Business Description





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, healthcare 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 healthcare facilities. Flame and smoke retardant vinyl coated fabrics are
used for a variety of commercial and institutional furniture applications,
including hospitals, restaurants and residential care centers and seats for
school buses, trains and aircraft.

We currently conduct our operations in manufacturing facilities that are located in Stoughton, Wisconsin and Earby, England.





  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")).



On January 27, 2020, we announced a one-for-five reverse stock split ("reverse
stock split") on our common stock that became effective on February 24, 2020.
All share and per share amounts reflect the effect of the reverse stock split.
The amounts in common stock and additional paid-in capital were adjusted as of
the effective date of the reverse stock split.



We and our subsidiaries use a 52/53-week fiscal year ending on the Sunday
nearest to December 31. The year ended January 3, 2021 was a 53-week year
whereas the year ended December 29, 2019 was a 52-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
27% of our global revenues and 32% 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 0.7% higher and the average exchange rate for the Euro to the
Pound Sterling was approximately 1.2% higher in 2020 compared to 2019. These
exchange rate changes had the effect of increasing net sales by approximately
$410,000 for the year ended January 3, 2021. The overall currency effect on our
net loss allocable to common shareholders was a positive amount of approximately
$51,000 for the year ended January 3, 2021.



The U.K. exit from the European Union on January 31, 2020, commonly referred to
as Brexit, has caused, and may continue to cause, uncertainty in the global
markets. Political and regulatory responses to the withdrawal are still
developing, and we are in the process of assessing the impact that the
withdrawal may have on our business as more information becomes available. 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.



During the first quarter of 2020, the World Health Organization declared the
novel coronavirus ("COVID-19") outbreak a public health emergency.  There have
been mandates from international, federal, state and local authorities requiring
forced closures of various schools, businesses and other facilities and
organizations. These forced closures have negatively impacted our
business. Primarily due to the negative impact that COVID-19 is having on the
global economy, we began to experience a decline in sales during the latter part
of March 2020. In order to mitigate the effect of the decrease in revenue, we
are managing our costs, which included initially reducing staff at our U.S.
manufacturing facility and furloughing the entire production staff at the U.K.
facility beginning in late March. During June 2020, we had some employees return
to work as our U.K. facility started limited production of vinyl products based
on orders it was receiving from its customers. We brought back additional
production workers as incoming orders increased during the third quarter of
2020. All employees returned to work as demand for our products continued to
improve in the fourth quarter and into the first quarter of 2021 although it was
well below normalized levels.

As described below, we have applied for loans under programs offered by the governmental agencies in the United States and in the United Kingdom and have found other supplementary cash flow opportunities to provide further liquidity.





For the U.S. operations, during the second quarter of 2020 we received
$2,217,500 in funds from One Community Bank (formerly Oregon Community Bank)
through the Paycheck Protection Program ("PPP") administered by the U.S. Small
Business Administration ("SBA") under the Coronavirus Aid, Relief, and Economic
Security Act ("the CARES Act"). The loan matures on April 13, 2022 and bears an
interest rate of 1.0%. Monthly payments of principal and interest were required
to begin on November 13, 2020 based on the amount that was outstanding on
October 13, 2020 in order to fully amortize the loan by April 13, 2022. The loan
may be prepaid by us at any time prior to maturity with no prepayment penalties.
Loan payments have been deferred pending loan forgiveness from the SBA.



  13


   Table of Contents




All or a portion of the loan may be forgiven by the SBA for costs we incurred
for payroll, rent, utilities and all other allowable expenses during the 24-week
period that began April 13, 2020. We used all proceeds from the loan to maintain
payroll and make payments for lease, utility and other allowable expenses. As a
result, management believes that we have met the PPP eligibility criteria for
forgiveness and has concluded that the loan represents, in substance, a
government grant that is expected to be forgiven. As such, in accordance with
International Accounting Standards ("IAS") 20, "Accounting for Government Grants
and Disclosure of Government Assistance," we have recognized the entire loan
amount as grant income, which is included in net other income (expense) in the
consolidated statement of operations for the year ended January 3, 2021. We
submitted our application for loan forgiveness to One Community Bank in November
2020.



Also for the U.S. operations, in December 2020 we received $2,432,353 in funds
from Wells Fargo Capital Finance, LLC through the Main Street Lending Program
established by the Federal Reserve Board. The loan matures in November 2025 and
bears an interest rate of 3.00% above LIBOR. We are required to make monthly
interest payments beginning in December 2021 with any deferred interest from the
first year of the loan added to principal. In addition, we are required to make
annual principal payments in November 2023, 2024 and 2025 in increments of 15%,
15% and 70% of the principal, respectively. The loan may be prepaid by us at any
time prior to maturity with no prepayment penalties.

Additionally for the U.S. operations, during the first quarter of 2021 we received a $2.0 million Second Draw PPP loan. This loan has the same general terms as our first PPP loan.


For the U.K. operations, during the year ended January 3, 2021 we recorded
reimbursed costs of approximately $1,569,000 under the Coronavirus Job Retention
Scheme ("CJRS") set up by the U.K. government to help employers pay the wages of
those employees who would otherwise have been laid off during the coronavirus
outbreak but under the CJRS were furloughed instead. This program reimbursed us
for up to 80% of the compensation expense plus national insurance and certain
benefits paid to the furloughed employees, resulting in lower salary expense for
us. While the employees were on furlough, the compensation paid to them was
limited to the amount reimbursed by the CJRS. We recorded the reimbursed amounts
as reductions to the associated expenses.



Additionally for the U.K. operations, during the second half of 2020 we received
$1,225,911 in loans from our principal shareholder and $3,268,664 in loans from
automotive lenders. These funds provided additional working capital to meet
various short-term cash needs.



While the closures and limitations on movement, domestically and
internationally, are expected to be temporary due to the COVID-19 outbreak, the
duration of the supply chain disruption and related financial impact cannot be
estimated at this time. Should the closures continue for a more extended period
of time or should the effects of the coronavirus continue to spread, the impact
could have a material adverse effect on our financial position, results of
operations and cash flows which may require that we obtain additional financing.



  14


   Table of Contents

Year Ended January 3, 2021 Compared to the Year Ended December 29, 2019

The following table sets forth, for the year ended January 3, 2021 ("year ended 2020") and December 29, 2019 ("year ended 2019"), certain operational data including their respective percentage of net sales:





                                                                Year Ended

                                                                                                        %
                                   January 3, 2021          December 29, 2019         Change         Change

Net Sales                      $ 60,218,355     100.0%   $ 91,136,244     100.0%   $ (30,917,889 )    -33.9%
Cost of Goods Sold               52,437,754      87.1%     76,174,406      83.6%     (23,736,652 )    -31.2%
Gross Profit                      7,780,601      12.9%     14,961,838      16.4%      (7,181,237 )    -48.0%
Operating Expenses:
Selling                           3,040,685       5.0%      4,300,730       4.7%      (1,260,045 )    -29.3%

General and administrative        6,720,969      11.2%      6,047,734       6.6%         673,235       11.1%
Research and development            980,695       1.6%      1,634,385       1.8%        (653,690 )    -40.0%
Other operating expenses                  -       0.0%        343,003       0.4%        (343,003 )   -100.0%
Total Operating Expenses         10,742,349      17.8%     12,325,852      13.5%      (1,583,503 )    -12.8%
Operating (Loss) Income          (2,961,748 )    -4.9%      2,635,986       2.9%      (5,597,734 )    <-100%
Interest expense                 (1,581,907 )    -2.6%     (2,036,248 )    -2.2%         454,341      -22.3%
Funding from Paycheck
Protection Program                2,217,500       3.7%              -       0.0%       2,217,500           -
Other (expense) income             (173,214 )    -0.3%        258,486       0.3%        (431,700 )    <-100%
(Loss) Income before Tax
Provision                        (2,499,369 )    -4.2%        858,224       0.9%      (3,357,593 )    <-100%
Tax benefit                      (1,275,743 )    -2.1%       (103,199 )   -0. 1%      (1,172,544 )     >100%
Net (Loss) Income                (1,223,626 )    -2.0%        961,423      1. 1%      (2,185,049 )    <-100%
Preferred stock dividend         (3,209,841 )    -5.3%     (3,126,496 )    -3.4%         (83,345 )      2.7%
Net Loss Allocable to Common
Shareholders                   $ (4,433,467 )    -7.4%   $ (2,165,073 )    -2.4%   $  (2,268,394 )     >100%




Revenue

Total revenue for the year ended 2020 decreased $30,917,889 or 33.9% to $60,218,355 from $91,136,244 for the year ended 2019. There was a favorable currency effect of approximately $410,000 on total revenue.





For the year ended 2020 compared to the year ended 2019, U.S. automotive sales
decreased 45.7% and European automotive sales decreased 37.1% (excluding the
currency adjustment). This significant decrease was principally due to the
COVID-19 pandemic, where most of the Company's customers in this market and the
OEMs that use the Company's products in their automobiles, shut down production
lines or their entire production facilities at the end of the first quarter 2020
and continued into the second quarter 2020 as the pandemic continued. The
automotive market began to improve at the end of the second quarter as most of
the customers and OEMs were restarting their production facilities. Due to the
continuing improvement in the automotive market and the Company retaining all of
its programs, the Company's sales activity increased significantly in the third
quarter of 2020 as compared to the second quarter of 2020. The increase in sales
continued as revenues in the fourth quarter of 2020 were higher than in the
third quarter of 2020. However, they have not yet reached the run-rate of the
period prior to the onset of COVID-19.



Additionally, sales for the industrial sector decreased 23.9% (24.1% before the
currency effect) primarily due to a decline in the U.S. contract market. The
negative impact of COVID-19 on the global economy was a major factor in the
overall decline in sales, particularly to our customers in the hospitality and
healthcare sectors, which principally began during the latter part of March
2020.



Also impacting 2020 revenue to a lesser degree, the Company in August 2019,
decommissioned and shut down equipment in the U.K. that manufactured calender
product for both the automotive and industrial market. The Company had built
sufficient inventory of this product to service its customers for several months
after the shutdown. During the years ended 2020 and 2019, the Company sold
$1,665,811 and $4,858,032, respectively, of calender product primarily to the
automotive market.



  15


   Table of Contents




Gross Profit




Total gross profit for the year ended 2020 decreased $7,181,237 or 48.0% to
$7,780,601 from $14,961,838 for the year ended 2019. The gross profit percentage
was 12.9% of sales for the year ended 2020 compared to 16.4% for the year ended
2019. Gross profit amount and percentage were negatively impacted by the effect
of COVID-19. However, as with sales, gross profit increased significantly in the
third quarter of 2020 as compared to the second quarter of 2020 and continued to
increase in the fourth quarter of 2020 as compared to the third quarter of 2020.
The gross profit percentage also increased significantly in the third quarter of
2020 as compared to the second quarter of 2020 but declined in the fourth
quarter of 2020 as compared to the third quarter of 2020 primarily due to higher
costs related to production inefficiencies. During the year ended 2020,
manufacturing costs were reduced approximately $1,309,000 due to reimbursements
through the CJRS for the salaries of furloughed employees. In addition, there
was a favorable currency effect of approximately $103,000 on gross profit.




Operating Expenses



Selling expenses for the year ended 2020 decreased $1,260,045 or 29.3% to
$3,040,685 from $4,300,730 for the year ended 2019. Due to lower sales activity
primarily as a result of COVID-19, selling expenses such as commission, travel
and entertainment were reduced in 2020. In addition, the Company was reimbursed
approximately $99,000 through the CJRS for the wages of furloughed employees
resulting in lower salary expense. Also contributing to the lower selling
expenses in 2020 was the 2019 closure of the calender product line and the
elimination of its applicable employment and commission costs. There was a
$19,000 unfavorable currency effect that partially offset the decrease in
selling expenses.



General and administrative expenses for the year ended 2020 increased $673,235
or 11.1% to $6,720,969 from $6,047,734 for the year ended 2019. This increase
was primarily due to costs for cash management consulting services provided to
the Company and a charge relating to a legal proceeding in the U.K., as
previously discussed in Item 3. Partially offsetting the increase were wages of
approximately $35,000 that were reimbursed through the CJRS. Included in the
increase in general and administrative expenses was an unfavorable currency
effect of $10,000.



Research and development expenses for the year ended 2020 decreased $653,690 or
40.0% to $980,695 from $1,634,385 for the year ended 2019. The decrease was
principally due to a decline in activities attributable to the COVID-19 pandemic
including lower development costs for new trials and wages of approximately
$126,000 that were reimbursed through the CJRS. There was a $3,000 unfavorable
currency effect that partially offset the decrease in research and development
expenses.




There were no other operating expenses for the year ended 2020 and $343,003 for
the year ended 2019. The amount for 2019 was cost incurred by the Company as
part of a restructuring plan to reduce inefficiencies at its U.K. facility.




Operating Income (Loss)




Operating loss for the year ended 2020 was $2,961,748 compared to operating
income of $2,635,986 for the year ended 2019, a decrease of $5,597,734. The
decrease was due to the decline in gross profit partially offset by the decrease
in operating expenses, which included the $343,003 non-recurring restructuring
charge in 2019. The operating loss percentage was -4.9% of sales for the year
ended 2020 compared to the operating income percentage of 2.9% for the year

ended 2019.



Interest Expense

Interest expense for the year ended 2020 decreased $454,341 or 22.3% to $1,581,907 from $2,036,248 for the year ended 2019. The decrease was primarily due to lower interest rates on LIBOR and prime during the year ended 2020 compared to the year ended 2019.

Funding from Paycheck Protection Program:

For the year ended 2020, the $2,217,500 funding from the PPP is the amount of debt forgiveness that the Company expects to receive from the SBA under the CARES Act for eligible costs incurred by the Company, as previously discussed.





Other Income (Expense)



Other expense for the year ended 2020 was $173,214 compared to other income of
$258,486 for the year ended 2019. 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. Also
included in other income (expense) are gains and losses from the change in fair
values on the Company's foreign currency exchange contracts.



  16


   Table of Contents




Tax Benefit



For the year ended 2020, the tax benefit was $1,275,743 compared to $103,199 for
the year ended 2019. The tax benefit for 2020 was principally attributable to
the results of the U.S. operations, while the tax benefit for 2019 was
principally attributable to the results of the U.K. operations partially offset
by a tax provision for the U.S. operations.



Based on management's review at January 3, 2021 and December 29, 2019, it was
determined that a valuation allowance for the Company's deferred tax assets was
not required since it was more likely than not that the deferred tax assets

would be realized.



Preferred Stock Dividend




The terms of the acquisitions in November 2014 resulted in the issuance of
preferred ownership units/stock of UEPH and UGEL to the sellers. These preferred
units 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 UEP Holdings
preferred units which started at 5.5% increases by 0.5% on the anniversary of
the issuance up to a maximum of 8.0%. The payment of dividends for the year
ended January 3, 2021 and the three months ended December 29, 2019 was deferred
to preserve cash and provide additional liquidity. As of January 3, 2021 and
December 29, 2019, accrued dividends of $4,019,905 and $788,599, respectively,
were included in accrued expenses and other liabilities in the accompanying
consolidated balance sheets.

Liquidity and Sources of Capital


Cash, as it is needed, is provided by using the Company's lines of credit. These
lines provide for a total borrowing commitment in excess of $44,000,000 subject
to the underlying borrowing base specified in the agreements.  Of the total
outstanding borrowings of $17,760,583 at January 3, 2021, $14.6 million of the
lines bears interest at LIBOR or the Eurodollar rate plus a range of 1.95% to
2.45%, depending on the underlying borrowing base, or, at our option, at the
bank's prime or base lending rate and $3.2 million bears interest at the bank's
prime or base lending rate which was 3.25% at January 3, 2021. The lines
provided additional availability of approximately $4.1 million and, combined
with UEP's and UGL's total cash balances, liquidity was approximately $5.7
million at January 3, 2021. We plan to use this availability and cash provided
by operating activities to finance our cash needs for fiscal 2021. The balances
due under the lines of credit are recorded as current liabilities on the
consolidated balance sheets.



As a result of the COVID-19 pandemic, sales of the Company's products are lower
than expected. This has had a negative impact on the Company's working capital
which could affect its ability to borrow using the Company's lines of credit. To
increase its liquidity, as previously discussed, the Company has applied for
loans under programs offered by the governmental agencies in the United States
and in the United Kingdom.



For the U.S. operations, early in the second quarter of 2020 the Company
received $2,217,500 in funds through the Paycheck Protection Program
administered by the United States Small Business Administration. The Company
believes that all of this debt will be forgiven; it submitted its application
for loan forgiveness in November 2020. Also for the U.S. operations, in December
2020 the Company received $2,432,353 in funds from Wells Fargo Capital Finance,
LLC through the Main Street Lending Program established by the Federal Reserve
Board. Additionally for the U.S. operations, during the first quarter of 2021
the Company received a $2.0 million Second Draw PPP loan.



In the U.K., during the year ended 2020 the Company recorded £1,253,000
($1,569,000) in funding available under the Coronavirus Job Retention Scheme
which reimbursed the Company for the compensation expense paid to furloughed
employees. Additionally for the U.K. operations, during the second half of 2020
the Company received $1,225,911 in loans from its principal shareholder and
$3,268,664 in loans from automotive lenders. These funds provided more working
capital to meet various short-term cash needs.



The Company continues to attempt to manage its operating costs to match the
reduced sales volume. We believe that the increasing sales activities combined
with the funding from nontraditional sources (U.S. and U.K. governments and
automotive lenders) will be sufficient to provide for short-term cash needs.
However, there can be no assurance that additional financing will be available
on favorable terms, if at all.



The ratio of current assets to current liabilities, including the amount due
under our lines of credit, was 0.89 at both January 3, 2021 and December 29,
2019.



Cash balances increased $1,057,201, before the effects of currency translation
of $86,093, to $1,656,882 at January 3, 2021 from $513,588 at December 29,
2019.  Of the above noted amounts, $1,621,692 and $498,007 were held outside the
U.S. by our foreign subsidiaries as of January 3, 2021 and December 29, 2019,
respectively.



  17


   Table of Contents





Cash used in operations was $992,158 for the year ended 2020 as compared to cash
provided by operations of $4,659,527 for the year ended 2019. 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 2019, cash provided by operations was primarily due to adjustments for
non-cash items of $2,444,326, changes in working capital of $1,355,358, and net
income of $961,423, offset by changes in other assets and liabilities of
$(101,580).



Cash used in investing activities was $1,417,623 for the year ended 2020 as
compared to $1,894,296 for the year ended 2019. During 2020 and 2019, 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 2020 and 2019, the payments made for the
life insurance premiums were net of proceeds from policy loans of $130,000

and
$249,051, respectively.



For the year ended 2020, cash provided by financing activities was $3,466,982
compared to cash used in financing activities of $3,298,592 for the year ended
2019. Impacting cash flows from financing activities were proceeds from issuance
of long-term debt of $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 and $604,935 for the year ended 2019. In addition, there were no
preferred dividend payments during the year ended 2020 compared to $3,114,592
during the year ended 2019. As previously stated, the payment of dividends for
the year ended January 3, 2021 and the three months ended December 29, 2019 was
deferred to preserve cash and provide additional liquidity. Also impacting cash
flows from financing activities for the year ended 2020 and 2019 were net
payments on lines of credit of $3,074,286 and net advances on lines of credit of
$891,022, respectively. The changes in the lines of credit reflect the funding
of working capital. Additionally during the years ended 2020 and 2019, our
majority shareholder provided $1,425,911 (net of translation adjustment of
$72,544) and $1,350,000, respectively, in financing in the form of subordinated
secured promissory notes. Payments on these notes were $875,000 and $675,000
during 2020 and 2019, respectively.



Our credit agreements contain customary affirmative and negative covenants. We
were in compliance with our debt covenants as of January 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.





  18


   Table of Contents

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.

Finite-Lived Long-Lived Assets





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.

Goodwill and Intangible Indefinite-Lived Assets

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 the events caused by the COVID-19 pandemic should be considered a triggering event, we used a qualitative assessment methodology and determined that it was not more likely than not that the fair value of our assets was less than the carrying amount and, therefore, concluded that no impairment charge was necessary as of January 3, 2021.





  19


   Table of Contents




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 $15.7 million as of January 3, 2021, of which $11.7 million expire
in years beginning 2022 through 2034 and $4.0 million may be carried forward
indefinitely. We have state net operating loss carryforwards of approximately
$14.1 million as of January 3, 2021, which also expire beginning 2022 through
2034. Additionally, we have foreign net operating loss carryforwards of
approximately $2.8 million as of January 3, 2021, which have no expiration date.
As a result of the federal and state loss carryforwards, we have deferred tax
assets of $4,900,595 net of a valuation allowance of $828,411 as of January

3,
2021.



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 state net operating
loss carryforward and has established a valuation allowance against a portion of
the state net operating loss carryforward.



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
investment. 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 consist of 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

Postretirement and Postemployment Benefit Liabilities





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 on accounting standards that we adopted during 2020 and on those recently issued but not yet required to be adopted.

© Edgar Online, source Glimpses