activity Descrition



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 Stoughton, Wis. and Earby, England.


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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, 2022 was a 52-week year
whereas the 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.



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 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
$1,625,000 for the year ended January 2, 2022. The overall currency effect on
our net loss was a positive amount of approximately $253,000 for the year ended
January 2, 2022.



The U.K. exit from the European Union on 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.



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Year ended January 2, 2022 Compared to the year ended January 3, 2021

The following table shows, for the fiscal year ended January 2, 2022 (“fiscal year ending in 2021”) and January 3, 2021 (“year ended 2020”), certain operational data, including their respective percentage of net sales:


                                                                          Year Ended
                                                                                                                    %
                                          January 2, 2022              January 3, 2021             Change        Change

Net Sales                             $ 71,704,995       100.0 %   $ 60,218,355       100.0 %   $ 11,486,640        19.1 %
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                   $  2,275,480         3.2 %   $ (4,433,467 )      -7.4 %   $  6,708,947       <-100 %




Revenue



Total revenue for the year ended 2021 increased $11,486,640 or 19.1% to
$71,704,995 from $60,218,355 for 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 $1,357,510 or 14.6% to
$8,918,111 from $7,780,601 for 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 $130,000 and $1,309,000 for 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.



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Operating Expenses



Selling expenses for the year ended 2021 decreased $25,669 or 0.8% to $3,015,016
from $3,040,685 for the year ended 2020. Selling expenses were reduced $7,000
and $99,000 for 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
$84,000 unfavorable 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 $595,386
or 8.9% to $6,125,583 from $6,720,969 for the year ended 2020. General and
administrative expenses were reduced $5,000 and $35,000 for 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 $100,000 unfavorable 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 $313,213 or
31.9% to $1,293,908 from $980,695 for the year ended 2020. Research and
development expenses were reduced $8,000 and $126,000 for 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 $45,000 unfavorable
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 $1,516,396 compared to $2,961,748 for
the year ended 2020. The $1,445,352 or 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 $59,092 or 3.7% to $1,640,999
from $1,581,907 for 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 2021 and August 2021, respectively.



Other Income (Expense)


Other income for the year ended 2021 was $188,011 compared to other expense of
$173,214 for 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.



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Income Taxes


For the year ended in 2021, the tax provision was $732,994 compared to a tax advantage of $1,275,743 for the year ended 2020. The tax provision for the year ended 2021 and the tax benefit for the year ended 2020 are mainly attributable to the results of we operations.

Based on management's review at January 2, 2022 and 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 $55,000,000 at 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, 2019 through 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 $6,100,000 was 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 $29,000,000 subject to the
underlying borrowing base specified in the agreements.  Of the total outstanding
borrowings of $17,816,919 at January 2, 2022, for the U.S. operations, $6.0
million of the lines bears interest at the Eurodollar rate plus 2.25% and $5.4
million bears interest at the Wells Fargo Capital Finance, LLC's prime rate
(3.25% at January 2, 2022) and, for the U.K. operations, $6.4 million bears
interest at the Bank of England Base Rate plus 2.25%-3.00%. The lines provided
additional availability of approximately $466,000 and, combined with UEP's and
UGL's total cash balances, liquidity was approximately $904,000 at 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 2021 and 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 2021 and 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.



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For our U.K. operations, during the years ended January 2, 2022 and January 3,
2021, we recorded reimbursed costs of approximately $150,000 and $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, 2022 reflected 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 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
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 $411,796 from 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, 2019
through 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 $6,100,000 was 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, 2022 and 0.89 at January
3,
2021.



Cash balances decreased $1,218,759, before the effects of currency translation
of $6,850, to $444,973 at January 2, 2022 from $1,656,882 at January 3, 2021.
Of the above noted amounts, $226,612 and $1,621,692 were held outside the U.S.
by our foreign subsidiaries as of January 2, 2022 and January 3, 2021,
respectively.



Cash used in operations was $1,525,215 and $992,158 for 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 $1,223,626 and adjustments for non-cash items
of $(1,069,834), offset by changes in working capital of $1,156,536 and changes
in other assets and liabilities of $144,766.



For the year ended 2021, cash used in investing activities was $1,280,112
compared to $1,417,623 for 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
$194,808 on our company owned life insurance policies. For the year ended
January 3, 2021, we obtained $130,000 in loans against the cash value of our
company owned life insurance policies and are shown net of payments of $178,771
on the life insurance policies in the consolidated statements of cash flows.



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Cash provided by financing activities was $1,586,568 and $3,466,982 for 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
($2,000,000 through 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 ($2,217,500 through the Paycheck Protection Program,
$3,268,664, net of translation adjustment of $(193,425), from automotive
lenders, and $2,432,353 through 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 $931,759 and net
payments of $3,074,286, respectively. The changes in the lines of credit reflect
the funding of working capital. Payments of $1,115,788 and $1,478,630 were 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 $1,476,713 and proceeds were $2,313,181 relating to
the extinguishment of existing long-term debt and recognition of new long-term
debt, respectively, while payments were $7,330,745 and proceeds were $6,522,040
relating 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 $675,000 were made on subordinated secured
promissory notes to our majority shareholder. In addition, proceeds of $200,000
were 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, 2022 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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Critical accounting policies, judgments and estimates



The U.S. Securities and Exchange Commission ("SEC") requires companies to
provide additional disclosure and commentary on their most critical accounting
policies. The SEC has 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.


Good will and intangible assets with an indefinite useful life



Goodwill and 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.



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Income Tax


We file income tax returns in the United States as 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 million as of January 2, 2022, of which $11.7 million expire
in years beginning 2023 through 2034 and $4.7 million may be carried forward
indefinitely. We have state net operating loss carryforwards of approximately
$14.2 million as of January 2, 2022, which also expire beginning 2023 through
2034. Additionally, we have foreign net operating loss carryforwards of
approximately $2.8 million as 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
$2,106,027 as 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.



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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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