We are a leading provider of manufactured vinyl coated fabrics. Our best known brand, Naugahyde, is the product of many improvements on rubber-coated fabrics developed a century ago in
Naugatuck, Connecticut. We design, manufacture and market a wide selection of vinyl coated fabric products under a portfolio of recognized brand names. We believe that our business has continued to be a leading supplier in its marketplace because of our ability to provide specialized materials with performance characteristics customized to the end-user specifications, complemented by technical and customer support for the use of our products in manufacturing. Our 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 with either flame or hot melt adhesive for seating, fascia and door applications. Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for water-based durability and weatherability is used. We also manufacture a line of products 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 operate out of manufacturing facilities located in
12 Table of Contents Overview On
November 10, 2014, we acquired through our subsidiary UEP Holdings LLC("UEPH") all of the ownership interests in Uniroyal Engineered Products, LLC("Uniroyal"), and acquired directly all of the ordinary common stock of Uniroyal Global (Europe) Limited("UGEL", formerly known as Engineered Products Acquisition Limited("EPAL")), the holding company for Uniroyal Global Limited(formerly known as Wardle Storeys (Earby) Limited("Wardle Storeys")). We and our subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest to December 31. The year ended January 2, 2022was a 52-week year whereas the year ended January 3, 2021was 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. Our Earby, Englandoperation'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 the U.S.Dollar was approximately 7.0% higher and the average exchange rate for the Euro to the Pound Sterling was approximately 3.4% lower in 2021 compared to 2020. These exchange rate changes had the effect of increasing net sales by approximately $1,625,000for the year ended January 2, 2022. The overall currency effect on our net loss was a positive amount of approximately $253,000for the year ended January 2, 2022. The U.K.exit from the European Unionon January 31, 2020, commonly referred to as Brexit, caused minimal disruption to our operations during the year ended January 2, 2022. However, any impact from Brexit on our business and operations over the long term will depend, in part, on the outcome of tariff, tax treaties, trade, regulatory, and other negotiations the U.K.conducts. The coronavirus pandemic ("COVID-19") and its current disruption of the supply chain has had an impact on markets we serve and our operations and liquidity. We continue to pursue supplementary cash flow opportunities, which have included loans through the Paycheck Protection Program ("PPP"), reimbursed costs under the Coronavirus Job Retention Scheme ("CJRS"), debt refinancing with PNC Business Credit ("PNC"), loans from the automotive lenders, and forgiveness of accrued dividends. See "Liquidity and Sources of Capital" below for further
discussion. 13 Table of Contents
The following table shows, for the fiscal year ended
Year Ended % January 2, 2022 January 3, 2021 Change Change Net Sales
$ 71,704,995100.0 % $ 60,218,355100.0 % $ 11,486,64019.1 % Cost of Goods Sold 62,786,884 87.6 % 52,437,754 87.1 % 10,349,130 19.7 % Gross Profit 8,918,111 12.4 % 7,780,601 12.9 % 1,357,510 14.6 % Operating Expenses: Selling 3,015,016 4.2 %
3,040,685 5.0% (25,669 ) -0.8% General and administrative
6,125,583 8.5 %
6,720,969 11.2% (595,386) -8.9% Research and development
1,293,908 1.8 %
980,695 1.6% 313,213 31.9% Total operating expenses
10,434,507 14.6 % 10,742,349 17.8 % (307,842 ) -2.9 % Operating Loss (1,516,396 ) -2.1 % (2,961,748 ) -4.9 % 1,445,352 -48.8 % Interest expense (1,640,999 ) -2.3 %
(1,581,907 ) -2.6% (59,092 ) 3.7% Paycheck Protection Program Funding
2,000,000 2.8 %
2,217,500 3.7% (217,500) -9.8% Other income (expenses)
188,011 0.3 % (173,214 ) -0.3 % 361,225 <-100 % Loss before Tax Provision (Benefit) (969,384 ) -1.4 % (2,499,369 ) -4.2 % 1,529,985 -61.2 % Tax provision (benefit) 732,994 1.0 % (1,275,743 ) -2.1 % 2,008,737 <-100 % Net Loss (1,702,378 ) -2.4 % (1,223,626 ) -2.0 % (478,752 ) 39.1 % Extinguishment of preferred stock dividend payable 6,145,463 8.6 % - 0.0 % 6,145,463 - Preferred stock dividend (2,167,605 ) -3.0 % (3,209,841 ) -5.3 % 1,042,236 -32.5 % Net Income (Loss) Allocable to Common Shareholders
$ 2,275,4803.2 % $ (4,433,467 )-7.4 % $ 6,708,947<-100 % Revenue Total revenue for the year ended 2021 increased $11,486,640or 19.1% to $71,704,995from $60,218,355for the year ended 2020. The lower amount for the year ended 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 $1,625,000. For the year ended 2021 compared to the year ended 2020, automotive sales for our U.K.operations increased 7.6% (excluding the currency adjustment) and automotive sales for our U.S.operations increased 24.3%, which reflects the negative effect of COVID-19 on prior year sales. However, the year-over-year growth was negatively impacted by supply chain issues experienced by the OEM's that use our automotive products, which lead to temporary intermittent shutdowns of their production lines beginning in the second quarter of 2021. We are encouraged that automotive sales improved when comparing the fourth quarter of 2021 with the third quarter of 2021. Additionally, sales for the industrial sector increased 21.4% (20.5% 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, these increases reflect the negative effect of COVID-19 on our prior year operations. Gross Profit
Total gross profit for the year ended 2021 increased
$1,357,510or 14.6% to $8,918,111from $7,780,601for the year ended 2020. The gross profit amount for the year ended 2020 reflected the negative impact of COVID-19. Manufacturing costs were reduced by the CJRS reimbursement of $130,000and $1,309,000for the years ended 2021 and 2020, respectively, for salaries of furloughed employees. Excluding the CJRS reimbursement, gross profit would have increased $2,316,510. In addition, the increase in gross profit was partially offset by an unfavorable currency effect of approximately $60,000. The gross profit percentage was 12.4% of sales for the year ended 2021 compared to 12.9% for the year ended 2020. The gross profit and percentage for the year ended 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 in several of our markets three times in 2021 with effective dates in March, July and December of 2021. However, we have not realized the full positive impact of the most recent increase yet. We expect some additional price increases on other select products to be implemented in 2022 for further offset to raw material price increases. 14 Table of Contents Operating Expenses Selling expenses for the year ended 2021 decreased $25,669or 0.8% to $3,015,016from $3,040,685for the year ended 2020. Selling expenses were reduced $7,000and $99,000for the years ended 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, selling expenses would have decreased $117,669. The decrease in selling expenses was partially offset by an $84,000unfavorable currency effect. The lower amount for the year ended 2021 was primarily due to a decline in employment costs for the U.S.operations partially offset by the increase in the U.K.operations due to greater sales activity (as the negative effect of COVID-19 decreased this activity during 2020) and the CJRS reimbursement. General and administrative expenses for the year ended 2021 decreased $595,386or 8.9% to $6,125,583from $6,720,969for the year ended 2020. General and administrative expenses were reduced $5,000and $35,000for the years ended 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, general and administrative expenses would have decreased $625,386. The decrease in general and administrative expenses was partially offset by a $100,000unfavorable currency effect. The decrease from the year ended 2020 was primarily due to lower costs for cash management consulting services provided to us and a charge relating to the legal proceeding in the U.K.that was expensed in 2020. See Note 1 to the consolidated financial statements for further discussion. Research and development expenses for the year ended 2021 increased $313,213or 31.9% to $1,293,908from $980,695for the year ended 2020. Research and development expenses were reduced $8,000and $126,000for the years ended 2021 and 2020, respectively, due to the CJRS reimbursement. Excluding the CJRS reimbursement, research and development expenses would have increased $195,213. The increase in research and development expenses included a $45,000unfavorable currency effect. The increase from the year ended 2020 was primarily due to more activity including qualifying raw material substitutions as a result of supply constraints. Operating Loss Operating loss for the year ended 2021 was $1,516,396compared to $2,961,748for the year ended 2020. The $1,445,352or 48.8% smaller operating loss for the year ended 2021 compared to the year ended 2020 was due to the combination of higher gross profit and lower operating expenses. The operating loss percentage was -2.1% of sales for the year ended 2021 compared to -4.9% for the year ended
2020. Interest Expense Interest expense for the year ended 2021 increased
$59,092or 3.7% to $1,640,999from $1,581,907for the year ended 2020. The increase in interest expense for the U.K.operations, which included amortization of debt issuance costs related to the debt refinancing with PNC, was partially offset by the decrease in interest expense for the U.S.operations.
Funding for the Paycheck Protection Program:
Funding from the PPP of
$2,000,000(from the Second Draw PPP Loan) for the year ended 2021 and $2,217,500(from the First Draw PPP Loan) for the year ended 2020, were the proceeds from the PPP loans that we used during those periods for allowable expenses under the PPP. All of the First and Second Draw PPP Loans were forgiven in June 2021and August 2021, respectively. Other Income (Expense)
Other income for the year ended 2021 was
$188,011compared to other expense of $173,214for the year ended 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 year. 15 Table of Contents Income Taxes
For the year ended in 2021, the tax provision was
Based on management's review at
January 2, 2022and January 3, 2021, it was determined that there is uncertainty as to the realization of a portion of the federal and state net operating loss carryforwards and, as a result, a valuation allowance was established against them. Preferred Stock Dividend Pursuant to the terms of their acquisitions, preferred ownership units/stock of UEPH and UGEL were issued to the sellers. These preferred units/stock (collectively "preferred shares") have carried quarterly dividend requirements on a total value of $55,000,000at rates ranging from 5% to 8%. The dividend rate on the Series B UEPH 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 ended December 29, 2019through the three months ended October 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 $6,100,000was derecognized as of October 3, 2021. The amendments to remove the entitlement of a quarterly 5%, 8% and €221,241 (approximately $261,657) dividend ("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 management 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 in excess of
$29,000,000subject to the underlying borrowing base specified in the agreements. Of the total outstanding borrowings of $17,816,919at January 2, 2022, for the U.S.operations, $6.0 millionof the lines bears interest at the Eurodollar rate plus 2.25% and $5.4 millionbears interest at the Wells Fargo Capital Finance, LLC'sprime rate (3.25% at January 2, 2022) and, for the U.K.operations, $6.4 millionbears interest at the Bank of England Base Rateplus 2.25%-3.00%. The lines provided additional availability of approximately $466,000and, combined with UEP's and UGL's total cash balances, liquidity was approximately $904,000at January 2, 2022. We plan to use this availability and cash provided by operating activities to finance our cash needs for fiscal 2022. The balances due under the lines of credit are recorded as current liabilities on the consolidated balance sheets. As previously stated, the coronavirus pandemic ("COVID-19") and its current disruption of the supply chain has had an impact on markets we serve and our operations and liquidity. 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 the U.S. Small Business Administration("SBA") under the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act"), our U.S.operations received $2,000,000("Second Draw PPP Loan") and $2,217,500("First Draw PPP Loan") in March 2021and in April 2020, respectively, in funds from One 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. In June 2021and August 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. 16 Table of Contents
U.K.operations, during the years ended January 2, 2022and January 3, 2021, we recorded reimbursed costs of approximately $150,000and $1,569,000, respectively, under the Coronavirus Job Retention Scheme ("CJRS") established 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 year ended January 2, 2022reflected that employees were furloughed significantly less than in the prior year. 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 our
U.K.operations, in June 2021its bank lending facilities with Lloyds Bank Commercial Finance Limited("Lloyds") were refinanced with PNC Business Credit ("PNC"). PNC provided us additional availability by expanding the 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 ( $64,342) was recognized on this transaction and is recorded in general and administrative expenses in the consolidated statement of operations for the year ended January 2, 2022. Debt issuance costs of £247,114 ( $333,081) related to this transaction were capitalized. These capitalized costs are being amortized over 36 months. We 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 our U.K.operations, during 2021 we received the second installment of loans of $411,796from the automotive lenders per the original loan agreement. 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. Also to provide liquidity, quarterly preferred dividend payments on UEPH Series A and Series B preferred units and UGEL preferred stock (collectively "preferred shares") were deferred beginning with the three months ended December 29, 2019through the three months ended October 3, 2021. During the third quarter of 2021, the owners of these preferred shares ("preferred shareholders") agreed to an amendment to the documents that govern the dividends ("amended documents") whereby the accrued dividends were forgiven. As a result, the total balance of accrued dividends of approximately $6,100,000was derecognized as of October 3, 2021. Additionally, under the amended documents, the preferred shareholders are no longer entitled to a quarterly dividend until such time as we declare a dividend payable. See Note 13 to the consolidated financial statements for further discussion. The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 0.99 at January 2, 2022and 0.89 at January
3, 2021. Cash balances decreased
$1,218,759, before the effects of currency translation of $6,850, to $444,973at January 2, 2022from $1,656,882at January 3, 2021. Of the above noted amounts, $226,612and $1,621,692were held outside the U.S.by our foreign subsidiaries as of January 2, 2022and January 3, 2021, respectively. Cash used in operations was $1,525,215and $992,158for the years ended 2021 and 2020, respectively. For 2021, cash used in operations was primarily due to the net loss of $1,702,378, changes in working capital of $(1,515,589), and changes in other assets and liabilities of $(23,466), partially offset by adjustments for non-cash items of $1,716,218. For 2020, cash used in operations was primarily due to the net loss of $1,223,626and adjustments for non-cash items of $(1,069,834), offset by changes in working capital of $1,156,536and changes in other assets and liabilities of $144,766. For the year ended 2021, cash used in investing activities was $1,280,112compared to $1,417,623for the year ended 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 year ended January 2, 2022, we made payments of $194,808on our company owned life insurance policies. For the year ended January 3, 2021, we obtained $130,000in loans against the cash value of our company owned life insurance policies and are shown net of payments of $178,771on the life insurance policies in the consolidated statements of cash flows. 17 Table of Contents
Cash provided by financing activities was
$1,586,568and $3,466,982for the years ended 2021 and 2020, respectively. Impacting cash flows from financing activities were proceeds from issuance of long-term debt of $2,411,796( $2,000,000through the Paycheck Protection Program and $411,796, net of translation adjustment of $(48,745), from automotive lenders) for the year ended 2021 and $7,725,092( $2,217,500through the Paycheck Protection Program, $3,268,664, net of translation adjustment of $(193,425), from automotive lenders, and $2,432,353through the Main Street Lending Program) for the year ended 2020. Also impacting cash flows from financing activities for the years ended 2021 and 2020 were net advances on lines of credit of $931,759and net payments of $3,074,286, respectively. The changes in the lines of credit reflect the funding of working capital. Payments of $1,115,788and $1,478,630were also made during the years ended 2021 and 2020, respectively, on long-term debt (excluding debt extinguishment) and finance lease liabilities. For the year ended 2021, payments were $1,476,713and proceeds were $2,313,181relating to the extinguishment of existing long-term debt and recognition of new long-term debt, respectively, while payments were $7,330,745and proceeds were $6,522,040relating to the extinguishment of an existing line of credit and recognition of a new line of credit, respectively. Also included for the year ended 2021 were payments for capitalized debt issuance costs of $339,643. For the year ended 2020, proceeds of $1,225,911(net of translation adjustment of $(72,544)) were received from and payments of $675,000were made on subordinated secured promissory notes to our majority shareholder. In addition, proceeds of $200,000were received from a short-term advance from our majority shareholder during the year ended 2020 and 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 January 2, 2022and 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.
18 Table of Contents
Critical accounting policies, judgments and estimates
U.S. Securities and Exchange Commission("SEC") requires companies to provide additional disclosure and commentary on their most critical accounting policies. The SEChas defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and requires management to make its most significant estimates and judgments in the preparation of its consolidated financial statements. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. Our critical accounting policies are described below. Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied, which includes the control of products transferring to the customer. For Uniroyal, this generally occurs when products are shipped and, for UGL, this generally occurs when the customer accepts delivery either at the Company's
U.K.facility or at a mutually agreed upon location. Revenue is measured as the amount of consideration we expect to receive in exchange for products transferred to the customer. Based on historical results and analysis, we estimate and calculate provisions for customer rebates and sales returns and allowances and record these estimated amounts as an offset to revenue in the same period the related revenue is recognized. Accounts Receivable On an ongoing basis, we evaluate our accounts receivable based on individual customer circumstances, historical write-offs and collections, and current industry and customer credit conditions, and adjust the allowance for doubtful accounts accordingly. Our policy regarding write-offs and collection efforts varies based on individual customer circumstances. Past due accounts receivable are determined based on individual customer credit terms. Inventories We value inventory at the lower of cost using the first-in, first-out (FIFO) method, or market. To determine the cost of inventory, we allocate fixed expense to the costs of production based on the normal capacity, which refers to a range of production levels and is considered the production expected to be achieved over a number of periods under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Fixed overhead costs allocated to each unit of production should not increase due to abnormally low production. Those excess costs are recognized as a current period expense. We assess the recoverability of inventory and record a provision for obsolescence based upon specifically identified, discontinued or obsolete items, or a percentage of quantities on hand compared with historical and forecasted usage and sales levels. These assessments, which require management's judgments and estimates, reduce inventories to their estimated net realizable value.
Assets with a finite life
Finite-lived long-lived assets consist of property, equipment and other intangible assets, which excludes goodwill and trademarks since they are considered to have indefinite useful lives. Property, equipment and other intangible assets are amortized using the straight-line method over their estimated useful life. These finite-lived long-lived assets are reviewed for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset.
Goodwilland trademarks are indefinite-lived assets and are not amortized unless, for trademarks, we determine that their useful lives are no longer indefinite. These indefinite-lived assets are reviewed for impairment at least annually or whenever events or changes in business circumstances ("triggering events") indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset.
In considering whether any triggering events had occurred to indicate that the carrying amount of our assets may not be fully recoverable, we used a qualitative assessment methodology and concluded that it was not more likely than not that the fair value of our assets was less than the carrying amount as of
January 2, 2022. We also performed a quantitative analysis using a discounted cash flow approach and determined that the fair value of our assets exceeded the carrying value as of January 2, 2022. Based on these results, we concluded that no impairment charge was necessary as of January 2, 2022. 19 Table of Contents Income Tax
We file income tax returns in
the United Statesas a C-Corporation, and in several state jurisdictions and in the United Kingdom. Our 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 follow ASC 740 Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities (temporary differences) using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. We have federal net operating loss carryforwards of approximately $16.4 millionas of January 2, 2022, of which $11.7 millionexpire in years beginning 2023 through 2034 and $4.7 millionmay be carried forward indefinitely. We have state net operating loss carryforwards of approximately $14.2 millionas of January 2, 2022, which also expire beginning 2023 through 2034. Additionally, we have foreign net operating loss carryforwards of approximately $2.8 millionas of January 2, 2022, which have no expiration date. As a result of the federal and state loss carryforwards, we have deferred tax assets of $5,370,903, which have a valuation allowance against them of $2,106,027as of January 2, 2022. We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. In making our valuation allowance determinations, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carryback and carryforward periods, and the implementation of tax planning strategies. Management has determined that there is uncertainty as to the realization of a portion of the federal and state net operating loss carryforwards and has established a valuation allowance against them. Foreign Currency Translation The financial position and results of operations of our foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated into U.S.dollars at exchange rates in effect at the balance sheet date, while the capital accounts are translated at the historical rate for the date they were recognized. Revenues and expenses are translated at the weighted average exchange rates during the year. The resulting translation gains and losses on assets and liabilities are recorded in accumulated other comprehensive loss, and are excluded from net income until realized through a sale or liquidation of the foreign subsidiaries. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operations are included in other income (expense) in the accompanying consolidated statements of operations.
Fair value of financial instruments
Our short-term financial instruments include cash and cash equivalents, accounts receivable, accounts payable and lines of credit. We adjust the carrying value of financial instruments denominated in other currencies such as cash, accounts receivable, accounts payable and lines of credit using the appropriate exchange rates at the balance sheet date. We believe that the carrying values of these short-term financial instruments approximate their estimated fair values.
The fair value of our long-term debt is estimated based on current rates for similar instruments with the same remaining maturities. In determining the current interest rates for similar instruments, we take into account its risk of nonperformance. We believe that the carrying value of our long-term debt approximates its estimated fair value. 20 Table of Contents
Liability for post-employment and post-employment benefits
We provide certain health care and life insurance benefits for substantially all employees (active or retired) who were employed prior to
February 20, 1987. In calculating our plan obligations and related expense, we make various assumptions and estimates. These assumptions include discount rates, mortality rates, retirement rates, termination rates and other factors. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our obligations and future expense. Recent Accounting Standards
See Note 1 to the consolidated financial statements for a discussion of accounting standards we adopted in 2021 and those recently issued but not yet required to be adopted.
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