Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 2021
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission file number: 000-50081

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

(Name of registrant as specified in its charter)

Nevada		65-1005398
(State or Other Jurisdiction of Organization)		(IRS Employer Identification Number)

1800 2nd Street, Suite 970

Sarasota, FL 34236

(Address of principal executive offices)

(941) 906-8580

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer þ	Smaller reporting company þ
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Securities registered under Section 12(b) of the Act: None.

As of May 3, 2021, the issuer had 3,412,186 shares of ordinary Common Stock, $0.001 par value, and 323,820 shares of Class B Common Stock, $0.001 par value, outstanding.

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

Form 10-Q

Table of Contents

		Page

Cautionary Note Regarding Forward-Looking Statements		3

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	5
	Consolidated Statements of Comprehensive Income (Loss)	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Mine Safety Disclosures	26

Item 5.	Other Information	26

Item 6.	Exhibits	26

Signatures		27

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Except for statements of historical fact, certain information contained herein constitutes forward-looking statements including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” and words of similar import, as well as all references to future results. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of Uniroyal Global Engineered Products, Inc. to be materially different from any future results or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: risks involved in implementing our business strategy, our ability to obtain financing on acceptable terms, competition, our ability to manage growth, pricing and availability of equipment, materials and inventories, performance issues with suppliers, economic growth, the Company’s ability to successfully integrate acquired operations, currency fluctuations, risks of technological change, the effectiveness of cost-reduction plans, our dependence on key personnel, our ability to protect our intellectual property rights, risks of new technology and new products, and government regulation. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update any such forward-looking statements to reflect events, developments or circumstances after the date hereof.

Table of Contents

Part 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements

Uniroyal Global Engineered Products, Inc.

Consolidated Balance Sheets

	(Unaudited)

ASSETS	April 4, 2021			January 3, 2021
CURRENT ASSETS
Cash and cash equivalents	$	1,820,504		$	1,656,882
Accounts receivable, net		13,232,799			10,114,819
Inventories, net		18,806,113			17,952,850
Other current assets		2,032,971			1,841,153
Related party receivable		30,273			907
Total Current Assets		35,922,660			31,566,611

PROPERTY AND EQUIPMENT, NET		18,149,788			18,491,122
OPERATING LEASE RIGHT-OF-USE ASSETS, NET		6,144,689			6,242,736

OTHER ASSETS
Intangible assets		3,402,599			3,388,357
Goodwill		1,079,175			1,079,175
Other long-term assets		4,801,496			4,679,990
Total Other Assets		9,283,270			9,147,522
TOTAL ASSETS	$	69,500,407		$	65,447,991

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of bank balance	$	108,676		$	275,297
Lines of credit		18,629,921			17,760,583
Current maturities of long-term debt		1,774,366			1,432,301
Current maturities of finance lease liabilities		243,327			257,298
Accounts payable		8,428,939			7,344,785
Accrued expenses and other liabilities		9,113,066			7,987,333
Current maturities of related party finance lease liabilities		153,658			149,366
Current portion of postretirement benefit liability - health and life		162,977			162,977
Total Current Liabilities		38,614,930			35,369,940

LONG-TERM LIABILITIES
Long-term debt, less current portion		7,916,753			7,338,762
Finance lease liabilities, less current portion		176,339			235,116
Operating lease liabilities, less current portion		5,829,177			5,893,268
Related party finance lease liabilities, less current portion		2,465,810			2,504,404
Long-term debt to related parties		4,216,566			4,216,566
Postretirement benefit liability - health and life, less current portion		2,701,077			2,713,585
Other long-term liabilities		934,834			807,190
Total Long-Term Liabilities		24,240,556			23,708,891
Total Liabilities		62,855,486			59,078,831

STOCKHOLDERS' EQUITY
Preferred units, Series A UEP Holdings, LLC, 200,000 units issued and outstanding ($100 issue price)		617,571			617,571
Preferred units, Series B UEP Holdings, LLC, 150,000 units issued and outstanding ($100 issue price)		463,179			463,179
Preferred stock, Uniroyal Global (Europe) Limited, 50 shares issued and outstanding ($1.51 stated value)		75			75
Common stock, 95,000,000 shares authorized ($.001 par value) 3,736,006 shares issued and outstanding as of April 4, 2021 and January 3, 2021		3,736			3,736
Additional paid-in capital		35,290,590			35,290,590
Accumulated deficit		(28,515,083	)		(28,734,670	)
Accumulated other comprehensive loss		(1,215,147	)		(1,271,321	)
Total Stockholders' Equity		6,644,921			6,369,160
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	69,500,407		$	65,447,991

See accompanying notes to the consolidated financial statements.

Table of Contents

Uniroyal Global Engineered Products, Inc.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended

	April 4, 2021			April 5, 2020

NET SALES	$	21,896,001		$	21,140,124

COST OF GOODS SOLD		18,658,664			17,309,542

Gross Profit		3,237,337			3,830,582

OPERATING EXPENSES:
Selling		898,712			992,447
General and administrative		1,579,027			1,603,717
Research and development		327,458			348,402
OPERATING EXPENSES		2,805,197			2,944,566

Operating Income		432,140			886,016

OTHER INCOME (EXPENSE):
Interest expense		(403,746	)		(467,483	)
Funding from Paycheck Protection Program		838,864			-
Other income (expense)		206,304			(190,889	)
Net Other Income (Expense)		641,422			(658,372	)

INCOME BEFORE TAX PROVISION		1,073,562			227,644

TAX PROVISION (BENEFIT)		37,561			(52,630	)

NET INCOME		1,036,001			280,274

Preferred stock dividend		(816,414	)		(792,835	)

NET INCOME (LOSS) ALLOCABLE TO COMMON SHAREHOLDERS	$	219,587		$	(512,561	)

INCOME (LOSS) PER COMMON SHARE:
Basic and Diluted	$	0.06		$	(0.14	)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted		3,736,006			3,736,006

See accompanying notes to the consolidated financial statements.

Table of Contents

Uniroyal Global Engineered Products, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended

	April 4, 2021			April 5, 2020

NET INCOME	$	1,036,001		$	280,274

OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment		56,174			(438,577	)
OTHER COMPREHENSIVE INCOME (LOSS)		56,174			(438,577	)

COMPREHENSIVE INCOME (LOSS)		1,092,175			(158,303	)

Preferred stock dividend		(816,414	)		(792,835	)

COMPREHENSIVE INCOME (LOSS) TO COMMON SHAREHOLDERS	$	275,761		$	(951,138	)

See accompanying notes to the consolidated financial statements.

Table of Contents

Uniroyal Global Engineered Products, Inc.

Consolidated Statements of Changes in Stockholders' Equity

(Unaudited)

	UEPH Series A				UEPH Series B				UGEL Preferred				Common Stock					Additional Paid In		Accumulated			Accumulated Other Comprehensive			Total Stockholders'
	Units		Amount		Units		Amount		Shares		Amount		Shares		Amount			Capital		Deficit			Loss			Equity
For the Three Months Ended
April 5, 2020
Balance December 29, 2019		200,000	$	617,571		150,000	$	463,179		50	$	75		3,736,006	$	18,680		$	35,275,646	$	(24,301,203	)	$	(1,297,439	)	$	10,776,509
Net income		-		-		-		-		-		-		-		-			-		280,274			-			280,274
Other comprehensive loss		-		-		-		-		-		-		-		-			-		-			(438,577	)		(438,577	)
Preferred stock dividend		-		-		-		-		-		-		-		-			-		(792,835	)		-			(792,835	)
Adjustment for a 1-for-5 reverse stock split		-		-		-		-		-		-		-		(14,944	)		14,944		-			-			-
Balance April 5, 2020		200,000	$	617,571		150,000	$	463,179		50	$	75		3,736,006	$	3,736		$	35,290,590	$	(24,813,764	)	$	(1,736,016	)	$	9,825,371


For the Three Months Ended
April 4, 2021
Balance January 3, 2021		200,000	$	617,571		150,000	$	463,179		50	$	75		3,736,006	$	3,736		$	35,290,590	$	(28,734,670	)	$	(1,271,321	)	$	6,369,160
Net income		-		-		-		-		-		-		-		-			-		1,036,001			-			1,036,001
Other comprehensive income		-		-		-		-		-		-		-		-			-		-			56,174			56,174
Preferred stock dividend		-		-		-		-		-		-		-		-			-		(816,414	)		-			(816,414	)
Balance April 4, 2021		200,000	$	617,571		150,000	$	463,179		50	$	75		3,736,006	$	3,736		$	35,290,590	$	(28,515,083	)	$	(1,215,147	)	$	6,644,921

See accompanying notes to the consolidated financial statements.

Table of Contents

Uniroyal Global Engineered Products, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES	April 4, 2021			April 5, 2020

Net income	$	1,036,001		$	280,274
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		619,375			594,416
Amortization of intangible assets		6,633			3,750
Loss on disposal of property and equipment		23,083			1,588
Funding from Paycheck Protection Program recognized as income		(838,864	)		-
Deferred interest on loan from Main Street Lending Program		24,242			-
Noncash lease adjustment		24,060			22,319
Changes in assets and liabilities:
Accounts receivable		(3,048,143	)		(232,480	)
Inventories		(784,585	)		(1,365,004	)
Other current assets		(176,348	)		242,258
Related party receivable		(29,366	)		(4,224	)
Other long-term assets		(70,991	)		(4,510	)
Accounts payable		1,032,380			2,191,699
Accrued expenses and other liabilities		280,844			490,565
Postretirement benefit liability - health and life		(12,508	)		(5,724	)
Other long-term liabilities		119,553			(50,195	)
Cash (used in) provided by operating activities		(1,794,634	)		2,164,732

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(202,778	)		(458,353	)
Payments on life insurance policies		(49,901	)		(25,761	)
Cash used in investing activities		(252,679	)		(484,114	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in checks issued in excess of bank balance		(166,621	)		(332,141	)
Net advances (payments) on lines of credit		782,781			(139,799	)
Payments on long-term debt		(314,631	)		(335,116	)
Proceeds from issuance of long-term debt - Paycheck Protection Program		2,000,000			-
Payments on finance lease liabilities		(72,812	)		(149,417	)
Proceeds from related party obligations		-			200,000
Payments on related party obligations		(34,302	)		(555,626	)
Cash provided by (used in) financing activities		2,194,415			(1,312,099	)
Net change in cash and cash equivalents		147,102			368,519
Cash and cash equivalents - beginning of period		1,656,882			513,588
Effects of currency translation on cash and cash equivalents		16,520			(40,824	)

CASH AND CASH EQUIVALENTS - END OF PERIOD	$	1,820,504		$	841,283

See Note 2 for noncash transactions and supplemental disclosure of cash flow information.

See accompanying notes to the consolidated financial statements.

Table of Contents

UNIROYAL GLOBAL ENGINEERED PRODUCTS, INC.

Notes to Consolidated Financial Statements

April 4, 2021

(Unaudited)

Basis of Presentation and Summary of Significant Accounting Policies

Uniroyal Global Engineered Products, Inc. (the “Company,” “Uniroyal Global,” “we,” or “us”) owns all of the ownership interests in Uniroyal Engineered Products, LLC (“Uniroyal”), a U.S. manufacturer of textured coatings, and its holding company, UEP Holdings, LLC (“UEPH”), and 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 (“UGL”) formerly Wardle Storeys (Earby) Limited (“Wardle Storeys”), a European manufacturer of textured coatings.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared based upon U.S. Securities and Exchange Commission rules that permit reduced disclosure for interim periods. Therefore, they do not include all information and footnote disclosures necessary for a complete presentation of the Company’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. Uniroyal Global filed audited consolidated financial statements as of and for the fiscal years ended January 3, 2021 and December 29, 2019 which included all information and notes necessary for such complete presentation in conjunction with its 2020 Annual Report on Form 10-K.

The results of operations for the interim period ended April 4, 2021 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended January 3, 2021, which are contained in the Company’s 2020 Annual Report on Form 10-K.

The Company and its subsidiaries use a 52/53-week fiscal year ending on the Sunday nearest to December 31. The current year ending January 2, 2022 is a 52-week year whereas the prior year ended January 3, 2021 was a 53-week year. The Company’s 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 the Company’s year-end is not material. The three months ended April 4, 2021 was a 13-week period and the three months ended April 5, 2020 was a 14-week period.

The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of April 4, 2021 and the results of operations, comprehensive income (loss) and cash flows for the interim periods ended April 4, 2021 and April 5, 2020.

The unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company uses the U.S. dollar as the reporting currency for financial reporting. The financial position and results of operations of the Company’s U.K.-based operations are measured using the British Pound Sterling as the functional currency. See Note 4 – “Foreign Currency Translation” for additional discussion.

For purposes of comparability, certain reclassifications have been made to amounts previously reported to conform with the current period presentation.

Significant Accounting Policies

For a discussion of Uniroyal Global’s significant accounting policies, refer to Note 1 – “Basis of Presentation and Summary of Significant Accounting Policies” to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2021.

Table of Contents

Coronavirus (“COVID-19”)

Demand for Uniroyal Global’s products continues to improve since the initial impact of COVID-19 on the global economy, which began for the Company in the latter part of March 2020, and as businesses move closer to resuming normal activities. However, COVID-19 is a continually evolving situation and the Company cannot predict the long-term impact the coronavirus will have on the economy or the Company’s business. The impact could have a material adverse effect on the Company’s financial position, results of operations and cash flows, which may require the Company to obtain additional financing. The Company continues to pursue supplementary cash flow opportunities to provide further liquidity, as described below.

In March 2021, the Company’s U.S. operations received $2.0 million in funds from One Community Bank through the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”) under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”). The loan matures in March 2026 and bears an interest rate of 1.0%. The loan may be prepaid at any time prior to maturity with no prepayment penalties.

All or a portion of the loan may be forgiven by the SBA for costs the Company incurs for payroll, rent, utilities and all other allowable expenses during the 24-week period that began March 1, 2021. The Company intends to use all proceeds from the loan to maintain payroll and make payments for lease, utility and other allowable expenses. As a result, management believes that the Company will meet 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,” the Company recognized $838,864 as grant income, which is included as a component of net other income (expense) in the consolidated statement of operations for the three months ended April 4, 2021. As of April 4, 2021, the remaining balance of the loan ($1,161,136), which was included in long-term debt, less current portion in the accompanying consolidated balance sheet, is expected to be recognized as forgiven debt during the second quarter of 2021.

Additionally, quarterly dividend payments have been deferred each quarter beginning with the dividends that were accrued for the three months ended December 29, 2019 through the dividends that were accrued for the three months ended April 4, 2021. As of April 4, 2021 and January 3, 2021, accrued dividends of $4,775,094 and $4,019,905, respectively, were included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

Legal Proceedings

On October 1, 2020, the Health and Safety Executive (“HSE”), the government agency responsible for the enforcement of health and safety law in the U.K., charged our U.K. subsidiary, Uniroyal Global Limited, with an offense under the Health and Safety at Work etc. Act 1974 arising from an August 2019 incident in which an employee was injured in the course of his employment.

The Company fully cooperated with the HSE investigation and negotiated a plea based on legal advice provided to it. Based on this legal advice, the Company believed that £150,000 ($193,000) was a reasonable estimate of the fine to be imposed and, accordingly, recorded an accrual for this charge in 2020, which was included in accrued expenses and other liabilities in the accompanying consolidated balance sheets as of April 4, 2021 and January 3, 2021.

In April 2021, a fine of £120,000 ($165,500) was imposed on the Company related to this matter. The Company has until October 2022 to pay the fine in full. In addition, a fee of £5,463 ($7,533) to reimburse the HSE for legal expenses was paid in May 2021.

Table of Contents

Noncash Transactions and Supplemental Disclosure of Cash Flow Information

The following is supplemental disclosure of cash paid for the three months ended:

	April 4, 2021		April 5, 2020

Interest	$	397,515	$	530,762

Fair Value of Financial Instruments

The Company’s short-term financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and lines of credit. The Company adjusts 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. The Company believes that the carrying values of these short-term financial instruments approximate their estimated fair values.

The fair value of the Company’s 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, the Company takes into account its risk of nonperformance. The Company believes that the carrying value of its long-term debt approximates its estimated fair value.

The Company uses foreign currency exchange contracts which are recorded at their estimated fair values in the accompanying consolidated balance sheets. The fair values of the currency exchange contracts are based upon observable market transactions of spot and forward rates.

For the three months ended April 4, 2021, there have been no changes in the application of valuation methods applied to similar assets and liabilities.

Foreign Currency Translation

The financial position and results of operations of the Company’s 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 reporting period. 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 the Company’s foreign operations are included in other income (expense) in the accompanying consolidated statements of operations.

Table of Contents

Inventories

Inventories consist of the following:

	April 4, 2021			January 3, 2021

Raw materials	$	6,382,342		$	5,193,919
Work-in-process		4,794,986			4,281,035
Finished goods		9,866,950			10,594,088
		21,044,278			20,069,042
Less: Allowance for inventory obsolescence		(2,238,165	)		(2,116,192	)

Total Inventories, net	$	18,806,113		$	17,952,850

Other Long-term Assets

Other long-term assets consist of the following:

	April 4, 2021		January 3, 2021

Deferred tax asset, net	$	4,154,675	$	4,072,184
Other		646,821		607,806

Total Other Long-term Assets	$	4,801,496	$	4,679,990

Other Long-term Liabilities

Other long-term liabilities consist of the following:

	April 4, 2021		January 3, 2021

Deferred tax liability	$	928,780	$	801,136
Other		6,054		6,054

Total Other Long-term Liabilities	$	934,834	$	807,190

Lines of Credit

The Company’s Uniroyal subsidiary has available a $30,000,000 revolving line of credit financing agreement with Wells Fargo Capital Finance, LLC (“Uniroyal Line of Credit”), which matures on June 15, 2023. Interest is payable monthly at the Eurodollar rate plus 2.25% or Wells Fargo Capital Finance, LLC's prime rate at the Company's election on outstanding balances up to $6,000,000 and prime rate on amounts in excess of $6,000,000. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable, inventories and equipment. The line of credit is secured by substantially all of Uniroyal's assets and includes certain financial and restrictive covenants. The Company was in compliance with these covenants as of April 4, 2021.

The outstanding balance on the Uniroyal Line of Credit was $10,349,999 and $9,204,572 as of April 4, 2021 and January 3, 2021, respectively. The Company has classified the outstanding balance on this line of credit within current liabilities in the accompanying consolidated balance sheets. Based upon eligible accounts receivable, inventories and equipment at April 4, 2021, the Uniroyal Line of Credit provided additional availability of approximately $1.1 million and, combined with its total cash balance of $1,512,208, Uniroyal had liquidity of approximately $2.6 million as of April 4, 2021.

Table of Contents

The Company’s UGL subsidiary has available a £10,500,000 (approximately $14.5 million) revolving line of credit financing agreement with Lloyds Bank Commercial Finance Limited (“UGL Line of Credit”), which is subject to a six-month notice by either party. The line has several tranches based on currency or underlying security. Interest is payable monthly at the base rate (U.K. LIBOR or Lloyds Bank Base Rate as published) plus 1.95% to 2.45% depending on the tranche. Borrowings on the line of credit are subject to the underlying borrowing base specified in the agreement. The underlying borrowing base is currently determined based upon eligible accounts receivable and inventories. The line of credit is secured by substantially all of the subsidiary's assets and includes certain financial and restrictive covenants. The Company was in compliance with these covenants as of April 4, 2021.

The outstanding balance on the UGL Line of Credit was £6,005,518 and £6,268,526 ($8,279,922 and $8,556,011) as of April 4, 2021 and January 3, 2021, respectively. The Company has classified the outstanding balance on this line of credit within current liabilities in the accompanying consolidated balance sheets. Based upon eligible accounts receivable and inventories at April 4, 2021, the UGL Line of Credit provided additional availability of approximately $1.4 million and, combined with its total cash balance of $285,505, UGL had liquidity of approximately $1.7 million as of April 4, 2021.

Long-term Debt

Long-term debt consists of the following:

	Interest Rate	April 4, 2021			January 3, 2021

Notes Payable
Wells Fargo Capital Finance, LLC	Prime	$	680,769		$	785,501
Lloyds Bank Commercial Finance Limited	4.43%		43,447			51,905
Lloyds Bank Commercial Finance Limited	4.87%		134,477			156,422
Automotive lenders	0.0%		3,301,719			3,268,664
Wells Fargo Capital Finance, LLC	LIBOR+3.00%		2,456,595			2,432,353
One Community Bank	1.00%		1,161,136			-
			7,778,143			6,694,845
Equipment Financing Obligations
Kennet Equipment Leasing Limited	10.90%		5,751			23,960
Regents Capital Corporation	6.20%-7.24%		595,829			678,329
Lloyds Bank Commercial Finance Limited	3.95%		1,311,396			1,373,929
			1,912,976			2,076,218
Total			9,691,119			8,771,063
Less: Current portion			(1,774,366	)		(1,432,301	)
Long-term Portion		$	7,916,753		$	7,338,762

During the first quarter of 2021, the Company received $2.0 million in loans from One Community Bank through the Paycheck Protection Program. See Note 1 for additional discussion.

Table of Contents

10.

Related Party Obligations

Long-term debt to related parties consists of the following:

	Interest Rate	April 4, 2021		January 3, 2021

Senior subordinated promissory note	9.25%	$	2,000,000	$	2,000,000
Senior secured promissory note	10.00%		765,655		765,655
Subordinated secured promissory note	8.00%		225,000		225,000
Subordinated secured promissory note	0.00%		1,225,911		1,225,911
Long-term debt to related parties		$	4,216,566	$	4,216,566

The above notes were issued to the Company’s majority shareholder.

The first three notes above were amended on March 26, 2021 to change the maturity date to January 15, 2023. No other terms of the notes were changed.

The Company has finance leases under which it leases its main U.S. manufacturing facility and certain other property from a related party lessor entity that is owned by the Company’s majority shareholder. These related party finance leases expire at various dates from October 2023 through October 2033. The Company has security deposits aggregating $267,500 held by the lessor entity. There were no new right-of-use assets obtained in exchange for related party finance lease obligations for the three months ended April 4, 2021 and April 5, 2020.

The components of lease expense for the related party finance leases for the three months ended April 4, 2021 and April 5, 2020 are as follows:

	Three Months Ended
	April 4, 2021		April 5, 2020
Finance lease expense:
Amortization of right-of-use assets	$	41,794	$	41,794
Interest on lease liabilities		103,299		105,972
Total finance lease expense	$	145,093	$	147,766

Cash paid for amounts included in the measurement of related party finance lease liabilities for the three months ended April 4, 2021 and April 5, 2020 are as follows:

	Three Months Ended
	April 4, 2021		April 5, 2020
Operating cash flows from finance leases	$	103,299	$	105,972
Financing cash flows from finance leases	$	34,302	$	30,626

Supplemental balance sheet and other information regarding related party finance leases are as follows:

	April 4, 2021		January 3, 2021
Finance leases:
Property and equipment, net	$	1,998,887	$	2,040,681
Current maturities of finance lease liabilities	$	153,658	$	149,366
Finance lease liabilities, less current portion		2,465,810		2,504,404
Total finance lease liabilities	$	2,619,468	$	2,653,770
Weighted average remaining lease term		11.0 years		11.2 years
Weighted average discount rate		16.81%		16.77%

Table of Contents

Maturities of related party finance lease liabilities as of April 4, 2021 are as follows:

	Totals
Due in one year or less	$	559,885
Due after one year through two years		555,816
Due after two years through three years		523,777
Due after three years through four years		469,141
Due after four years through five years		473,329
Thereafter		3,472,475
Total lease payments		6,054,423
Less: Interest		(3,434,955	)
Total related party finance lease liabilities	$	2,619,468

11.

Leases

The Company has operating leases for equipment and office facilities and finance leases for equipment. These leases expire at various dates from April 2021 through March 2039. Operating leases are included in operating lease right-of-use assets, accrued expenses and other liabilities, and operating lease liabilities in the accompanying consolidated balance sheets. Finance leases are included in property and equipment, current maturities of finance lease liabilities, and finance lease liabilities, less current portion in the accompanying consolidated balance sheets. There were no new right-of-use assets obtained in exchange for lease obligations for the three months ended April 4, 2021 and April 5, 2020.

The components of lease expense for the three months ended April 4, 2021 and April 5, 2020 are as follows:

	Three Months Ended
	April 4, 2021		April 5, 2020

Operating lease expense	$	253,945	$	250,921

Finance lease expense:
Amortization of right-of-use assets	$	24,982	$	55,395
Interest on lease liabilities		5,267		9,404
Total finance lease expense	$	30,249	$	64,799

Cash paid for amounts included in the measurement of lease liabilities for the three months ended April 4, 2021 and April 5, 2020 are as follows:

	Three Months Ended
	April 4, 2021		April 5, 2020

Operating cash flows from operating leases	$	292,219	$	239,232
Operating cash flows from finance leases	$	5,267	$	9,404
Financing cash flows from finance leases	$	72,812	$	149,417

Supplemental balance sheet and other information related to operating leases are as follows:

	April 4, 2021		January 3, 2021
Operating leases:
Operating lease right-of-use assets, net	$	6,144,689	$	6,242,736
Accrued expenses and other liabilities	$	431,405	$	440,386
Operating lease liabilities, less current portion		5,829,177		5,893,268
Total operating lease liabilities	$	6,260,582	$	6,333,654
Weighted average remaining lease term		15.7 years		15.7 years
Weighted average discount rate		7.29%		7.26%

Table of Contents

Supplemental balance sheet and other information related to finance leases are as follows:

	April 4, 2021			January 3, 2021
Finance leases:
Property and equipment, net	$	1,054,291		$	1,084,394
Current maturities of finance lease liabilities	$	243,327		$	257,298
Finance lease liabilities, less current portion		176,339			235,116
Total finance lease liabilities	$	419,666		$	492,414
Weighted average remaining lease term		1.7 years			1.8 years
Weighted average discount rate		4.44	%		4.56	%

Maturities of operating and finance lease liabilities as of April 4, 2021 are as follows:

	Operating Leases			Finance Leases
Due in one year or less	$	872,533		$	256,870
Due after one year through two years		835,141			167,532
Due after two years through three years		615,644			12,504
Due after three years through four years		537,491			261
Due after four years through five years		537,491			-
Thereafter		7,760,302			-
Total lease payments		11,158,602			437,167
Less: Interest		(4,898,020	)		(17,501	)
Total	$	6,260,582		$	419,666

12.

Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss were as follows:

	Minimum Benefit Liability Adjustments			Foreign Currency Translation Adjustment			Total

Balance at December 29, 2019	$	5,694		$	(1,303,133	)	$	(1,297,439	)

Other comprehensive loss		-			(438,577	)		(438,577	)

Balance at April 5, 2020	$	5,694		$	(1,741,710	)	$	(1,736,016	)

Balance at January 3, 2021	$	(154,662	)	$	(1,116,659	)	$	(1,271,321	)

Other comprehensive income		-			56,174			56,174

Balance at April 4, 2021	$	(154,662	)	$	(1,060,485	)	$	(1,215,147	)

Table of Contents

13.

Recent Accounting Standards

On December 18, 2019, the Financial Accounting Standards Board issued a new standard, ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This new guidance simplifies the accounting for income taxes by removing certain exceptions such as the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income/gain from other items; and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The new guidance also simplifies the accounting for income taxes under certain circumstances such as requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of a business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted this standard for fiscal year 2021 and management has determined that the adoption of this standard for fiscal year 2021 did not have a significant effect on the Company’s consolidated financial position, results of operations and cash flows.

14.

Income (Loss) per Common Share

The calculation of diluted earnings per share for the three months ended April 4, 2021 excluded options (as provided under the Company’s 2015 Stock Option Plan) to purchase 139,300 shares of common stock because the options’ exercise price of $14.02 per share was greater than the average market price of the common shares. Due to the net loss allocable to common shareholders for the three months ended April 5, 2020, the calculations of basic and diluted loss per share were the same since including options to purchase shares of the Company’s common stock in the calculation of diluted loss per share would have been anti-dilutive. However, if diluted earnings per share had been reported for the three months ended April 5, 2020, the calculation would have excluded options to purchase 151,800 shares of common stock because the options’ weighted average exercise price of $14.02 per share was greater than the average market price of the common shares.

Table of Contents

15.

Revenue

The Company recognizes revenue and related accounts receivable 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 the Company expects to receive in exchange for products transferred to the customer.

The following table sets forth revenue disaggregated by the Company’s automotive and industrial sectors for the three months ended April 4, 2021 and April 5, 2020:

	Three Months Ended
	April 4, 2021		April 5, 2020
Revenue by sector:
Automotive	$	14,022,402	$	13,298,059
Industrial		7,873,599		7,842,065
Total Revenue	$	21,896,001	$	21,140,124

The following table sets forth revenue disaggregated by the geographic locations of the Company’s customers for the three months ended April 4, 2021 and April 5, 2020:

	Three Months Ended
	April 4, 2021		April 5, 2020
Revenue by customer location:
North America	$	10,166,297	$	10,748,197
Europe		10,303,440		8,994,499
Asia		1,281,196		1,181,859
Other		145,068		215,569
Total Revenue	$	21,896,001	$	21,140,124

16.

Subsequent Events

The Company has evaluated subsequent events occurring through the date that the financial statements were available to be issued for events requiring recording or disclosure in the April 4, 2021 consolidated financial statements. Subsequent to April 4, 2021, as previously discussed, a fine of £120,000 ($165,500) was imposed on the Company related to the HSE investigation. The Company has until October 2022 to pay the fine in full. In addition, a fee of £5,463 ($7,533) to reimburse the HSE for legal expenses was paid in May 2021.

Table of Contents

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Description

We are a leading provider of manufactured vinyl coated fabrics. Our best-known brand, Naugahyde, is the product of many improvements on a rubber-coated fabric developed a century ago in Naugatuck, Connecticut. We design, manufacture and market a wide selection of vinyl coated fabric products under a portfolio of recognized brand names. We believe that our business has continued to be a leading supplier in its marketplace because of our ability to provide specialized materials with performance characteristics customized to the end-user specifications, complemented by technical and customer support for the use of our products in manufacturing.

Our vinyl coated fabric products have undergone considerable evolution and today are distinguished by superior performance in a wide variety of applications as alternatives to leather, cloth and other synthetic fabric coverings. Our standard product lines consist of more than 525 SKUs with combinations of colors, textures, patterns and other properties. Our products are differentiated by unique protective top finishes and transfer print capabilities. Additional process capabilities include embossing grains and patterns, and rotogravure printing, which imparts five color character prints and non-registered prints, lamination and panel cutting.

Our vinyl coated fabric products have various high-performance characteristics and capabilities. They are durable, stain resistant, easily processed, more cost-effective and better performing than traditional leather or fabric coverings. Our products are frequently used in applications that require rigorous performance characteristics such as automotive and non-automotive transportation, certain indoor/outdoor furniture, commercial and hospitality seating, 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 by either flame or hot melt adhesive for seating, fascia and door applications.

Products are developed and marketed based upon the performance characteristics required by end-users. For example, for recreational products used outdoors, such as boats, personal watercraft, golf carts and snowmobiles, a product designed primarily for water-based durability and weatherability is used. We also manufacture a line of products called BeautyGard^®, with water-based topcoats that contain agents to protect against bacterial and fungal micro-organisms and can withstand repeated cleaning, a necessity in the restaurant and health care industries. These topcoats are environmentally friendlier than solvent-based topcoats. The line is widely used in hospitals and other 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.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. For further discussion of our significant accounting policies, refer to Note 1 – “Basis of Presentation and Summary of Significant Accounting Policies” to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies, Judgments and Estimates” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021.

Table of Contents

Recent Accounting Pronouncements

See Note 13 – “Recent Accounting Standards” to the consolidated financial statements for a discussion of recent accounting guidance.

Overview:

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 33% of the Company’s global revenues and 35% of its 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 7.8% higher and the average exchange rate for the Euro to the Pound Sterling was approximately 1.3% higher in 2021 compared to 2020. These exchange rate changes had the effect of increasing net sales by approximately $952,000 for the three months ended April 4, 2021. The overall currency effect on the Company’s net income was a positive amount of approximately $68,000 for the three months ended April 4, 2021.

Demand for our products continues to improve since the initial impact of COVID-19 on the global economy, which began for us in the latter part of March 2020, and as businesses move closer to resuming normal activities. However, COVID-19 is a continually evolving situation and we cannot predict the long-term impact the coronavirus will have on the economy or our business. The impact could have a material adverse effect on our financial position, results of operations and cash flows, which may require us to obtain additional financing. We continue to pursue supplementary cash flow opportunities to provide further liquidity, as described below.

In March 2021, our U.S. operations received $2.0 million in funds from One Community Bank through the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”) under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”). The loan matures in March 2026 and bears an interest rate of 1.0%. The loan may be prepaid at any time prior to maturity with no prepayment penalties.

All or a portion of the loan may be forgiven by the SBA for costs we incur for payroll, rent, utilities and all other allowable expenses during the 24-week period that began March 1, 2021. We intend to use 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 will meet 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 recognized $838,864 as grant income, which is included as a component of net other income (expense) in the consolidated statement of operations for the three months ended April 4, 2021. As of April 4, 2021, the remaining balance of the loan ($1,161,136) is expected to be recognized as forgiven debt during the second quarter of 2021.

Table of Contents

Three Months Ended April 4, 2021 Compared to the Three Months Ended April 5, 2020

The following table sets forth, for the three months ended April 4, 2021 (“three months 2021”) and April 5, 2020 (“three months 2020”), certain operational data including their respective percentage of net sales:

	Three Months Ended
	April 4, 2021					April 5, 2020					Change			% Change

Net Sales	$	21,896,001		100.0	%	$	21,140,124		100.0	%	$	755,877			3.6	%
Cost of Goods Sold		18,658,664		85.2	%		17,309,542		81.9	%		1,349,122			7.8	%
Gross Profit		3,237,337		14.8	%		3,830,582		18.1	%		(593,245	)		-15.5	%
Operating Expenses:
Selling		898,712		4.1	%		992,447		4.7	%		(93,735	)		-9.4	%
General and administrative		1,579,027		7.2	%		1,603,717		7.6	%		(24,690	)		-1.5	%
Research and development		327,458		1.5	%		348,402		1.6	%		(20,944	)		-6.0	%
Total Operating Expenses		2,805,197		12.8	%		2,944,566		13.9	%		(139,369	)		-4.7	%
Operating Income		432,140		2.0	%		886,016		4.2	%		(453,876	)		-51.2	%
Interest expense		(403,746	)	-1.8	%		(467,483	)	-2.2	%		63,737			-13.6	%
Funding from Paycheck Protection Program		838,864		3.8	%		-		0.0	%		838,864			-
Other income (expense)		206,304		0.9	%		(190,889	)	-0.9	%		397,193			<-100	%
Income before Tax Provision		1,073,562		4.9	%		227,644		1.1	%		845,918			>100	%
Tax provision (benefit)		37,561		0.2	%		(52,630	)	-0.2	%		90,191			<-100	%
Net Income		1,036,001		4.7	%		280,274		1.3	%		755,727			>100	%
Preferred stock dividend		(816,414	)	-3.7	%		(792,835	)	-3.8	%		(23,579	)		3.0	%
Net Income (Loss) Allocable to Common Shareholders	$	219,587		1.0	%	$	(512,561	)	-2.4	%	$	732,148			<-100	%

Revenue:

Total revenue for the three months 2021 increased $755,877 or 3.6% to $21,896,001 from $21,140,124 for the three months 2020. The increase in revenue included a favorable currency effect of approximately $952,000.

For the three months 2021 compared to the three months 2020, European automotive sales increased 5.8% (excluding the currency adjustment), which was partially offset by the 15.5% decrease in U.S. automotive sales. The decrease in U.S. automotive sales was primarily due to a slower than expected start to new programs.

Additionally, sales for the industrial sector increased less than 1.0% (-0.8% before the currency effect) primarily due to a decline in the U.S. contract market. However, future sales in the U.S. contract market are expected to be more robust as our customers (mainly in the hospitality sector) are placing orders as their businesses resume pre-coronavirus activities.

Gross Profit:

Total gross profit for the three months 2021 decreased $593,245 or 15.5% to $3,237,337 from $3,830,582 for the three months 2020. The gross profit percentage was 14.8% of sales for the three months 2021 compared to 18.1% for the three months 2020. The lower amount and percentage for the three months 2021 were primarily due to higher costs of raw materials. To offset raw material price increases, the Company increased prices during the three months 2021 in several of its markets. The decrease in gross profit was partially offset by a favorable currency effect of approximately $165,000.

Table of Contents

Operating Expenses:

Selling expenses for the three months 2021 decreased $93,735 or 9.4% to $898,712 from $992,447 for the three months 2020. Selling expenses decreased primarily due to lower employment costs and travel expenses, which have not returned to the levels of the period prior to the onset of COVID-19. There was a $45,000 unfavorable currency effect that partially offset the decrease in selling expenses.

General and administrative expenses for the three months 2021 decreased $24,690 or 1.5% to $1,579,027 from $1,603,717 for the three months 2020. The decrease was primarily due to lower employment related costs. Partially offsetting the decrease was an unfavorable currency effect of $30,000.

Research and development expenses for the three months 2021 decreased $20,944 or 6.0% to $327,458 from $348,402 for the three months 2020. The decrease was principally due to a decline in activities such as new trials, which have not returned to the levels of the period prior to the onset of COVID-19. There was a $13,000 unfavorable currency effect that partially offset the decrease in research and development expenses.

Operating Income:

Operating income for the three months 2021 decreased $453,876 or 51.2% to $432,140 from $886,016 for the three months 2020. The decrease was primarily due to the decline in gross profit, which was partially offset by the decrease in operating expenses. The operating income percentage was 2.0% of sales for the three months 2021 compared to 4.2% for the three months 2020.

Interest Expense:

Interest expense for the three months 2021 decreased $63,737 or 13.6% to $403,746 from $467,483 for the three months 2020. The decrease was primarily due to lower interest rates on LIBOR and prime during the three months 2021 compared to the three months 2020.

Funding from Paycheck Protection Program:

For the three months 2021, the $838,864 funding from the PPP was the amount of proceeds from the PPP loan that the Company used during the first quarter for allowable expenses under the PPP. The Company expects to receive forgiveness on this debt from the SBA under the CARES Act for these eligible costs incurred by the Company, as previously discussed.

Other Income (Expense):

Other income for the three months 2021 was $206,304 compared to other expense of $190,889 for the three months 2020. Included in other income (expense) are the currency gains and losses recognized on foreign currency transactions and the change in the fair value of financial assets and liabilities that are denominated in Euros as these currencies fluctuated during the period.

Tax Provision (Benefit):

The Company files income tax returns in the United States as a C-Corporation, and in several state jurisdictions and in the United Kingdom. The Company’s U.S. operating subsidiary, Uniroyal, is a limited liability company (LLC) for federal and state income tax purposes and as such, its income, losses, and credits pass through to its members. The Company 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 the Company’s 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.

Table of Contents

The Company does not have a history of repatriating a significant portion of its foreign cash. However, if it decided to repatriate these foreign amounts to fund U.S. operations, the Company would not be required to pay any additional U.S. tax related to these amounts since the Company previously recorded a one-time transition tax on deemed repatriation of deferred foreign income.

The tax provision for the three months 2021 was $37,561 compared to a tax benefit of $52,630 for the three months 2020. The $37,561 tax provision for the three months 2021 was principally attributable to the results of the U.K. operations partially offset by the tax benefit attributable to the U.S. operations. The $52,630 tax benefit for the three months 2020 was principally attributable to the results of the U.K. operations.

Preferred Stock Dividend:

Pursuant to the terms of their acquisitions, the issuance of preferred ownership units/stock of UEP Holdings, LLC and UGEL (formerly EPAL) were issued to the sellers. These preferred units have carried quarterly dividend requirements on a total value of $55,000,000 at rates ranging from 5.0% to 8.0%. The dividend rate on the Series B UEP Holdings preferred units which started at 5.5% increased by 0.5% on the anniversary of the issuance and is now at the maximum of 8.0%. Quarterly dividend payments have been deferred each quarter beginning with the dividends that were accrued for the three months ended December 29, 2019 through the dividends that were accrued for the three months ended April 4, 2021 in order to preserve cash and provide additional liquidity. As of April 4, 2021 and January 3, 2021, accrued dividends of $4,775,094 and $4,019,905, respectively, were included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

Liquidity and Sources of Capital

Cash, as it is needed, is provided by using 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 $18,629,921 at April 4, 2021, $14.3 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 and $4.3 million bears interest at the bank’s prime or base lending rate which was 3.25% at April 4, 2021. The lines provided additional availability of approximately $2.5 million and, combined with UEP’s and UGL’s total cash balances, liquidity was approximately $4.3 million at April 4, 2021. We plan to use this availability and cash provided by operating activities to finance our cash needs for the remaining months of fiscal 2021 and future periods. The balances due under the lines of credit are recorded as current liabilities on the consolidated balance sheets.

Impacting the liquidity discussion above, in March of 2021, the Company’s U.S. operations received $2.0 million in funds through the Paycheck Protection Program administered by the United States Small Business Administration. As previously stated, the Company believes that all of this debt will be forgiven.

The ratio of current assets to current liabilities, including the amount due under our lines of credit, was 0.93 at April 4, 2021 and 0.89 at January 3, 2021.

Cash balances increased $147,102 before the effects of currency translation of $16,520, to $1,820,504 at April 4, 2021 from $1,656,882 at January 3, 2021. Of the above noted amounts, $285,505 and $1,621,692 were held outside the U.S. by our foreign subsidiaries as of April 4, 2021 and January 3, 2021, respectively.

Cash used in operations was $1,794,634 for the three months 2021 compared to cash provided by operations of $2,164,732 for the three months 2020. For the three months 2021, cash used in operations was primarily due to changes in working capital of $(2,725,218) and adjustments for non-cash items of $(141,471) offset by net income of $1,036,001 and changes in other assets and liabilities of $36,054. For the three months 2020, cash provided by operations was primarily due to changes in working capital of $1,322,814, adjustments for non-cash items of $622,073 and net income of $280,274 offset by changes in other assets and liabilities of $(60,429).

Cash used in investing activities was $252,679 for the three months 2021 compared to $484,114 for the three months 2020. During 2021 and 2020, cash used in investing activities was principally for purchases of machinery and equipment at our manufacturing locations and payments made for company-owned key man life insurance premiums.

Table of Contents

For the three months 2021, cash provided by financing activities was $2,194,415 compared to cash used in financing activities of $1,312,099 for the three months 2020. Impacting cash flows from financing activities for the three months 2021 were proceeds from issuance of long-term debt of $2,000,000 through the Paycheck Protection Program. There was no issuance of long-term debt for the three months 2020. Also impacting cash flows from financing activities for the three months 2021 and 2020 were net advances on lines of credit of $782,781 and net payments on lines of credit of $139,799, respectively. The changes in the lines of credit reflect the funding of working capital. Payments of $387,443 and $484,533 were also made during the three months 2021 and 2020, respectively, on long-term debt and finance lease liabilities. Additionally during the three months 2020, payments of $525,000 were made on subordinated secured promissory notes to our majority shareholder, net of proceeds of $200,000 from our majority shareholder.

Our credit agreements contain customary affirmative and negative covenants. We were in compliance with our debt covenants as of April 4, 2021 and through the date of filing of this report.

We currently have several on-going capital projects that are important to our long-term strategic goals. Machinery and equipment will also be added as needed to increase capacity or enhance operating efficiencies in our manufacturing plants. We will use a combination of financing arrangements to provide the necessary capital. We believe that our existing resources, including cash on hand and our credit facilities, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However, there can be no assurance that additional financing will be available on favorable terms, if at all.

We have no off balance sheet arrangements.

Table of Contents

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.

Controls and Procedures

The Company maintains “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of April 4, 2021 and concluded that our disclosure controls and procedures were effective as of April 4, 2021.

Changes in Internal Controls over Financial Reporting

During the three months ended April 4, 2021, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

Not applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

(a)

Exhibits.

Exhibit No.		Description

10.68*		Amendment to Senior Secured Promissory Note dated March 26, 2021
31.1 *		Chief Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14(a)
31.2 *		Chief Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14(a)
32.1 *		Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350
32.2 *		Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350
101.INS * +		XBRL Instance Document
101.CAL * +		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF * +		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB * +		XBRL Taxonomy Extension Label Linkbase Document
101.PRE * +		XBRL Taxonomy Extension Presentation Linkbase Document
101.SCH * +		XBRL Taxonomy Extension Schema Document

_______________

Filed herewith.

In accordance with Rule 406T of Regulation S-T, this information is deemed not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Table of Contents

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.