UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC. 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 inNaugatuck, 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
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity withU.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 endedJanuary 3, 2021 . 21 Table of Contents Overview: We and our subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest toDecember 31 . The current year endingJanuary 2, 2022 is a 52-week year whereas the prior year endedJanuary 3, 2021 was a 53-week year. OurU.K. subsidiaries use the calendar year end ofDecember 31 . The activity of theU.K. subsidiaries that occurs on the days that do not coincide with our year-end is not material. Both the three months endedOctober 3, 2021 andOctober 4, 2020 were 13-week periods while the nine months endedOctober 3, 2021 was a 26-week period and the nine months endedOctober 4, 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 30% of our global revenues and 33% of our global raw material purchases are derived from these Euro transactions. The average year-to-date exchange rate for the Pound Sterling to theU.S. Dollar was approximately 8.8% higher and the average exchange rate for the Euro to the Pound Sterling was approximately 2.4% lower in 2021 compared to 2020. These exchange rate changes had the effect of increasing net sales by approximately$1,841,000 for the nine months endedOctober 3, 2021 . The overall currency effect on our net income was a negative amount of approximately$148,000 for the nine months endedOctober 3, 2021 . The current coronavirus pandemic ("COVID-19") has had an impact on markets we serve and our operations. Since COVID-19 is a continually evolving situation, we cannot predict the long-term impact it 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. As discussed below, we continue to pursue supplementary cash flow opportunities. Through the Paycheck Protection Program ("PPP") administered by theU.S. Small Business Administration ("SBA") under the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act"), ourU.S. operations received$2,000,000 ("Second Draw PPP Loan") and$2,217,500 ("First Draw PPP Loan") inMarch 2021 and inApril 2020 , respectively, in funds fromOne Community Bank . We used all proceeds from these PPP loans for allowable expenses (as defined in the PPP loans) and applied for forgiveness of the PPP loans in accordance with the terms of the CARES Act. InJune 2021 andAugust 2021 , we were notified that all of our First and Second Draw PPP Loans, respectively, were forgiven. See Note 9 to the consolidated financial statements for further discussion. For theU.K. operations, during the third quarter of 2021 and 2020, we recorded reimbursed costs of approximately$49,000 and$474,000 , respectively, and during the first nine months of 2021 and 2020 we recorded reimbursed costs of approximately$150,000 and$1,560,000 , respectively, under the Coronavirus Job Retention Scheme ("CJRS") set up by theU.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 third quarter and first nine months of 2021 reflected that employees were furloughed significantly less than in the same periods 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.
Also for theU.K. operations, inJune 2021 its bank lending facilities withLloyds Bank Commercial Finance Limited ("Lloyds") were refinanced with PNC Business Credit ("PNC"). PNC provided us additional availability by expanding its 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 ($64,768 ) was recognized on this transaction and is recorded in general and administrative expenses in the consolidated statement of operations for the nine months endedOctober 3, 2021 . Debt issuance costs of £247,114 ($341,895 ) related to this transaction were capitalized. These capitalized costs are being amortized over 36 months. The Company has classified these debt issuance costs within other long-term assets in the accompanying consolidated balance sheet. See Notes 8 and 9 to the consolidated financial statements for further discussion. Additionally for theU.K. operations, inSeptember 2021 we received$137,815 related to the second installment of loans from the automotive lenders per the original loan agreement. The remainder of the second installment of loans of approximately$260,000 was received inOctober 2021 . These amounts are due to be repaid in the first quarter of 2023. In addition, the amounts due to be repaid at the end of the third and fourth quarters of 2021 (each approximately$162,500 ) from the first installment of loans from the automotive lenders were deferred until the third and fourth quarters of 2022, respectively. 22 Table of Contents
Three Months Ended
The following table sets forth, for the three months ended
Three Months Ended
%
October 3, 2021 October 4, 2020 Change Change
Net Sales $ 16,385,914 100.0% $ 15,171,898 100.0% $ 1,214,016 8.0%
Cost of Goods Sold 14,430,915 88.1% 13,114,967 86.4% 1,315,948 10.0%
Gross Profit 1,954,999 11.9% 2,056,931 13.6% (101,932 ) -5.0%
Operating Expenses:
Selling 681,397 4.2% 778,699 5.1% (97,302 ) -12.5%General and administrative 1,555,660 9.5% 1,957,486 12.9% (401,826 ) -20.5% Research and development 307,283 1.9% 198,182 1.3% 109,101 55.1% Total Operating Expenses 2,544,340 15.5% 2,934,367 19.3% (390,027 ) -13.3% Operating Loss (589,341 ) -3.6% (877,436 ) -5.8% 288,095 -32.8% Interest expense (430,177 ) -2.6% (367,454 ) -2.4% (62,723 ) 17.1% Funding from Paycheck Protection Program - 0.0% 33,824 0.2% (33,824 ) -100% Other (expense) income (7,381 ) 0.0% 85,753 0.6% (93,134 ) <-100% Loss before Tax Benefit (1,026,899 ) -6.3% (1,125,313 ) -7.4% 98,414 -8.7% Tax benefit (202,925 ) -1.2% (111,318 ) -0.7% (91,607 ) 82.3% Net Loss (823,974 ) -5.0% (1,013,995 ) -6.7% 190,021 -18.7% Extinguishment of preferred stock dividend payable 6,158,311 37.6% - 0.0% 6,158,311 - Preferred stock dividend (539,866 ) -3.3% (808,638 ) -5.3% 268,772 -33.2% Net Income (Loss) Allocable to Common Shareholders$ 4,794,471 29.3%$ (1,822,633 ) -12.0%$ 6,617,104 <-100% 23 Table of Contents Revenue: Total revenue for the three months 2021 increased$1,214,016 or 8.0% to$16,385,914 compared to$15,171,898 for the three months 2020. The increase in revenue included a favorable currency effect of approximately$155,000 . However, sales in the third quarter of 2021 declined$1,363,321 or 7.7% compared to
the second quarter of 2021. For the three months 2021 compared to the three months 2020, automotive sales declined 3.9% primarily due to a decline in sales of 14.4% (excluding the currency adjustment) for ourU.K. operations, which was partially offset by a 10.2% increase in automotive sales for ourU.S. operations. 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, particularly at ourU.K. operations since the majority of their business is in the automotive sector. These supply chain issues were also the primary reason for the 14.1% decline in automotive sales when comparing the third quarter of 2021 with the second quarter of 2021. Additionally for the three months 2021 compared to the three months 2020, sales for the industrial sector increased 25.7% (25.3% before the currency effect) mostly due to an increase in ourU.S. operations (primarily in the contract market) as well as in ourU.K. operations. Sales for the industrial sector increased slightly when comparing the third quarter of 2021 with the second
quarter of 2021. Gross Profit:
Total gross profit for the three months 2021 decreased$101,932 or 5.0% to$1,954,999 compared to$2,056,931 for the three months 2020. Impacting the decrease was the CJRS reimbursement of$47 ,000and$370,000 for the three months 2021 and 2020, respectively, for salaries of furloughed employees, which reduced manufacturing costs. Excluding the CJRS reimbursement, gross profit would have increased$221,068 . In addition, the decrease in gross profit included an unfavorable currency effect of approximately$87,000 . The gross profit percentage was 11.9% of sales for the three months 2021 compared to 13.6% for the three months 2020. The gross profit and percentage for the three months 2021 were negatively impacted by supply chain issues, as discussed above, as well as higher costs of raw materials and freight. To offset raw material price increases, we increased prices on most product categories during the first quarter of 2021 and at the beginning and end of the third quarter of 2021 in several of our markets. However, we have not realized the full impact of the increases yet. Both the gross profit amount and percentage for the third quarter of 2021 improved when compared to the second quarter of 2021 gross profit amount and percentage of$1,821,793 and 10.3%, respectively, as lower costs more than offset the reduction in sales. Operating Expenses: Selling expenses for the three months 2021 decreased$97,302 or 12.5% to$681,397 from$778,699 for the three months 2020. Selling expenses were not reduced for the three months 2021 but were reduced$43,000 for the three months 2020 due to the CJRS reimbursement. Excluding the CJRS reimbursement, selling expenses would have decreased$140,302 .The decrease in selling expenses was partially offset by a$9,000 unfavorable currency effect. When comparing the third quarter of 2021 with the second quarter of 2021, selling expenses decreased$153,341 or 18.4%. The decrease from the three months 2020 was primarily due to a decline in employment costs for theU.S. operations partially offset by the increase in theU.K. operations (mainly due to the CJRS reimbursement) while the decrease from the second quarter of 2021 was primarily due to lower commissions fromU.K. automotive programs. General and administrative expenses for the three months 2021 decreased$401,826 or 20.5% to$1,555,660 from$1,957,486 for the three months 2020. General and administrative expenses were reduced$1,000 and$15,000 for the three months 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, general and administrative expenses would have decreased$415,826 . The decrease in general and administrative expenses was partially offset by a$25,000 unfavorable currency effect. When comparing the third quarter of 2021 with the second quarter of 2021, general and administrative expenses increased$116,172 or 8.1%. The decrease from the three months 2020 was primarily due to lower costs related to cash management consulting services provided to us while the increase from the second quarter of 2021 was primarily due to higher costs related to these services. The decrease from the three months 2020 was also due to a charge relating to the legal proceeding in theU.K. that was expensed in 2020. 24 Table of Contents Research and development expenses for the three months 2021 increased$109,101 or 55.1% to$307,283 from$198,182 for the three months 2020. Research and development expenses were reduced$1,000 and$46,000 for the three months 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, research and development expenses would have increased$64,101 . The increase in research and development expenses included a$10,000 unfavorable currency effect. The increase from the three months 2020 was primarily due to more activity including qualifying raw material substitutions due to supply constraints. When comparing the third quarter of 2021 with the second quarter of 2021, research and development expenses decreased$24,682 or 7.4% as qualifying activity declined. Operating Loss:
Operating loss for the three months 2021 was$589,341 compared to$877,436 for the three months 2020 and$784,398 for the second quarter of 2021. The smaller operating loss for the three months 2021 compared to the three months 2020 was due to lower operating expenses more than offsetting the decline in gross profit. The smaller operating loss for the three months 2021 compared to the second quarter of 2021 was due to the combination of higher gross profit and lower operating expenses. The operating loss percentage was -3.6% of sales for the three months 2021 compared to -5.8% for the three months 2020 and -4.4%
for the second quarter of 2021. Interest Expense: Interest expense for the three months 2021 increased$62,723 or 17.1% to$430,177 from$367,454 for the three months 2020. The increase was primarily due to debt issuances and capitalized debt issuance costs, the amortization of which began in the third quarter of 2021, partially offset by debt repayments.
Funding from Paycheck Protection Program:
Funding from the PPP of$33,824 (from the First Draw PPP Loan) for the three months 2020 were the proceeds from the PPP loans that we used during the period for allowable expenses under the PPP. As previously discussed, all of the First and Second Draw PPP Loans were forgiven inJune 2021 andAugust 2021 , respectively. Other (Expense) Income: Other expense for the three months 2021 was$(7,381) compared to other income of$85,753 for the three months 2020. Included in other (expense) income 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 inthe United States as a C-Corporation, and in several state jurisdictions and in theUnited Kingdom . OurU.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 fundU.S. operations, we would not be required to pay any additionalU.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$202,925 compared to$111,318 for the three months 2020. The tax benefit for the three months 2021 was attributable to the results of both theU.S. andU.K. operations while the tax benefit for the three months 2020 was principally attributable to the results of theU.K. operations. 25 Table of Contents Preferred Stock Dividend: Pursuant to the terms of their acquisitions, the issuance of preferred ownership units/stock ofUEP Holdings, LLC and UGEL were issued to the sellers. These preferred units/stock (collectively "preferred shares") 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 theSeries 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 preferred dividend payments were deferred beginning with the three months endedDecember 29, 2019 through the three months endedOctober 3, 2021 . During the third quarter of 2021, the owners of the preferred shares ("preferred shareholders") agreed to an amendment to the documents that govern the dividends ("amended documents") whereby the accrued dividends were forgiven. In addition, under the amended documents the preferred shareholders are no longer entitled to a quarterly dividend until such time as the Company declares a dividend payable. We accounted for the dividend forgiveness as an extinguishment of debt between related parties per ASC 470, "Debt". As a result, the total balance of accrued dividends of approximately$6,100,000 was derecognized as ofOctober 3, 2021 . The amendments to remove the entitlement of the quarterly dividends ("entitlement amendments") relating to the preferred shares were considered not significant and, therefore, were considered a modification rather than an extinguishment per ASC 470. The entitlement amendments were considered not significant since the change in the fair values of the preferred shares after the amendments compared to the fair values of the preferred shares immediately before the amendments was less than 10% as we determined that the entitlement amendments resulted in a reduction of fair value of the preferred shares. Per ASC 718, "Compensation - Stock Compensation", the reduction of fair value of the preferred shares in this modification had no accounting impact (i.e., recognition of a gain). 26 Table of Contents
Nine Months Ended
The following table sets forth, for the nine months endedOctober 3, 2021 ("nine months 2021") andOctober 4, 2020 ("nine months 2020"), certain operational data including their respective percentage of net sales: Nine Months Ended % October 3, 2021 October 4, 2020 Change Change Net Sales$ 56,031,150 100.0%$ 43,528,393 100.0%$ 12,502,757 28.7% Cost of Goods Sold 49,017,021 87.5% 37,931,227 87.1% 11,085,794 29.2% Gross Profit 7,014,129 12.5% 5,597,166 12.9% 1,416,963 25.3% Operating Expenses: Selling 2,414,847 4.3% 2,278,279 5.2% 136,568 6.0%
General and administrative 4,574,175 8.2% 4,834,011
11.1% (259,836 ) -5.4% Research and development 966,706 1.7% 704,239 1.6% 262,467 37.3% Total Operating Expenses 7,955,728 14.2% 7,816,529 18.0% 139,199 1.8% Operating Loss (941,599 ) -1.7% (2,219,363 ) -5.1% 1,277,764 -57.6% Interest expense (1,217,861 ) -2.2% (1,215,771 ) -2.8% (2,090 ) 0.2% Funding from Paycheck Protection Program 2,000,000 3.6% 2,217,500 5.1% (217,500 ) -9.8% Other income (expense) 157,978 0.3% (185,417 ) -0.4% 343,395 <-100% Loss before Tax Benefit (1,482 ) 0.0% (1,403,051 ) -3.2% 1,401,569 -99.9% Tax benefit (409,548 ) -0.7% (404,141 ) -0.9% (5,407 ) 1.3% Net Income (Loss) 408,066 0.7% (998,910 ) -2.3% 1,406,976 <-100% Extinguishment of preferred stock dividend payable 6,158,311 11.0% - 0.0% 6,158,311 - Preferred stock dividend (2,172,253 ) -3.9% (2,396,479 ) -5.5% 224,226 -9.4% Net Income (Loss) Allocable to Common Shareholders$ 4,394,124 7.8%$ (3,395,389 ) -7.8%$ 7,789,513 <-100% Revenue: Total revenue for the nine months 2021 increased$12,502,757 or 28.7% to$56,031,150 from$43,528,393 for the nine months 2020. The lower amount for the nine 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$1,841,000 . For the nine months 2021 compared to the nine months 2020, automotive sales for ourU.K. operations increased 23.7% (excluding the currency adjustment) and automotive sales for ourU.S. operations increased 26.5% due to the negative effect that COVID-19 had primarily on 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 and third quarters of 2021. 27 Table of Contents
Additionally, sales for the industrial sector increased 24.1% (22.8% before the currency effect) mostly due to an increase in ourU.S. operations (primarily in the contract market) as well as in ourU.K. operations. As discussed above, COVID-19 had a negative effect on our operations primarily during the second quarter of 2020. Gross Profit: Total gross profit for the nine months 2021 increased$1,416,963 or 25.3% to$7,014,129 from$5,597,166 for the nine months 2020. The gross profit amount for the nine months 2020 reflected the negative impact of COVID-19. Impacting the increase was the CJRS reimbursement of$130,000 and$1,304,000 for the nine months 2021 and 2020, respectively, for salaries of furloughed employees, which reduced manufacturing costs. Excluding the CJRS reimbursement, gross profit would have increased$2,590,963 . In addition, the increase in gross profit was partially offset by an unfavorable currency effect of approximately$67,000 . The gross profit percentage was 12.5% of sales for the nine months 2021 compared to 12.9% for the nine months 2020. The gross profit and percentage for the nine months 2021 were negatively impacted by supply chain issues, as discussed above, as well as higher costs of raw materials and freight. To offset raw material price increases, we increased prices on most product categories during the first quarter of 2021 and at the beginning and end of the third quarter of 2021 in several of our markets. However, we have not realized the full impact of the increases yet. Operating Expenses: Selling expenses for the nine months 2021 increased$136,568 or 6.0% to$2,414,847 from$2,278,279 for the nine months 2020. Selling expenses were reduced$7,000 and$99,000 for the nine months 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, selling expenses would have increased$44,568 . The increase in selling expenses included a$100,000 unfavorable currency effect. The higher amount for the nine months 2021 reflected increased selling-related expenses due to greater sales activity as the negative effect of COVID-19 decreased this activity during 2020, but was partially offset by the slowing of sales activity beginning in the second quarter of 2021. General and administrative expenses for the nine months 2021 decreased$259,836 or 5.4% to$4,574,175 from$4,834,011 for the nine months 2020. General and administrative expenses were reduced$5 ,000and$35,000 for the nine months 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, general and administrative expenses would have decreased$289,836 . The decrease in general and administrative expenses was partially offset by an unfavorable currency effect of$94,000 . The decrease from the nine months 2020 was primarily due to lower costs for cash management consulting services provided to us and a charge relating to the legal proceeding in theU.K. that was expensed in 2020. Research and development expenses for the nine months 2021 increased$262,467 or 37.3% to$966,706 from$704,239 for the nine months 2020. Research and development expenses were reduced$8 ,000and$122,000 for the nine months 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, research and development expenses would have increased$148,467 . The increase in research and development expenses included a$40,000 unfavorable currency effect. The increase from the nine months 2020 was primarily due to more activity including qualifying raw material substitutions due to supply
constraints. Operating Loss:
Operating loss for the nine months 2021 was$941,599 compared to$2,219,363 for the nine months 2020. The smaller operating loss for the nine months 2021 compared to the nine months 2020 was due to higher gross profit partially offset by higher operating expenses. The operating loss percentage was -1.7% of sales for the nine months 2021 compared to -5.1% for the nine months 2020. Interest Expense: Interest expense for the nine months 2021 decreased$2,090 or 0.2% to$1,217,861 from$1,215,771 for the nine months 2020. The decline in interest expense for theU.S. operations offset the increase in interest expense for theU.K. operations, which included amortization of debt issuance costs related to the PNC debt.
Funding from Paycheck Protection Program:
Funding from the PPP of$2,000,000 (from the Second Draw PPP Loan) for the nine months 2021 and$2,217,500 (from the First Draw PPP Loan) for the nine months 2020, were the proceeds from the PPP loans that we used during those periods for allowable expenses under the PPP. As previously discussed, all of the First and Second Draw PPP Loans were forgiven inJune 2021 andAugust 2021 , respectively. 28 Table of Contents Other Income (Expense): Other income for the nine months 2021 was$157,978 compared to other expense of$(185,417) for the nine 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 inthe United States as a C-Corporation, and in several state jurisdictions and in theUnited Kingdom . OurU.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 fundU.S. operations, we would not be required to pay any additionalU.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 nine months 2021 was$409,548 compared to$404,141 for the nine months 2020. The tax benefits for the nine months 2021 and 2020 were principally attributable to the results of theU.S. operations. Preferred Stock Dividend: Pursuant to the terms of their acquisitions, the issuance of preferred ownership units/stock ofUEP Holdings, LLC and UGEL were issued to the sellers. These preferred units/stock (collectively "preferred shares") 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 theSeries 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 preferred dividend payments were deferred beginning with the three months endedDecember 29, 2019 through the three months endedOctober 3, 2021 . During the third quarter of 2021, the owners of the preferred shares ("preferred shareholders") agreed to an amendment to the documents that govern the dividends ("amended documents") whereby the accrued dividends were forgiven. In addition, under the amended documents the preferred shareholders are no longer entitled to a quarterly dividend until such time as the Company declares a dividend payable. We accounted for the dividend forgiveness as an extinguishment of debt between related parties per ASC 470, "Debt". As a result, the total balance of accrued dividends of approximately$6,100,000 was derecognized as ofOctober 3, 2021 . The amendments to remove the entitlement of the quarterly dividends ("entitlement amendments") relating to the preferred shares were considered not significant and, therefore, were considered a modification rather than an extinguishment per ASC 470. The entitlement amendments were considered not significant since the change in the fair values of the preferred shares after the amendments compared to the fair values of the preferred shares immediately before the amendments was less than 10% as we determined that the entitlement amendments resulted in a reduction of fair value of the preferred shares. Per ASC 718, "Compensation - Stock Compensation", the reduction of fair value of the preferred shares in this modification had no accounting impact (i.e., recognition of a gain).
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 of approximately$30,000,000 subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of$17,807,174 atOctober 3, 2021 , for theU.S. operations,$6.0 million of the lines bears interest at the Eurodollar rate plus 2.25% and$4.9 million bears interest at theWells Fargo Capital Finance, LLC's prime rate (3.25% atOctober 3, 2021 ) and, for theU.K. operations,$6.9 million bears interest at theBank of England Base Rate plus 2.25%-3.00%. The lines provided additional availability of approximately$764,000 and, combined with UEP's and UGL's total cash balances, liquidity was approximately$1.4 million atOctober 3, 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. 29 Table of Contents The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 0.99 atOctober 3, 2021 and 0.89 at January
3, 2021. Cash balances decreased$1,040,515 before the effects of currency translation of$17,466 to$633,833 atOctober 3, 2021 from$1,656,882 atJanuary 3, 2021 . Of the above noted amounts,$216,524 and$1,621,692 were held outside theU.S. by our foreign subsidiaries as ofOctober 3, 2021 andJanuary 3, 2021 , respectively. Cash used in operations was$1,823,827 for the nine months 2021 compared to cash provided by operations of$966,649 for the nine months 2020. For the nine months 2021, cash used in operations was primarily due to changes in working capital of$(1,892,152) , adjustments for non-cash items of$(312,209) and changes in other assets and liabilities of$(27,532) offset by net income of$408,066 . For the nine months 2020, cash provided by operations was primarily due to changes in working capital of$2,772,839 offset by the net loss of$998,910 , adjustments for non-cash items of$(784,889) and changes in other assets and liabilities of$(22,391) . Cash used in investing activities was$743,725 for the nine months 2021 compared to$1,171,258 for the nine 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 nine months 2020, the payments made for the life insurance premiums were offset by proceeds from policy loans of$130,000 . For the nine months 2021, cash provided by financing activities was$1,527,037 compared to cash provided by financing activities of$464,890 for the nine months 2020. Impacting cash flows from financing activities for the nine 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 nine months 2021 and 2020 were net advances on lines of credit of$892,278 and net payments of$1,913,809 , respectively. The changes in the lines of credit reflect the funding of working capital. Payments of$917,536 and$1,189,638 were also made during the nine months 2021 and 2020, respectively, on long-term debt (excluding debt extinguishment) and finance lease liabilities. For the nine months 2021, payments were$1,486,504 and proceeds were$2,328,520 relating to the extinguishment of existing long-term debt and recognition of new long-term debt, respectively, while payments were$7,379,356 and proceeds were$6,565,288 relating to the extinguishment of an existing line of credit and recognition of a new line of credit, respectively. Also included for the nine months 2021 were payments for capitalized debt issuance costs of$341,895 . For the nine months 2021 and 2020, proceeds from issuance of long-term debt from automotive lenders were$137,815 and$1,545,538 (net of translation adjustment of$(25,677) ). Also for the nine months 2020, proceeds of$783,958 were received from and payments of$675,000 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 nine 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 ofOctober 3, 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.
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