tax related to these amounts since we previously recorded a one-time transition tax on deemed repatriation
of deferred foreign income.
The tax benefit for the three months 2021 was
$244,184 compared to $240,193 for the three months 2020. The tax benefit for the three months 2021 was attributable almost equally to
the results of the U.S. and U.K. operations while the tax benefit for the three months 2020 was principally attributable to the results
of the U.S. operations.
Preferred Stock Dividend:
Pursuant to the terms of their acquisitions, the
issuance of preferred ownership units/stock of UEP Holdings, LLC and UGEL were issued to the sellers. These preferred units have carried
quarterly dividend requirements on a total value of $55,000,000 at rates ranging from 5.0% to 8.0%. The dividend rate on the Series B
UEP Holdings preferred units which started at 5.5% increased by 0.5% on the anniversary of the issuance and is now at the maximum of 8.0%.
Quarterly dividend payments have been deferred each quarter beginning with the dividends that were accrued for the three months ended
December 29, 2019 through the dividends that were accrued for the three months ended July 4, 2021 in order to preserve cash and provide
additional liquidity. As of July 4, 2021 and January 3, 2021, accrued dividends of $5,596,391 and $4,019,905, respectively, were included
in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
Six Months Ended July 4, 2021 Compared to the Six Months Ended July
5, 2020
The following table sets forth, for the six months
ended July 4, 2021 (“six months 2021”) and July 5, 2020 (“six months 2020”), certain operational data including
their respective percentage of net sales:
|
|
|
Six Months Ended
|
|
|
|
|
July 4, 2021
|
|
|
July 5, 2020
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
39,645,236
|
|
|
|
100.0
|
%
|
|
$
|
28,356,495
|
|
|
|
100.0
|
%
|
|
$
|
11,288,741
|
|
|
|
39.8
|
%
|
|
Cost of Goods Sold
|
|
|
34,586,106
|
|
|
|
87.2
|
%
|
|
|
24,816,260
|
|
|
|
87.5
|
%
|
|
|
9,769,846
|
|
|
|
39.4
|
%
|
|
Gross Profit
|
|
|
5,059,130
|
|
|
|
12.8
|
%
|
|
|
3,540,235
|
|
|
|
12.5
|
%
|
|
|
1,518,895
|
|
|
|
42.9
|
%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
1,733,450
|
|
|
|
4.4
|
%
|
|
|
1,499,580
|
|
|
|
5.3
|
%
|
|
|
233,870
|
|
|
|
15.6
|
%
|
|
General and administrative
|
|
|
3,018,515
|
|
|
|
7.6
|
%
|
|
|
2,876,525
|
|
|
|
10.1
|
%
|
|
|
141,990
|
|
|
|
4.9
|
%
|
|
Research and development
|
|
|
659,423
|
|
|
|
1.7
|
%
|
|
|
506,057
|
|
|
|
1.8
|
%
|
|
|
153,366
|
|
|
|
30.3
|
%
|
|
Total Operating Expenses
|
|
|
5,411,388
|
|
|
|
13.6
|
%
|
|
|
4,882,162
|
|
|
|
17.2
|
%
|
|
|
529,226
|
|
|
|
10.8
|
%
|
|
Operating Loss
|
|
|
(352,258
|
)
|
|
|
-0.9
|
%
|
|
|
(1,341,927
|
)
|
|
|
-4.7
|
%
|
|
|
989,669
|
|
|
|
-73.7
|
%
|
|
Interest expense
|
|
|
(787,684
|
)
|
|
|
-2.0
|
%
|
|
|
(848,317
|
)
|
|
|
-3.0
|
%
|
|
|
60,633
|
|
|
|
-7.1
|
%
|
|
Funding from Paycheck Protection Program
|
|
|
2,000,000
|
|
|
|
5.0
|
%
|
|
|
2,183,676
|
|
|
|
7.7
|
%
|
|
|
(183,676
|
)
|
|
|
-8.4
|
%
|
|
Other income (expense)
|
|
|
165,359
|
|
|
|
0.4
|
%
|
|
|
(271,170
|
)
|
|
|
-1.0
|
%
|
|
|
436,529
|
|
|
|
<-100
|
%
|
|
Income (Loss) before Tax Benefit
|
|
|
1,025,417
|
|
|
|
2.6
|
%
|
|
|
(277,738
|
)
|
|
|
-1.0
|
%
|
|
|
1,303,155
|
|
|
|
<-100
|
%
|
|
Tax benefit
|
|
|
(206,623
|
)
|
|
|
-0.5
|
%
|
|
|
(292,823
|
)
|
|
|
-1.0
|
%
|
|
|
86,200
|
|
|
|
-29.4
|
%
|
|
Net Income
|
|
|
1,232,040
|
|
|
|
3.1
|
%
|
|
|
15,085
|
|
|
|
0.1
|
%
|
|
|
1,216,955
|
|
|
|
>100
|
%
|
|
Preferred stock dividend
|
|
|
(1,632,387
|
)
|
|
|
-4.1
|
%
|
|
|
(1,587,841
|
)
|
|
|
-5.6
|
%
|
|
|
(44,546
|
)
|
|
|
2.8
|
%
|
Net Loss Allocable to Common
Shareholders
|
|
$
|
(400,347
|
)
|
|
|
-1.0
|
%
|
|
$
|
(1,572,756
|
)
|
|
|
-5.5
|
%
|
|
$
|
1,172,409
|
|
|
|
-74.5
|
%
|
Revenue:
Total revenue for the six months 2021 increased
$11,288,741 or 39.8% to $39,645,236 from $28,356,495 for the six months 2020. The lower amount for the six months 2020 reflected the negative
effect of COVID-19, which primarily occurred during the second quarter of 2020. The increase in revenue included a favorable currency
effect of approximately $1,740,000.
For the six months 2021 compared to the six months
2020, automotive sales for our U.K. operations increased 46.8% (excluding the currency adjustment) and automotive sales for our U.S. operations
increased 34.1% due to the negative effect of COVID-19 primarily during the second quarter of 2020. However, the year-to-date growth was
negatively impacted by supply chain issues experienced by the OEM’s that use our automotive products, which lead to temporary shutdowns
of their production lines during the second quarter of 2021.
Additionally, sales for the industrial sector
increased 23.4% (21.6% before the currency effect) mostly due to an increase in our U.S. operations (primarily in the contract market)
as well as in our U.K. operations. As discussed above, COVID-19 had a negative effect on our operations primarily during the second quarter
of 2020. However, the year-to-date growth was negatively impacted by difficulties in fulfilling orders at the plant of our U.S. operations
during the second quarter of 2021. Production changes have been implemented to resolve these issues.
Gross Profit:
Total gross profit for the six months 2021 increased
$1,518,895 or 42.9% to $5,059,130 from $3,540,235 for the six months 2020. The gross profit percentage was 12.8% of sales for the six
months 2021 compared to 12.5% for the six months 2020. Both the gross profit amount and percentage for the six months 2020 reflected the
negative impact of COVID-19. The year-to- date increase in the gross profit and percentage for the six months 2021 was negatively impacted
by supply chain and fulfillment issues, as discussed above, as well as higher costs of raw materials. To offset raw material price increases,
we increased prices during the first quarter of 2021 in several of our markets and announced an additional price increase effective July
1, 2021. Manufacturing costs were reduced $83,000 and $934,000 for the six months 2021 and
2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in gross profit included a
favorable currency effect of approximately $166,000.
Operating Expenses:
Selling expenses for the six months 2021 increased
$233,870 or 15.6% to $1,733,450 from $1,499,580 for the six months 2020. The lower amount for the six months 2020 reflected reduced selling-related
expenses due to lower sales activity from the negative effect of COVID-19 primarily during the second quarter of 2020. Selling expenses
were reduced $7,000 and $56,000 for the six months 2021 and 2020, respectively, from reimbursement
through the CJRS for salaries of furloughed employees. The increase in selling expenses was partially offset by a $94,000 favorable currency
effect.
General and administrative expenses for the six
months 2021 increased $141,990 or 4.9% to $3,018,515 from $2,876,525 for the six months 2020. The increase was primarily due to higher
employment related costs and the loss associated with the debt extinguishment. General and administrative expenses were reduced $4,000
and $20,000 for the six months 2021 and 2020, respectively, from reimbursement through the CJRS for salaries of furloughed employees.
The increase in general and administrative expenses was partially offset by a favorable currency effect of $68,000.
Research and development expenses for the six
months 2021 increased $153,366 or 30.3% to $659,423 from $506,057 for the six months 2020. The lower amount for the six months 2020 reflected
reduced activities including fewer new trials due to the negative effect of COVID-19 primarily during the second quarter of 2020. Research
and development expenses were reduced $7,000 and $76,000 for the six months 2021 and 2020,
respectively, from reimbursement through the CJRS for salaries of furloughed employees. The increase in research and development expenses
was partially offset by a $31,000 favorable currency effect.
Operating Loss:
Operating loss for the six months 2021 was $352,258
compared to $1,341,927 for the six months 2020. Operating losses in both periods were due to gross profit being less than operating expenses
with the much greater loss in the six months 2020 reflecting the negative impact of COVID-19 primarily during the second quarter of 2020.
The operating loss percentage was -0.9% of sales for the six months 2021 compared to -4.7% for the six months 2020.
Interest Expense:
Interest expense for the six months 2021 decreased
$60,633 or 7.1% to $787,684 from $848,317 for the six months 2020. The decrease was primarily due to lower interest rates on LIBOR and
prime during the six months 2021 and debt repayments.
Funding from Paycheck Protection Program:
Funding from the PPP of $2,000,000 (from the Second
Draw PPP Loan) for the six months 2021 and $2,183,676 (from the First Draw PPP Loan) for the six months 2020, were the proceeds from the
PPP loans that we used during those periods for allowable expenses under the PPP. As previously discussed, the First and Second Draw PPP
Loans were forgiven in June 2021 and August 2021, respectively.
Other Income (Expense):
Other income for the six months 2021 was $165,359
compared to other expense of $(271,170) for the six months 2020. Included in other income (expense) are the currency gains and losses
recognized on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated
in Euros as these currencies fluctuated during the period.
Income Taxes:
We file income tax returns in the United States
as a C-Corporation, and in several state jurisdictions and in the United Kingdom. Our 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.
We made the acquisition of Uniroyal through UEPH, a limited liability company, which issued preferred ownership interests to the sellers
that provide for quarterly dividends. Uniroyal’s taxable income is allocated entirely to UEPH as its sole member and since it is
a pass-through entity, this income less the dividends paid to the sellers of Uniroyal is reported on our tax return. The taxable income
applicable to the dividends for the preferred ownership interests is reported to the sellers who report it on their respective individual
tax returns.
We do not have a history of repatriating a significant
portion of our foreign cash. However, if we decided to repatriate these foreign amounts to fund U.S. operations, we would not be required
to pay any additional U.S. tax related to these amounts since we previously recorded a one-time transition tax on deemed repatriation
of deferred foreign income.
The tax benefit for the six months 2021 was $206,623
compared to $292,823 for the six months 2020. The tax benefit for the six months 2021 and 2020 was principally attributable to the results
of the U.S. operations.
Preferred Stock Dividend:
Pursuant to the terms of their acquisitions, the
issuance of preferred ownership units/stock of UEP Holdings, LLC and UGEL were issued to the sellers. These preferred units have carried
quarterly dividend requirements on a total value of $55,000,000 at rates ranging from 5.0% to 8.0%. The dividend rate on the Series B
UEP Holdings preferred units which started at 5.5% increased by 0.5% on the anniversary of the issuance and is now at the maximum of 8.0%.
Quarterly dividend payments have been deferred each quarter beginning with the dividends that were accrued for the three months ended
December 29, 2019 through the dividends that were accrued for the three months ended July 4, 2021 in order to preserve cash and provide
additional liquidity. As of July 4, 2021 and January 3, 2021, accrued dividends of $5,596,391 and $4,019,905, respectively, were included
in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
Liquidity and Sources of Capital
Cash, as it is needed, is provided by using our
lines of credit. These lines provide for a total borrowing commitment in excess of $30,000,000 subject to the underlying borrowing base
specified in the agreements. Of the total outstanding borrowings of $17,397,346 at July 4, 2021, for the U.S. operations, $6.0 million
of the lines bears interest at the Eurodollar rate plus 2.25% and $4.5 million bears interest at the Wells Fargo Capital Finance, LLC’s
prime rate (3.25% at July 4, 2021), and for the U.K. operations, $6.9 million bears interest at the Bank of England Base Rate plus 2.25%-3.00%.
The lines provided additional availability of approximately $2.0 million and, combined with UEP’s and UGL’s total cash balances,
liquidity was approximately $3.1 million at July 4, 2021. We plan to use this availability and cash provided by operating activities to
finance our cash needs for the remaining months of fiscal 2021 and future periods. The balances due under the lines of credit are recorded
as current liabilities on the consolidated balance sheets.
Impacting the liquidity discussion above, in March
of 2021, our U.S. operations received $2.0 million in funds through the Paycheck Protection Program administered by the United States
Small Business Administration. As previously stated, this debt was forgiven in August 2021.
The ratio of current assets to current liabilities, including the amount
due under our lines of credit, was 0.88 at July 4, 2021 and 0.89 at January 3, 2021.
Cash balances decreased $566,071 before the effects
of currency translation of $24,968, to $1,115,779 at July 4, 2021 from $1,656,882 at January 3, 2021. Of the above noted amounts, $94,667
and $1,621,692 were held outside the U.S. by our foreign subsidiaries as of July 4, 2021 and January 3, 2021, respectively.
Cash used in operations was $1,415,663 for the
six months 2021 compared to cash provided by operations of $5,752,683 for the six months 2020. For the six months 2021, cash used in operations
was primarily due to changes in working capital of $(1,850,065), adjustments for non-cash items of $(780,125) and changes in other assets
and liabilities of $(17,513) offset by net income of $1,232,040. For the six months 2020, cash provided by operations was primarily due
to changes in working capital of $7,017,139 and net income of $15,085 offset by adjustments for non-cash items of $(1,255,414) and changes
in other assets and liabilities of $(24,127).
Cash used in investing activities was $464,073
for the six months 2021 compared to $919,610 for the six months 2020. During 2021 and 2020, cash used in investing activities was principally
for purchases of machinery and equipment at our manufacturing locations and payments made for company-owned key man life insurance premiums.
For the six months 2021, cash provided by financing
activities was $1,313,665 compared to cash used in financing activities of $4,085,134 for the six months 2020. Impacting cash flows from
financing activities for the six months 2021 and 2020 were proceeds from issuance of long-term debt of $2,000,000 and $2,217,500, respectively,
through the Paycheck Protection Program. Also impacting cash flows from financing activities for the six months 2021 and 2020 were net
advances on lines of credit of $376,351 and net payments of $4,685,592, respectively. The changes in the lines of credit reflect the funding
of working capital. Payments of $694,065 and $856,442 were also made during the six months 2021 and 2020, respectively, on long-term debt
(excluding debt extinguishment) and finance lease liabilities. For the six months 2021, payments were $1,489,800 and proceeds were $2,333,683
relating to the extinguishment of existing long-term debt and recognition of new long-term debt, respectively, while payments were $7,395,719
and proceeds were $6,579,847 relating to the extinguishment of an existing line of credit and recognition of a new line of credit, respectively.
Also included for the six months 2021 were payments for capitalized debt issuance costs of $342,653. For the six months 2020, payments
of $575,000 were made on subordinated secured promissory notes to our majority shareholder. Proceeds of $200,000 were received from a
short-term advance from our majority shareholder during the first six months of 2020 which was repaid in the same period.
Our credit agreements contain customary affirmative
and negative covenants. We were in compliance with our debt covenants as of July 4, 2021 and through the date of filing of this report.
We currently have several on-going capital projects
that are important to our long-term strategic goals. Machinery and equipment will also be added as needed to increase capacity or enhance
operating efficiencies in our manufacturing plants. We will use a combination of financing arrangements to provide the necessary capital.
We believe that our existing resources, including cash on hand and our credit facilities, together with cash generated from operations
and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However,
there can be no assurance that additional financing will be available on favorable terms, if at all.
We have no off balance sheet arrangements.