Unique Fabricating, Inc. - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2021


☐			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: 001-37480

UNIQUE FABRICATING, INC.

(Exact name of registrant as specified in its Charter)

Delaware

46-1846791

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

800 Standard Parkway

Auburn Hills, MI 48326

(248) 853-2333

(Address including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.001 per share	UFAB	NYSE American

Indicate by check mark whether the registrant (1) has 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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. ☐

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

As of April 30, 2021, the registrant had 9,779,147 shares of common stock outstanding.

Table of Contents

UNIQUE FABRICATING, INC.

FORM 10-Q

TABLE OF CONTENTS


			Page
Part I.	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and as of December 31, 2020 (unaudited)	2
		Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 (unaudited) and three months ended March 31, 2020 (unaudited)	3
		Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2021 (unaudited) and the three months ended March 31, 2020 (unaudited)	4
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 (unaudited) and three months ended March 31, 2020 (unaudited)	5
		Notes to Condensed Consolidated Financial Statements (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4.	Controls and Procedures	27
Part II.	Other Information
	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
	Item 3.	Defaults Upon Senior Securities	28
	Item 4.	Mine Safety Disclosures	28
	Item 5.	Other Information	28
	Item 6.	Exhibits	29
		Signatures	30

Table of Contents

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

UNIQUE FABRICATING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited – dollars in thousands)


	March 31, 2021		December 31, 2020
Assets
Current assets
Cash and cash equivalents	$	2,729	$	760
Accounts receivable, net of reserves of approximately $1.2 million and $1.2 million at March 31, 2021 and December 31, 2020, respectively	27,020		23,759
Inventory, net	13,562		11,951
Prepaid expenses and other current assets:
Prepaid expenses and other	4,667		5,643
Refundable taxes	3,975		4,027

Total current assets	51,953		46,140
Property, plant, and equipment, net	23,095		22,383
Goodwill	22,111		22,111
Intangible assets	6,705		7,605
Other assets
Operating leases	9,837		10,415
Investments, at cost	1,054		1,054
Deposits and other assets	289		579
Deferred tax asset	893		893
Total assets	$	115,937	$	111,180
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	13,455	$	10,892
Current maturities of long-term debt	37,133		35,864
Income taxes payable	224		204
Revolver, current maturities	16,787		11,494
Accrued compensation	863		792
Other accrued liabilities	4,158		4,551
Total current liabilities	72,620		63,797
Long-term debt, net of current maturities	750		2,999

Other long-term liabilities:

Other liabilities	9,744		10,519
Total liabilities	83,114		77,315
Stockholders’ equity:
Common stock, $0.001 par value: 15,000,000 shares authorized and 9,779,147 and 9,779,147 issued and outstanding at March 31, 2021 and December 31, 2020, respectively	10		10
Additional paid-in-capital	46,153		46,126
Accumulated deficit	(13,340)		(12,271)
Total stockholders’ equity	32,823		33,865
Total liabilities and stockholders’ equity	$	115,937	$	111,180

The accompanying notes are an integral part of these Condensed Consolidated Statements.

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UNIQUE FABRICATING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited – dollars in thousands, except per share amounts)


	Three Months Ended March 31,
	2021		2020
Net sales	$	34,798	$	34,661
Cost of sales	28,936		29,070
Gross profit	5,862		5,591
Selling, general, and administrative expenses	5,814		5,884

Restructuring expenses	—		920
Operating income (loss)	48		(1,213)
Other income (expense):

Other, net	18		(24)
Interest expense	(693)		(1,666)
Other expense, net	(675)		(1,690)
Loss before income tax expense (benefit)	(627)		(2,903)
Income tax expense (benefit)	442		(601)
Net loss	$	(1,069)	$	(2,302)
Net loss per share:
Basic	$	(0.11)	$	(0.24)
Diluted	$	(0.11)	$	(0.24)
Dividends declared per share	$	—	$	—

The accompanying notes are an integral part of these Condensed Consolidated Statements.

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UNIQUE FABRICATING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited – dollars in thousands)


	Number of Shares of Common Stock	Common Stock		Additional Paid-In Capital		Accumulated Deficit		Total
Balance - December 31, 2020	9,779,147	$	10	$	46,126	$	(12,271)	$	33,865
Net loss	—	—		—		(1,069)		(1,069)
Stock option expense	—	—		27		—		27


Balance - March 31, 2021	9,779,147	$	10	$	46,153	$	(13,340)	$	32,823


	Number of Shares of Common Stock	Common Stock		Additional Paid-In Capital		Accumulated Deficit		Total
Balance - December 29, 2019	9,779,147	$	10	$	46,011	$	(6,561)	$	39,460
Net loss	—	—		—		(2,302)		(2,302)
Stock option expense	—	—		23		—		23

Balance - March 31, 2020	9,779,147	$	10	$	46,034	$	(8,863)	$	37,181

The accompanying notes are an integral part of these Condensed Consolidated Statements.

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UNIQUE FABRICATING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited – dollars in thousands)


	Three Months Ended March 31,
	2021		2020
Cash Flows from Operating Activities:
Net loss	$	(1,069)	$	(2,302)
Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization	1,644		1,751
Amortization of debt issuance costs	45		37
Loss on sale of assets	14		12
Bad debt adjustment	(118)		213
Loss (gain) on derivative instrument	(185)		614
Stock option expense	27		23
Deferred income taxes	—		(788)

Accounts receivable	(3,142)		(103)
Inventory	(1,611)		(1,996)
Prepaid expenses and other assets	1,317		(1,224)
Accounts payable	3,485		5,968
Other assets and liabilities, net	(317)		4
Net cash provided by operating activities	90		2,209
Cash Flows from Investing Activities:
Capital expenditures	(1,530)		(296)
Proceeds from sale of property, plant and equipment	65		5
Net cash used in investing activities	(1,465)		(291)
Cash Flows from Financing Activities:
Net change in bank overdraft	(922)		(335)
Payments on term loans and capital expenditure line	(1,007)		(1,425)
Proceeds from capital expenditure line	—		—
Payments on revolving credit facilities	(6,280)		(3,359)
Proceeds from revolving credit facilities	11,553		3,671



Proceeds from PPP Note	—		—
Net cash provided by (used for) financing activities	3,344		(1,448)
Cash and cash equivalents:
Net increase in cash and cash equivalents	1,969		470
Cash and cash equivalents at beginning of period	760		650
Cash and cash equivalents at end of period	$	2,729	$	1,120
Supplemental disclosure of cash flow information:
Cash paid for interest	$	815	$	1,513
Cash paid for Income taxes	$	226	$	241

The accompanying notes are an integral part of these Condensed Consolidated Statements.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Business and Basis of Presentation

Nature of Business

Unique Fabricating, Inc. (the “Company”) engineers and manufactures components for customers in the transportation, appliance, medical, and consumer off-road markets. The Company’s solutions are comprised of multi-material foam, rubber, and plastic components and utilized in noise, vibration and harshness (“NVH”) management, acoustical management, water and air sealing, decorative and other functional applications. The Company leverages proprietary manufacturing processes, including die cutting, thermoforming, compression molding, fusion molding, and reaction injection molding to manufacture a wide range of products including air management products, heating ventilating and air conditioning (“HVAC”), seals, fender stuffers, air ducts, acoustical insulation, door water shields, gas tank pads, light gaskets, topper pads, mirror gaskets, glove box liners, personal protection equipment, and packaging. The Company operates as one reportable segment and is headquartered in Auburn Hills, Michigan.

Basis of Presentation

The Company’s condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements contain all material adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company, its results of operations, and its cash flows. The interim results for the periods presented may not be indicative of the Company's actual annual results. The Company’s Statement of Cash Flows, presented above, has been recast to show the gross movements of payments on and proceeds from our revolving credit facility. The Company’s management believes this presentation provides a more transparent view of the activity, as such prior periods set forth in this report have been recast for comparability. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Going Concern

The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company’s financial results for the six months ended December 31, 2020 and the nine months ended March 31, 2021 resulted in a violation of certain of its financial covenants, as defined in the Company’s Credit Agreement (Note 6). As a result of the default, the lenders may accelerate the maturity of the debt and accordingly all debt subject to the Credit Agreement, totaling $48.7 million, has been classified as current as of March 31, 2021. On April 9, 2021, the Company and its lenders entered into a 68-day forbearance agreement during which the Company will be able to borrow on its revolving line of credit, subject to availability and the satisfaction of certain other conditions, and the Lenders will not accelerate the maturity of the Company’s debt during the forbearance period. However, the Company does not have sufficient cash and cash equivalents on hand or other available sources of liquidity to repay outstanding debt under the Credit Agreement at expiration of the forbearance agreement. These events and conditions raise substantial doubt about the Company’s ability to continue as a going concern for the one year period following the date that these financial statements are issued.

In response to these conditions, the Company has been actively pursuing with Citizens Bank, National Association (“Citizens”), acting as lender and Administrative Agent, and other lenders (collectively, the “Lenders”) a waiver or amendment of its financial covenants prior to expiration of the forbearance agreement. However, these plans have not been finalized and are not within the Company’s control, and therefore cannot be deemed probable. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Concentration Risks

The Company is exposed to significant concentration risks as follows:

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Customer and Credit — During the three months ended March 31, 2021 and March 31, 2020, the Company’s net sales were derived from customers principally engaged in the North American automotive industry. The following table presents the Company's sales directly to General Motors Company (GM), Stellantis (formerly Fiat Chrysler Automobiles), and Ford Motor Company (Ford) as a percentage of total net sales:


	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
General Motors Company	7	%	9	%
Stellantis	6	%	6	%
Ford Motor Company	5	%	6	%

No customer represented more than 10% of direct Company sales for the three months ended March 31, 2021. However, the Company did have additional sales to the customers listed in the above table indirectly through other OEM suppliers.

Labor Markets — At March 31, 2021, of the Company’s hourly plant employees working in the United States manufacturing facilities, 37% were covered under a collective bargaining agreement which expires in August 2022 while another 14% were covered under a separate collective bargaining agreement that expires in February 2023. The remaining US employees are not part of a union.

International Operations — The Company manufactures and sells products outside of the United States primarily in Mexico and Canada. Foreign operations are subject to various political, economic and other risks and uncertainties inherent in foreign countries. Among other risks, the Company’s operations may be subject to the risks of: restrictions on transfers of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; political conditions; and governmental regulations. The following table presents the percentage of the Company's total production in Mexico, Canada, and other foreign markets:


	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Mexico	23	%	23	%
Canada	10	%	9	%
Other	—	%	—	%

The following table presents the percentage of the Company's total net sales represented by net sales from operations located in Mexico, Canada, and other foreign countries:


	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Mexico	24	%	23	%
Canada	10	%	8	%
Other	—	%	—	%

2. New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses,” which introduced new guidance for an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. Instruments in scope include loans, held-to-maturity debt securities, and net investments in leases as well as reinsurance and trade receivables. In November 2018, the FASB issued ASU 2018-19, which clarifies that operating lease receivables are outside the scope of the new standard. In November 2019, the FASB issued ASU 2019-10, which established the effective date of the new standard for smaller reporting companies as fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is evaluating the impact, if any the adoption of the new credit losses model will have on its financial statements.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842). This update requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. We have identified our existing lease contracts and calculated the right of use assets, which are reflected in Other Assets on the Condensed Consolidated Balance Sheets, and lease liabilities, which are reflected in the Other Accrued Liabilities on the Condensed Consolidated Balance Sheets. This guidance was effective for the Company as of January 1, 2020. Adoption of the new standard resulted in the recording of right-of-use assets and liabilities of $12.1 million and $12.8 million, respectively, as of January 1, 2020. The FASB has issued further ASUs related to the standard providing an optional transition method allowing entities to not recast comparative periods. The Company elected the practical expedients upon transition that retained the lease classification and initial direct costs for any leases that exist prior to adoption of the standard. The Company has approximately $10.7 million of non-cancelable future rental obligations as of March 31, 2021, as shown in Note 11.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). The guidance simplifies accounting for income taxes by removing certain exceptions. This new guidance is effective for fiscal years beginning after December 15, 2020 for public companies. The Company adopted this guidance on a prospective basis and there was no material impact.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform”. The ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or any other reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022. The Company is currently assessing which contracts may be affected.

3. Revenues

The following table presents the Company's net sales disaggregated by major sales channel for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
	(dollars in thousands)
Net Sales
Transportation	$	31,244	$	31,697
Appliance	3,135		2,779
Other	419		185
Total	$	34,798	$	34,661

General Recognition Policy

Revenue is recognized by the Company once all performance obligations under the terms of a contract with the Company's customers are satisfied. Generally this occurs with the transfer of control to a customer of its transportation, appliance, and other products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring its products. The Company’s payment terms vary by the type and location of its customers and the products offered. The term between invoicing and when payment is due is not significant.

In general for sales arrangements, the Company deems control to transfer at a single point in time and recognizes revenue when it ships products from its manufacturing facilities to its customers. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to transfer upon shipment because the Company has a present right to payment at that time, the customer has legal title to the asset, and the customer has significant risks and rewards of ownership of the asset.

Contract Balances

The timing of revenue recognition, billings and cash collections and payments results in billed accounts receivable. The Company does not have deferred revenue. Additionally, management reviews the allowance for doubtful accounts at regular intervals. Account balances are charged off against the allowance when management determines it is probable the receivable will not be recovered.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. Inventory

Inventories consist of the following:


	March 31, 2021		December 31, 2020
	(dollars in thousands)
Raw materials	$	8,922	$	7,366
Work in progress	1,276		1,225
Finished goods	3,364		3,360
Total inventory	$	13,562	$	11,951

The Company periodically evaluates inventory for obsolescence, excess quantities, slow moving goods and other impairments of value and establishes reserves for any identified impairments. The allowance for obsolete inventory was $0.5 million at March 31, 2021 and $0.4 million at December 31, 2020.

Included in inventory are assets located in Mexico with a carrying amount of $4 million at March 31, 2021 and $3.1 million million at December 31, 2020, and assets located in Canada with a carrying amount of $1.0 million at March 31, 2021 and $1.1 million at December 31, 2020.

5. Property, Plant, and Equipment, Net

Property, plant, and equipment, net consists of the following (in thousands):


	March 31, 2021		December 31, 2020		Depreciable Life – Years
	(dollars in thousands)
Land	$	538	$	538
Buildings	6,923		6,923		23 – 40
Shop equipment	24,941		23,436		7 – 10
Leasehold improvements	1,269		1,245		3 – 10
Office equipment	2,577		2,331		3 – 7
Mobile equipment	101		152		3
Construction in progress	2,010		2,315
Total cost	38,359		36,940
Less: Accumulated depreciation	15,264		14,557
Net property, plant, and equipment, net	$	23,095	$	22,383

Depreciation expense was $0.7 million for the three months ended March 31, 2021, and $0.7 million for the three months ended March 31, 2020.

Included in property, plant, and equipment, net are assets located in Mexico with a carrying amount of $3.6 million and $3.7 million at March 31, 2021 and December 31, 2020, respectively, and assets located in Canada with a carrying amount of $0.4 million and $0.4 million at March 31, 2021 and December 31, 2020, respectively.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. Long-term Debt

The Company’s long-term debt consists of the following:


	March 31, 2021		December 31, 2020
	(dollars in thousands)
U.S. Small Business Administration Paycheck Protection Program loan (PPP Note), payable in equal monthly installments on the first day after the deferment period. The PPP Note is unsecured and bears interest at 1% per annum. The PPP Note may be forgiven subject to the terms of the Paycheck Protection Program.	$	5,999	$	5,999
US Term Loan, payable to lenders in quarterly installments of $0.6 million through September 30, 2021 and $0.8 million through November 7, 2023 with a lump sum due at maturity. The effective interest rate was 5.25% per annum at March 31, 2021. At March 31, 2021, the balance of the New US Term Loan is presented net of a debt discount of $0.2 million from costs paid to or on behalf of the lenders.	22,207		22,768
CA Term Loan, payable to lenders in quarterly installments of $0.4 million through November 7, 2023, with a lump sum due at maturity. The effective interest rate was 5.25% per annum at March 31, 2021. At March 31, 2021, the balance of the CA Term Loan is presented net of a debt discount of $0.1 million from costs paid to or on behalf of the lenders.	8,512		8,876
Capital expenditure line payable to lenders in quarterly installments of 10% per annum through September 30, 2021, and 12.5% per annum through November 7, 2023 with a lump sum due at maturity. The effective interest rate was 5.25% per annum at March 31, 2021.	1,165		1,220
Total debt excluding Revolver	37,883		38,863
Less current maturities	37,133		35,864
Long-term debt – Less current maturities	$	750	$	2,999

As of March 31, 2021 and December 31, 2020 the fair value of the Company’s debt approximates book value based on the variable terms.

The Company’s financial results for the six months ended December 31, 2020 and nine months ended March 31, 2021 have resulted in violations of certain of its financial covenants, as defined in the Company’s Credit Agreement. The Company has been actively discussing its results and the Company’s failure to meet its financial covenants with the Administrative Agent and has entered into a forbearance agreement, providing a period commencing on April 9, 2021 and through and including June 15, 2021, during which the Company will be able to borrow on its Revolver, subject to the terms and conditions to making a revolving credit advance, including availability, and the Lenders have agreed, subject to the terms of the forbearance agreement, to forbear from enforcing their rights or seeking to collect payment of the Company’s debt or disposing of the collateral securing the debt. However, entering into a forbearance agreement will not alleviate the substantial doubt about the Company’s ability to continue as a going concern, please refer to Note 1 for further discussion. The Company intends to use the forbearance period to continue negotiations with the Lenders to enter into an amendment and waiver to cure the defaults. There can be no assurance that the Company will be able to enter into an amendment or waiver with the Lenders or if it enters into an amendment, what the terms, restrictions, and covenants of the amendment will contain. As a result of the default all debt subject to the Credit Agreement is classified as current maturities of long-term debt as of March 31, 2021.

Credit Agreement

On November 8, 2018, Unique Fabricating NA, Inc. (the “US Borrower”) and Unique-Intasco Canada, Inc. (the “CA Borrower” and together with the US Borrower, the “Borrowers”) and Citizens Bank, National Association (“Citizens”), acting as lender and Administrative Agent, and other lenders (collectively, the “Lenders”), entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), which amended and restated the Original Credit Agreement entered into on April 29, 2016 (as amended, the “Original Credit Agreement”). The Amended and Restated Credit Agreement is a five year agreement and provided for borrowings up to an aggregate principal amount of $73.0 million. The Amended and Restated Credit Agreement which is a senior secured credit facility comprised of a revolving line of credit of up to $30.0 million (the “Revolver”) to the US Borrower, a $26.0 million principal amount term loan (the “US Term Loan”) to the US Borrower, a

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

$12.0 million principal amount term loan (the “CA Term Loan”) to the CA Borrower, and a two year line to fund capital expenditures of up to $2.5 million through November 8, 2019 and $5.0 million thereafter through November 8, 2020 to the US Borrower (the “Capital Expenditure Line”). The Amended and Restated Credit Agreement has a maturity date for all borrowings of November 7, 2023.

The Amended and Restated Credit Agreement requires quarterly principal payments for the US Term Loan, which commenced on December 31, 2018, of $337.5 thousand through September 30, 2020, $575.0 thousand thereafter through September 30, 2021, and $812.5 thousand thereafter with a lump sum due at maturity. The Amended and Restated Credit Agreement requires quarterly principal payments for the CA Term Loan, which commenced on December 31, 2018, of $375.0 thousand with a lump sum due at maturity. The Capital Expenditure Line requires quarterly principal payments of 7.5% of the outstanding balance per annum beginning on December 31, 2019 through September 30, 2020, 10% per annum beginning December 31, 2020 through September 30, 2021, 12.5% per annum beginning December 31, 2021 and thereafter with a lump sum due at maturity.

In addition, the Amended and Restated Credit Agreement allows for increases in the principal amount of the Revolver and the US and CA Term Loans not to exceed a $10.0 million principal amount, in the aggregate, provided that before and after giving effect to the proposed increase (and any transactions to be consummated using proceeds of the increase), the total leverage and debt service coverage ratios do not exceed specified amounts. The Amended and Restated Credit Agreement also provides for the issuance of letters of credit with a face amount of up to a $2.0 million, in the aggregate, provided that any letter of credit that is issued will reduce availability under the Revolver.

The Amended and Restated Credit Agreement contains customary negative covenants and requires that the Company comply with various financial covenants, including a total leverage ratio and debt service coverage ratio, as defined in the Amended and Restated Credit Agreement. Additionally, the US Term Loan and CA Term Loan each contains a clause, effective December 30, 2018, that requires an excess cash flow payment to be made to the lenders to reduce the US Term Loan and CA Term Loan if the Company’s cash flow exceeds certain thresholds as defined by the Amended and Restated Credit Agreement.

Due to the impact of the COVID-19 pandemic on the Company and the global automotive industry, the Company anticipated that the EBITDA for the twelve months ended June 30, 2020 was likely to result in the Company not being in compliance with its financial covenants. In response to the anticipated impact of COVID-19, on April 23, 2020, the Borrowers entered into the Seventh Amendment (the “Seventh Amendment”) to the Credit Agreement. The Seventh Amendment, among other things, (i) permitted additional indebtedness in the form of unsecured loans authorized pursuant to and in compliance with the CARES Act under the Paycheck Protection Program of the U.S. Small Business Administration, in an aggregate amount not to exceed $6.0 million; (ii) deferred the June 30, 2020 principal payments on the US Term Loan, CA Term Loan, and Capital Expenditure Line, with the deferred principal amounts payable at the existing maturity dates; (iii) waived the requirement to test Maximum Total Leverage Ratio, Minimum Debt Service Coverage Ratio and Minimum Unadjusted Consolidated EBITDA for the fiscal quarter ended June 30, 2020; (iv) allowed the release of the lien on the Evansville, Indiana property and for the net cash proceeds from its sale to be applied against any outstanding balance on the Revolver, without permanently reducing the Revolving Credit Aggregate Commitment; (v) added a weekly requirement for the Borrowers to deliver a 13-week cash flow forecast until September 30, 2020; and (vi) added a 1.0% LIBOR Floor and 2.0% Base Rate Floor.

On August 7, 2020, the Company entered into the Eighth Amendment (the “Eighth Amendment”) to the Amended and Restated Credit Agreement and Loan Documents, as amended. The Eighth Amendment, among other things, amended the definition of Consolidated EBITDA and made changes to the calculations of financial covenants. The definition of Consolidated EBITDA has been amended to include as an addition to Consolidated Net Income (i) costs and expenses incurred in connection with the Eighth Amendment not to exceed $175,000, (ii) restructuring expenses not to exceed $500,000 in any 12 month period, (iii) costs incurred with respect to the purchase and implementation of the ERP system not to exceed (A) $200,000 during each fiscal quarter in 2020 and (B) $100,000 during each fiscal quarter in 2021, and (iv) to the extent added in calculating Consolidated Net Income any portion of the PPP loan that has been forgiven and cancelled. The Eighth Amendment also amended the calculation of certain financial covenants based upon 12 month results to effectively exclude results of the quarter ended June 30, 2020. The calculation of Maximum Total Leverage Ratio has been amended, commencing with the quarter ending September 30, 2020 and through and including the quarter ending March 31, 2021, to annualize Consolidated EBITDA for the periods beginning July 1, 2020 through the date of calculation. The calculation of Minimum Debt Service Coverage Ratio for the quarters ended September 30, 2020, December 31, 2020 and March 31, 2021 are based upon results for one, two and three quarters, respectively. The Eighth Amendment further adds a Minimum Liquidity requirement to be calculated monthly through June 30, 2021 and Minimum Consolidated EBITDA for each measurement period, as defined, through June 30, 2021. The Eighth Amendment permitted distributions by US Borrower to the Parent to be declared and made only after December 31, 2021 provided certain conditions are satisfied.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Credit Agreement, as amended, bears interest at the Company’s election of either (i) the greater of the Prime Rate or the Federal Funds Effective Rate (the “Base Rate”) or (ii) the LIBOR rate, plus an applicable margin ranging from 1.75% to 3.25% per annum in the case of the Base Rate and 2.75% to 4.25% per annum in the case of the LIBOR rate, in each case, based on senior leverage ratio thresholds, measured quarterly, as increased by the Waiver and Fourth Amendment to the Amended and Restated Credit Agreement. As stated above, the Seventh Amendment added a 1.0% LIBOR Floor and 2.0% Base Rate Floor.

As of March 31, 2021, $17.0 million was outstanding under the Revolver. This amount is gross of debt issuance costs which are further described in the next section. The Revolver had an effective interest rate of 5.25% percent per annum at March 31, 2021, and is secured by substantially all of the Company’s assets. At March 31, 2021, the maximum additional available borrowings under the Revolver was $2.9 million which includes a reduction for a $0.1 million letter of credit issued for the benefit of the landlord of one of the Company’s leased facilities.

Paycheck Protection Program Note

On April 24, 2020, the Company entered into a Promissory Note (“PPP Note”) for $6.0 million with Citizens Bank, National Association, (“PPP Lender”) pursuant to the U.S. Small Business Administration (“SBA”) Paycheck Protection Program under Title I of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed by Congress and signed into law on March 27, 2020. On June 3, 2020, Congress passed the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”) and on June 5, 2020 it was signed into law. The PPP Flexibility Act modified certain provisions of the CARES Act. The PPP Note is unsecured, bears interest at 1.00% per annum, with principal and interest payments deferred until the earlier of (i) the PPP Lender receiving the forgiveness amount from the SBA or (ii) August 12, 2021. The PPP Note matures on April 24, 2022. The principal is payable in equal monthly installments, with interest, beginning on the first business day after the end of the deferment period. The PPP Note may be forgiven subject to the terms of the Paycheck Protection Program and PPP Flexibility Act. The Company applied for forgiveness in the fourth quarter of 2020 and is awaiting forgiveness determination from the U.S. Small Business Administration and our PPP Lender.

Additionally, certain acts of the Company, including but not limited to: (i) the failure to pay any taxes when due, (ii) becoming the subject of a proceeding under any bankruptcy or insolvency law, (iii) making an assignment for the benefit of creditors, or (iv) reorganizing, merging, consolidating or otherwise changing ownership or business structure without PPP Lender’s prior written consent, are considered events of default which grant Lender the right to seek immediate payment of all amounts owing under the PPP Note. As of March 31, 2021, none of the circumstances listed above exist at the Company.

Debt Issuance Costs

Debt issuance costs represent legal, consulting, and other financial costs associated with debt financing and are reported netted against the related debt instrument. Amounts paid to or on behalf of lenders are presented as a debt discount and are also shown as a reduction of the associated debt instrument. Debt issuance costs on term debt are amortized using the straight line basis over the term of the related debt (which is immaterially different from the required effective interest method) while those related to revolving debt are amortized using a straight line basis over the term of the related debt.

At March 31, 2021 and December 31, 2020, unamortized debt issuance costs were $0.3 million and $0.4 million, respectively, while amounts paid to or on behalf of lenders presented as unamortized debt discounts were $0.3 million and $0.3 million, respectively.

Amortization expense of both debt issuance costs and debt discounts has been recognized as a component of interest expense in the amounts of $0.06 million for the three months ended March 31, 2021, and $0.04 million for the three months ended March 31, 2020.

Covenant Compliance

The Company’s financial results for the nine months ended March 31, 2021 have resulted in violations of the following financial covenants: (1) Maximum Total Leverage Ratio; (2) Minimum Debt Service Coverage Ratio; and (3) Minimum Consolidated EBITDA; as defined in the Company’s Amended and Restated Credit Agreement.

The Amended and Restated Credit Agreement, as further amended, contains the following financial covenants:

Maximum Total Leverage Ratio

The Total Leverage Ratio, as defined in the Credit Agreement, as amended, may not exceed (i) 3.75 to 1.00, with respect to the fiscal quarter ended as of September 30, 2020; (ii) 3.50 to 1.00, with respect to the fiscal quarter ended December 31, 2020; (iii) 3.25 to 1.00, with respect to the fiscal quarters ended March 31, 2021 and June 30, 2021; and (iv) 3.00 to 1.00, with respect to each fiscal quarter thereafter. For purposes of calculating the Total Leverage Ratio, “Consolidated EBITDA”, as defined, shall

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

be determined (i) with respect to the fiscal quarter ended as of September 30, 2020, for the single fiscal quarter then ended, multiplied by 4,(ii) with respect to the fiscal quarter ended as of December 31, 2020, for the two fiscal quarters then ended, multiplied by 2, (iii) with respect to the fiscal quarter ended as of March 31, 2021, for the three fiscal quarters then ended, multiplied by 4/3, and (iv) with respect to each fiscal quarter thereafter, for the four fiscal quarters then ended. Also, for purposes of calculating the Total Leverage Ratio, the PPP Note is excluded from Total Debt for all periods until a determination of forgiveness is made.

Minimum Debt Service Coverage Ratio

The Debt Service Coverage Ratio may not be less than 1.20 to 1.00, to be measured, as of the end of each fiscal quarter. Notwithstanding anything to the contrary set forth in the definition of "Debt Service Coverage Ratio," such calculation shall be made (i) with respect to the fiscal quarter ended as of September 30 2020, for the single fiscal quarter then ended, (ii) with respect to the fiscal quarter ended as of December 31, 2020, for the two fiscal quarters then ended, (iii) with respect to the fiscal quarter ended as of March 31, 2021, for the three fiscal quarters then ended, and (iv) with respect to the last day of each fiscal quarter thereafter, for the four fiscal quarters then ended.

Minimum Liquidity

The US Borrower's Liquidity, as defined in the Credit Agreement, as amended, may not to be less than 20% of the Borrowing Base, calculated as of the last day of each fiscal month through and including June 30, 2021.

Minimum Consolidated EBITDA

The Consolidated EBITDA, as defined, must not be less than the amounts set forth below, with respect to the measurement period ended as of each date of determination set forth below:

Date of Determination

Measurement Period

Minimum Consolidated EBITDA

September 30, 2020

Trailing 3 months

$3,000,000

December 31, 2020

Trailing 6 months

$6,500,000

March 31, 2021

Trailing 9 months

$10,000,000

June 30, 2021

Trailing 12 months

$13,500,000

Future Maturities

Maturities on the Company’s Credit Agreement and other long term debt obligations for the remainder of the current fiscal year and future fiscal years are as follows:


	Future Maturities
	(dollars in thousands)
2021	$	52,262
2022	2,999
2023	—


Total	55,261
Discounts	(260)
Debt issuance costs	(331)
Total debt, net	$	54,670

7. Derivative Financial Instruments

Interest Rate Swap

The Company holds a derivative financial instrument, in the form of an interest rate swap, as required by its Credit Agreement and Amended and Restated Credit Agreement, for the purpose of hedging certain identifiable transactions in order to mitigate risks relating to the variability of future earnings and cash flows caused by interest rate fluctuations. The Company has elected not to apply hedge accounting for financial reporting purposes. The interest rate swap is recognized in the accompanying condensed consolidated balance sheets at its fair value. Monthly settlement payments due on the interest rate swap and changes

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

in its fair value are recognized currently in net income as interest expense in the accompanying condensed consolidated statements of operations.

Effective November 30, 2018, as required under the Amended and Restated Credit Agreement, the Company entered into another interest rate swap that requires the Company to pay a fixed rate of 3.075% per annum while receiving a variable interest rate per annum based on the one month LIBOR for a net monthly settlement based on the notional amount in effect. The notional amount at the effective date was $5.0 million which increased by $0.4 million each quarter until June 28, 2019 when the notional amount increased to $17.5 million due to the interest rate swap from 2016 described above expiring. Since June 28, 2019, the notional amount then decreased each quarter by $0.2 million million until September 30, 2020 when the notional amount increases to $17.5 million due to the interest rate swap from 2017 described above expiring. The notional amount then decreases each quarter by $0.4 million until December 31, 2021, then decreases each subsequent quarter by $0.6 million until it expires on November 8, 2023.

At March 31, 2021, the fair value of all swaps was in a net liability position of $1.0 million and is included in other long term liabilities in the condensed consolidated balance sheets. The Company paid $0.1 million in net monthly settlements with respect to the interest rate swaps for the three months ended March 31, 2021. At March 31, 2020, the fair value of the swaps was a net liability of $1.5 million, which was included in other accrued liabilities and other long term liabilities in the condensed consolidated balance sheet. The Company paid $0.8 million in net monthly settlements in respect to the interest rate swaps for the three months ended March 31, 2020. Both the change in fair value and the net monthly settlements were included in interest expense in the condensed consolidated statements of operations.

8. Restructuring

The Company's restructuring activities are undertaken as necessary to implement management's strategy and improve operating results. The restructuring activities generally relate to realignment of existing manufacturing capacity and closure of facilities and other exit or disposal activities, either in the normal course of business or pursuant to specific restructuring programs.

2019 Restructurings

Bryan Restructuring

On November 7, 2019, the Company made the decision to close its manufacturing facility in Bryan, Ohio. Approximately 43 positions were eliminated as a result of the closure. The Company's decision resulted from its desire to streamline operations and to utilize some of the available excess capacity in other of our facilities.

The Company moved existing Bryan production to its manufacturing facilities in Querétaro, Mexico and LaFayette, Georgia. The Company provided the affected employees severance pay, health benefits continuation, and job search assistance. The Company evaluated whether or not this closing met the criteria for discontinued operations and concluded that the closing did not meet the definition as it did not represent a strategic shift in the Company's operations and the Company will have continuing cash flows from the production being moved to other facilities within the Company.

Evansville Restructuring

On July 16, 2019, the Company made the decision to close its manufacturing facility in Evansville, Indiana. The Company ceased operations at the Evansville facility during the fourth quarter of 2019, and approximately 47 positions were eliminated as a result of the closure. The Company's decision resulted from its desire to streamline operations and to utilize some of the available excess capacity in other of our facilities.

The Company moved existing Evansville production to its manufacturing facilities in LaFayette, Georgia, Auburn Hills, Michigan, and Louisville, Kentucky. The Company provided the affected employees severance pay, health benefits continuation, and job search assistance. The Company evaluated whether or not this closing met the criteria for discontinued operations and concluded that the closing did not meet the definition as it did not represent a strategic shift in the Company's operations and the Company will have continuing cash flows from the production being moved to other facilities within the Company.

The restructuring activities described above were completed in 2020, the Company has not incurred any restructuring costs in 2021. The Company had $0.6 million and $0.7 million of remaining lease payments for a warehouse near the Evansville, Indiana facility as of March 31, 2021 and December 31, 2020, respectively. The Company has secured a sublease of roughly 11% of the facility.

The table below summarizes the activity in the restructuring liability for the three months ended March 31, 2020:

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Employee Termination Benefits Liability		Other Exit Costs Liability		Total
	(dollars in thousands)
Accrual balance at December 29, 2019	$	438	$	116	$	554
Provision for estimated expenses to be incurred	—		920		920
Payments made during the year and asset write offs	333		684		1,017
Accrual balance at March 31, 2020	$	105	$	352	$	457

9. Stock Incentive Plans

2013 Stock Incentive Plan

The Company’s board of directors approved a stock incentive plan (the “Plan”) in 2013. The Plan permits the Company to grant 495,000 non statutory or incentive stock options to the employees, directors and consultants of the Company. 495,000 shares of unissued common stock are reserved for the Plan. The board of directors has the authority to determine the participants to whom stock options shall be awarded as well as any restrictions to be placed upon the awards. The exercise price cannot be less than the fair value of the underlying shares at the time the stock options are issued and the maximum length of an award is ten years.

2014 Omnibus Performance Award Plan

In 2014, the board of directors and stockholders adopted the Unique Fabricating, Inc. 2014 Omnibus Performance Award Plan, or the 2014 Plan. The 2014 Plan provides for the grant of cash awards, stock options, stock appreciation rights, or SARs, shares of restricted stock and restricted stock units, or RSUs, performance shares and performance units. The 2014 Plan originally authorized the grant of awards relating to 250,000 shares of our common stock. In the event of any transaction that causes a change in capitalization, the Compensation Committee, such other committee administering the 2014 Plan or the board of directors will make such adjustments to the number of shares of common stock delivered, and the number and/or price of shares of common stock subject to outstanding awards granted under the 2014 Plan, as it deems appropriate and equitable to prevent dilution or enlargement of participants’ rights. An amendment approved in March of 2016 by our board of directors which was approved by our stockholders at our annual meeting of stockholders in June 2016, increased the number of shares authorized for grant of awards under the 2014 Plan to a total of 450,000 shares of our common stock. In July 2020, an additional amendment was approved at our annual meeting of stockholders, which increased the number of shares authorized for grant of awards under the 2014 Plan to a total of 700,000 shares of our common stock.

The fair value of each of the option awards is estimated on the grant date using a Black Scholes option pricing model that uses the weighted average assumptions noted in the following tables. The expected volatility is based on the historical volatility of the stock of comparable companies. The expected term of the awards was estimated based on findings from academic studies investigating the average holding period for options for adjusted for the Company’s size and risk factors. The risk free rate for periods within the contractual life of the option is based on the United States Treasury yield curve in effect at the time of grant.

A summary of option activity under both plans is presented below:


	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value(1)
	(dollars in thousands, except share data and exercise price)
Outstanding at December 31, 2020	726,500	$	4.53	7.2	$	1,484
Granted	—	$	—	0
Exercised	—	$	—	0
Forfeited or expired	—	$	—	0
Outstanding at March 31, 2021	726,500	$	4.53	7.2	$	1,760
Vested and exercisable at March 31, 2021	333,500	$	6.29	5.0	$	613

————————————

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) The aggregate intrinsic value above is obtained by subtracting the exercise price from the estimated fair value of the underlying shares and multiplying this result by the related number of options outstanding and exercisable as of the period end date. There is no intrinsic value if the exercise price exceeds the fair value of the underlying shares. The estimated fair value of the shares is based on the closing price of the stock of $5.95 as of March 31, 2021 and $5.50 as of December 31, 2020.

The Company recorded stock-based compensation expense of $27 thousand for the three months ended March 31, 2021, and $23 thousand for the three months ended March 31, 2020, in its condensed consolidated statements of operations, as a component of sales, general and administrative expenses. The income tax (expense) benefit related to share based compensation expense was immaterial for all periods presented.

As of March 31, 2021, there was $474 thousand of total unrecognized compensation cost related to non-vested stock option awards under the plans. That cost is expected to be recognized over a weighted average period of 4.7 years.

10. Income Taxes

For interim tax reporting we estimate our annual effective tax rate and apply it to our year to date income before income taxes. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effect of changes in tax laws or rates, are reported in the interim period in which they occur, if applicable.

Income tax (benefit) expense for the three months ended March 31, 2021 was $0.4 million, compared to $(0.6) million for the three months ended March 31, 2020.

During the three months ended March 31, 2021, the effective tax rate was (70)%. The differences between the effective tax rates and the statutory rate of 21% were primarily due to valuation allowance in the U.S. and earnings in Mexico and Canada, which both have higher statutory income tax rates than the U.S.

11. Leases

The Company records a right-of-use (“ROU”) asset and lease liability for substantially all leases for which it is a lessee, in accordance with ASC 842. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has no significant lease agreements in place for which the Company is a lessor. At inception of a contract, the Company considers all relevant facts and circumstances to assess whether or not the contract represents a lease by determining whether or not the contract conveys the right to control the use of an identified asset, either explicit or implicit, for a period of time in exchange for consideration.

The Company leases certain industrial spaces, office space, land, and equipment. Some leases include one or more options to renew, with renewal terms that can extend the lease term from generally one to 5 years. The exercise of lease renewal options is at the Company’s sole discretion, and are included in the lease term only to the extent such renewal options are reasonably certain of being exercised at lease commencement. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. New leased assets obtained in exchange for new operating lease liabilities during the three months ended March 31, 2021, were immaterial. As of March 31, 2021, leases that the Company has signed but have not yet commenced are immaterial.

Leased assets and liabilities included within the condensed consolidated balance sheets consist of the following:

Classification

March 31, 2021

(dollars in thousands)

Right-of-Use-Assets

Operating

Operating leases

9,837

Liabilities

Current

Operating

Other accrued liabilities

2,168

Non-current

Operating

Other liabilities

8,485

Total lease liabilities

10,653

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Lease costs included in the condensed consolidated statements of operations consist of the following:

Classification

Three Months Ended March 31, 2021

(dollars in thousands)

Lease cost

Cost of sales, selling expenses and general and administrative expense

709

Maturity of the Company’s lease liabilities as of March 31, 2021 is as follows:


	Lease Liability Maturities
	(dollars in thousands)
2021 (remainder)	$	2,178
2022	2,049
2023	1,371
2024	1,286
2025	1,279
Thereafter	5,410
Total lease payments	13,573
Less: interest	2,921
Present value of lease payments	$	10,653

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Remaining lease term and discount rates are as follows:


	March 31, 2021
Weighted average remaining lease term (years)	7.1
Weighted average discount rate	6.5	%

Lease costs included in the condensed consolidated statements of cash flows are as follows (in thousands):

Three Months Ended March 31, 2021

(dollars in thousands)

Cash paid for amounts included in the measurement of lease liabilities

Operating cash outflows from operating leases

796

12. Retirement Plans

The Company maintains a defined contribution plan covering certain full time salaried employees. Employees can make elective contributions to the plan. The Company contributes a match on 100% of an employee’s contribution up to the first 3% of each employee’s total compensation and 50% for the next 2% of each employee’s total compensation. In addition, the Company, at the discretion of the board of directors, may make additional contributions to the plan on behalf of the plan participants. The Company contributed $0.1 million for the three months ended March 31, 2021 and $0.1 million for the three months ended March 31, 2020.

13. Related Party Transactions

Effective March 18, 2013, the Company is a party to a management agreement with a firm related to several stockholders. The agreement initially provided for annual management fees of $0.3 million and additional fees for assistance provided with acquisitions. Effective upon completion of the Company's initial public offering, the agreement was amended to reduce the annual management fee by an amount equal to the amount, if any, of annual cash retainers and equity awards received as

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

compensation for service on the board of directors to any person who is a related person of Taglich Private Equity, LLC or Taglich Brothers, Inc. The Company incurred management fees of $0.1 million for the three months ended March 31, 2021 and $0.1 million for the three months ended March 31, 2020. The management agreement had an initial term of five years, expiring on March 18, 2020, and renews automatically annually for additional one year terms. The current term expires on March 18, 2023. The agreement also will terminate on the date that the Taglich Founding Investors or Taglich Equity Investors, each as defined, no longer also collectively own 50% of the equity securities owned by either of them on March 18, 2013.

14. Fair Value Measurements

Financial instruments consist of cash equivalents, accounts receivable, accounts payable and debt. The carrying amount of all significant financial instruments approximates fair value due to either the short maturity or the existence of variable interest rates that approximate prevailing market rates.

Accounting standards require certain other items be reported at fair value in the financial statements and provides a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the valuation techniques and inputs used to measure fair value.

Fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. Level 2 inputs may include quoted prices for similar items in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related item. Level 3 fair value measurements are based primarily on management’s own estimates using inputs such as pricing models, discounted cash flow methodologies or similar techniques taking into account the characteristics of the item.

In instances whereby inputs used to measure fair value fall into different levels of the fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each item.

The Company measures its interest rate swaps at fair value on a recurring basis based primarily on Level 2 inputs using an income model based on disparity between variance and fixed interest rates, the scheduled balance of principal outstanding, yield curves and other information readily available in the market.

15. Earnings Per Share

Basic earnings per share is computed by dividing the net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed giving effect to all potentially weighted average dilutive shares including stock options and warrants. The dilutive effect of outstanding awards, if any, is reflected in diluted earnings per share by application of the treasury stock method.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted loss per share for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
	(dollars in thousands, except per share amounts)
Numerator:
Net income (loss)	$	(1,069)	$	(2,302)
Denominator:
Weighted average shares outstanding, basic	9,779,147		9,779,147
Dilutive effect of stock-based awards	—		—
Weighted average share outstanding, diluted	9,779,147		9,779,147

Basic loss per share	$	(0.11)	$	(0.24)
Diluted loss per share	$	(0.11)	$	(0.24)

The effect of certain common stock equivalents were excluded from the computation of weighted average diluted shares outstanding for the three months ended March 31, 2020, as inclusion would have resulted in anti-dilution. A summary of these anti-dilutive common stock equivalents is provided in the table below:


	Three Months Ended March 31, 2021	Three Months Ended March 31, 2020
Number of options	726,500	611,480
Exercise price of options	$2.36 - $12.58	$2.89 - $12.50
Warrants(1)		142,185
Exercise price of warrants		$3.33 - $11.88

_________________________________

(1) Includes warrants to purchase 141,000 shares of common stock issued to the underwriters of the Company's IPO in July 2015 with an exercise price of $11.88 per share of common stock which expired on July 7, 2020.

16. Contingencies

The Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made. While uncertainties are inherent in the final outcome of such matters, the Company believes that there are no pending proceedings in which the Company is currently involved that will have a material effect on its financial position, results of operations or cash flow.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operation is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes to unaudited condensed consolidated financial statements included elsewhere in this document as well as the consolidated financial statements and the related notes to consolidated financial statements for the year ended December 31, 2020 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”). Our actual results and the timing of events could differ materially from those discussed in forward-looking statements contained herein. Factors that could cause or contribute to these differences include those discussed below as well as in our Annual Report on Form 10-K and in other filings by us with the SEC, particularly in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” We make no guarantees regarding outcomes, and assume no obligation to update the forward-looking statements herein, except as may be required by law.

Forward-Looking Statements

The following discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. These statements are based on management's beliefs and assumptions and on information currently available to us. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. When used in this document the words “anticipate,” “believe,” “continue,” “could,” “seek,” “might,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “approximately,” “project,” “should,” “will,” “would,” or the negative or plural of these words or similar expressions, as they relate to our company, business and management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the future events and circumstances discussed may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements, including those discussed in our Annual Report on Form 10-K and in particular the section entitled “Risk Factors” of the Annual Report on Form 10-K and in other filings by us with the SEC.

Forward-looking statements speak only as of the date of this Form 10-Q filing. Except as required by law, we assume no obligation to publicly update or revise any forward-looking statement to reflect actual results, changes in assumptions based on new information, future events or otherwise. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

Basis of Presentation

The Company’s operations are classified in one reportable business segment. Although we have expanded the products that we manufacture and sell to include components used in the appliance, medical and consumer off-road markets, products for these industries are manufactured at facilities that also manufacture or are capable of manufacturing products for the automotive industries. Our manufacturing locations have capabilities to produce diverse products utilizing multiple processes to serve various markets. The manufacturing operations for our transportation, appliance, medical and consumer off-road products share management and labor forces and use common personnel and strategies for new product development, marketing and the sourcing of raw materials.

Overview

Unique Fabricating, Inc. (the “Company” or “Unique”) engineers and manufactures components for customers in the transportation, appliance, medical, and consumer markets. The Company’s solutions are comprised of multi-material foam, rubber, and plastic components and utilized in NVH management, acoustical management, water and air sealing, decorative and other functional applications. The Company leverages proprietary manufacturing processes, including die cutting, thermoforming, compression molding, fusion molding, and reaction injection molding to manufacture a wide range of products including air management products, HVAC, seals, fender stuffers, air ducts, acoustical insulation, door water shields, gas tank pads, light gaskets, topper pads, mirror gaskets, glove box liners, personal protection equipment, and packaging. The Company is headquartered in Auburn Hills, Michigan.

The Company serves the North American transportation market, which includes automotive and heavy-duty trucks, as well as the appliance, medical, and consumer markets. Sales are conducted directly to major automotive and heavy-duty truck, appliance, water heater and HVAC manufacturers, referred throughout this report as OEMs, or indirectly through the Tier 1 suppliers of these OEMs. The Company has its principal executive offices in Auburn Hills, Michigan and has sales, engineering and production facilities in Auburn Hills, Michigan; Concord, Michigan; LaFayette, Georgia; Louisville, Kentucky; Monterrey, Mexico; Querétaro, Mexico; and London, Ontario. The Company also has an independent client sales representative who maintains offices in Baldham, Germany.

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The Company derives most of its net sales from the sales of foam, rubber plastic, and tape adhesive related automotive products. These products are produced by a variety of manufacturing processes including die cutting, compression molding, thermoforming, reaction injection molding and fusion molding. We believe Unique Fabricating has a broader array of processes and materials utilized than any of its direct competitors, based on our product offerings. By sealing out air, noise and water intrusion, and by providing sound absorption and blocking, Unique Fabricating’s products improve the interior comfort of a vehicle, increasing perceived vehicle quality and the overall experience of its passengers. Unique Fabricating’s products perform similar functions for appliances medical and consumer off-road systems, improving thermal characteristics, reducing noise and prolonging equipment life. We primarily operate within the highly competitive and cyclical automotive parts industry.

The Company’s financial results for the six months ended December 31, 2020 and nine months ended March 31, 2021 have resulted in violations of the following financial covenants: (1) Maximum Total Leverage Ratio; (2) Minimum Debt Service Coverage Ratio; and (3) Minimum Consolidated EBITDA; as defined in the Company’s Amended and Restated Credit Agreement. The Company has entered into a forbearance agreement, providing a period commencing on April 9, 2021 and through and including June 15, 2021, during which the Company will be able to borrow on its Revolver, subject to the terms and conditions to making a revolving credit advance, including availability, and the Lenders have agreed, subject to the terms of the forbearance agreement, to forbear from enforcing their rights or seeking to collect payment of the Company’s debt or disposing of the collateral securing the debt. However, entering into a forbearance agreement will not alleviate the substantial doubt about the Company’s ability to continue as a going concern. The Company intends to use the forbearance period to continue negotiations with the Lenders to enter into an amendment and waiver to cure the defaults. During the forbearance period, the Company may not make any payment, transfer, or distribution out of the ordinary course of business or payments, including salary or compensation or distributions to or for the benefit of any member, owner, or director other than normal and customary employment salaries which do not exceed sums paid for similar positions in the Company’s marketplace.

Recent Developments

COVID-19 Pandemic

The Company’s operations continue to be adversely affected by the COVID-19 pandemic. In response to the continued impact the COVID-19 pandemic is having on the global automotive industry, the Company has taken actions to reduce costs and increase financial flexibility. These actions include actively managing costs, capital expenditures, and working capital. Additionally, the Company received a loan of approximately $6.0 million pursuant to the U.S. Small Business Administration Paycheck Protection Program under Title I of the Coronavirus Aid, Relief, and Economic Security Act. Refer to Note 6, in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on the Paycheck Protection Program Note.

Our supply chain has been adversely affected by the COVID-19 outbreak. Throughout 2020 we worked with our supply chain to minimize the impact to our customers by improving our suppliers’ visibility of our future demand requirements, utilizing substitutions when possible, and incurring additional freight costs to expedite the delivery of materials from our suppliers to us and our products to our customers. These additional costs cannot always be passed to our customers and when we are able to pass them to our customers the recovery of costs is sometimes delayed due to competitive pressures. Supply chain disruptions have continued into 2021 and they have impacted the entire North American transportation market as well as other markets.

Due to the inherent uncertainty of the unprecedented situation including the duration of the actions taken by our various customers and governments, we are unable to determine the full impact of the COVID-19 pandemic on our future operations.

The Company continues to follow guidelines with respect to operating during the COVID-19 pandemic provided by the various governmental entities in the jurisdictions where we operate and is taking additional measures to protect our employees.

Comparison of Results of Operations for the Three Months Ended March 31, 2021 and March 31, 2020

Net Sales


	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
	(dollars in thousands)
Net sales	$	34,798	$	34,661

Net sales for the quarter ended March 31, 2021 were approximately $34.8 million compared to $34.7 million for the quarter ended March 31, 2020, representing a increase of 0.4%. The level of our net sales reflect primarily the impact of the pandemic.

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Cost of Sales

The major components of cost of sales are raw materials purchased from third parties, direct labor and benefits, and manufacturing overhead, including facility costs, utilities, supplies, repairs and maintenance, insurance, freight costs of products shipped to customers and depreciation. Cost of sales consists of the following major components:


	Three Months Ended March 31, 2021				Three Months Ended March 31, 2020
	Amount		As % of net sales		Amount		As % of net sales
	(dollars in thousands)
Materials	$	18,104	52.0	%	$	18,604	53.7	%
Direct labor and benefits	5,243		15.1	%	5,785		16.7	%
Manufacturing overhead	4,845		13.9	%	4,056		11.7	%
Sub-total	28,192		81.0	%	28,445		82.1	%
Depreciation	744		2.1	%	625		1.8	%
Cost of Sales	$	28,936	83.2	%	$	29,070	83.9	%
Gross Profit	$	5,862	16.8	%	$	5,591	16.1	%

Cost of sales as a percentage of net sales for the quarter ended March 31, 2021 decreased compared to the quarter ended March 31, 2020. The decrease in cost of sales is primarily driven by lower labor costs resulting from the completion of our face mask production at the end of 2020, which was a labor intensive process. These impacts are offset by increased outbound freight costs in the current year.

Gross Profit

Gross profit as a percentage of net sales, or gross margin, for the quarter ended March 31, 2021 was 16.8%, compared to 16.1% for the quarter ended March 31, 2020.

Selling, General and Administrative Expenses


	Three Months Ended March 31, 2021			Three Months Ended March 31, 2020
	(dollars in thousands)
Selling, general, and administrative expenses, excluding depreciation and amortization expenses	$	4,914		$	4,758
Depreciation and amortization	900			1,126
Selling, general, and administrative expenses	$	5,814		$	5,884
Selling, general, and administrative expenses as a percentage of net sales	16.7		%	17.0		%

Selling, general, and administrative expenses for the quarter ended March 31, 2021, decreased $0.1 million to $5.8 million compared to $5.9 million for the quarter ended March 31, 2020. Amortization expense decreased compared to the first quarter of 2020 due to intangible assets becoming fully amortized during the first quarter of 2021. This decrease was partially offset by increased professional fees and higher health insurance costs in the first quarter of 2021.

Operating Income

Operating income for the quarter ended March 31, 2021 was $0.05 million, or 0.1% of net sales, compared to an operating loss of $1.2 million, or (3.5)% of net sales, for the quarter ended March 31, 2020. The increase in operating income is primarily attributable to the absence of restructuring activities in the current year, which reduced operating income by $0.9 million in the first quarter of 2020.

Non-Operating Expense

Non-operating expense for the quarter ended March 31, 2021 was $0.7 million compared to $1.7 million for the quarter ended March 31, 2020. The $1.0 million decrease was primarily driven by lower interest expense with $0.7 million related to our interest rate swap compared to the first quarter of 2020 and the remainder reflecting the lower interest rate composition of our debt compared to last year.

Net Loss Before Income Taxes

As a result of the foregoing factors, our loss before income taxes decreased $2.3 million to $0.6 million for the quarter ended March 31, 2021 compared to a loss of $2.9 million in 2020.

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Income Tax Provision

During the three months ended March 31, 2021, income tax expense was $0.4 million, and the effective income tax rate was (70)%. The Company had higher income tax expense in the current quarter due to valuation allowance in the U.S. and higher income in certain tax jurisdictions compared to 2020.

Net Loss

Net loss for the quarter ended March 31, 2021 was $1.1 million compared to a net loss of $2.3 million the quarter ended March 31, 2020. The decrease in net loss is the result of lower interest expenses and the completion of the Company’s restructuring activities.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flows from operations and borrowings under our Credit Agreement from our senior lenders. Our primary uses of cash are payment of vendors, payroll, operating costs, capital expenditures and debt service. As of March 31, 2021 and December 31, 2020, we had a cash balance of $2.7 million and $0.8 million, respectively. As of March 31, 2021 and December 31, 2020, we had $2.9 million and $5.7 million, respectively, available to be borrowed under our revolving credit facility. Our ability to borrow, however, under the revolving line of credit is dependent on the forbearance agreement which currently expires in June 2021.

Our Debt

On April 24, 2020, due to the significant impact the COVID-19 pandemic was having on our business, our subsidiary, Unique Fabricating NA, Inc., entered into a Promissory Note for approximately $6.0 million (the “PPP Note”), pursuant to the U.S. Small Business Administration Paycheck Protection Program under Title I of the CARES Act passed by Congress and signed into law on March 27, 2020. Prior to entering into the PPP Note, on April 23, 2020, we entered into the Seventh Amendment to the Amended and Restated Credit Agreement and Loan Documents. Refer to Note 6 in Part I, Item 1 of this Quarterly Report on Form 10-Q for more discussion of the details related to the PPP Note and Seventh Amendment. The Seventh Amendment, among other things, provided us necessary liquidity by allowing us to take on the additional indebtedness from the PPP Note, deferring the June 30, 2020 principal payments on the US Term Loan, CA Term Loan, and CAPEX Loan, with the deferred principal amounts payable at the existing maturity dates, and by releasing the lien on our Evansville, Indiana property and allowing for the net cash proceeds from its sale, which was completed in June 2020, to be applied against any outstanding balance on our revolving line of credit (“Revolver”), while not permanently reducing the Revolving Credit Aggregate Commitment, as defined.

On August 7, 2020, the Company entered into the Eighth Amendment. The Eighth Amendment to the Amended and Restated Credit Agreement and Loan Documents, among other things, amended the definition of Consolidated EBITDA and made changes to the calculations of financial covenants. The definition of Consolidated EBITDA has been amended to include as an addition to Consolidated Net Income (i) costs and expenses incurred in connection with the Eighth Amendment not to exceed $175,000, (ii) restructuring expenses not to exceed $500,000 in any 12 month period, (iii) costs incurred with respect to the purchase and implementation of the ERP system not to exceed (A) $200,000 during each fiscal quarter in 2020 and (B) $100,000 during each fiscal quarter in 2021, and (iv) to the extent added in calculating Consolidated Net Income any portion of the PPP loan that has been forgiven and cancelled. The Eighth Amendment also amended the calculation of certain financial covenants based upon 12 month results to effectively exclude results of the quarter ended June 30, 2020. The calculation of Maximum Total Leverage Ratio has been amended, commencing with the quarter ending September 30, 2020 and through and including the quarter ending March 31, 2021, to annualize Consolidated EBITDA for the periods beginning July 1, 2020 through the date of calculation. The calculation of Minimum Debt Service Coverage Ratio for the quarters ended September 30, 2020, December 31, 2020 and March 31, 2021 are based upon results for one, two and three quarters, respectively. The Eighth Amendment further adds a Minimum Liquidity requirement to be calculated monthly through June 30, 2021 and Minimum Consolidated EBITDA for each measurement period, as defined, through June 30, 2021.

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including salary or compensation or distributions to or for the benefit of any member, owner, or director other than normal and customary employment salaries which do not exceed sums paid for similar positions in the Company’s marketplace.

The following is a reconciliation of net income, as reported, which is a U.S. GAAP measure of our operating results, to Consolidated EBITDA, as defined in our Credit Agreement, a non-GAAP measure, for the nine months ended March 31, 2021 which is the measuring period for determining compliance with our financial covenants:


	Nine Months Ended March 31, 2021(e)
	(dollars in thousands)
Net loss	$	(155)
Plus:
Interest expense	2,012
Income tax expense	(1,683)
Depreciation and amortization	5,271
Management fees	168
Non-cash stock awards	87
Non-recurring expenses (a)	69
ERP system implementation consulting and licensing costs (b)	214
Consolidated EBITDA, as defined	$	5,983

	Nine Months Ended March 31, 2021(e)
	(dollars in thousands)
Total Consolidated Indebtedness, as defined (c)	$	48,670
Consolidated EBITDA, as defined	$	5,983
Total leverage ratio (d)	6.10 x
Covenant requirement	3.25 x

_________________________________

(a) Represents any other non-recurring, non-cash gains during such period, including without limitation, (i) gains from the sale or exchange of assets other than in the ordinary course of business, and (ii) gains from early extinguishment of Indebtedness or Hedging Agreements

(b) Represents costs incurred with respect to the purchase and implementation of the Company's enterprise resource planning system, in an aggregate amount under the definition, not to exceed (i) $200,000 during each of US Borrower's fiscal quarters in 2020, (ii) $100,000 during each of the Company's fiscal quarters in 2021, and (iii) $0 with respect to any calculation thereafter

(c) Total Consolidated Indebtedness, as defined, excludes the $6.0 million PPP loan for covenant purposes until final determination by the SBA and Lender on forgiveness

(d) Ratio to Total Consolidated Indebtedness, as defined, divided by Consolidated EBITDA, as defined. To calculate the Total Leverage Ratio at March 31, 2021, the Consolidated EBITDA for the nine months ended March 31, 2021 is annualized by multiplying it by 4/3.

(e) The nine months ended March 31, 2021 is the most recent period for which information is available for measuring compliance with financial covenants under the Amended and Restated Credit Agreement.

Refer to Note 6, “Long-term Debt,” in Part 1, Item 1, included within this quarterly report on Form 10-Q for the first quarter ended March 31, 2021 for additional information.

Capital Expenditures

In 2020, we plan to spend approximately $4.0 million in capital expenditures, of which $1.5 million was spent through March 31, 2021, primarily to add new production equipment as we expand our production capabilities, upgrade existing equipment, and improve our information technology software and hardware throughout our facilities.

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Dividends

The Eighth Amendment permits distributions only after December 31, 2021 as long as the Borrower is in compliance with specified conditions including that the Borrower's liquidity, as defined, is not less than $5 million after giving effect to the distributions, total leverage ratio is not more than 2.00 to 1.00, post distribution DSCR, as defined, is greater than 1.10 to 1.00, and Borrower is in compliance with financial covenants, before and after giving effect to the distributions. The forbearance agreement does not permit the payment of dividends and if we are able to enter into a waiver of our existing defaults and amendments to our Amended and Restated Credit Agreement, it is likely that the amendments will restrict or prohibit dividends.

Cash Flow Data

The following table presents cash flow data for the periods presented:


	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
	(dollars in thousands)
Cash flows provided by (used in):
Operating activities	$	90	$	2,209
Investing activities	$	(1,465)	$	(291)
Financing activities	$	3,344	$	(1,448)

Operating Activities

Cash provided by operating activities consists of: net income adjusted for non-cash items; including depreciation and amortization; gain or loss on sale of assets; inventory reserve; goodwill impairment; gain or loss on derivative instruments; bad debt adjustments; stock option expense; changes in deferred income taxes; accrued and other liabilities; prepaid expenses and other assets; and the effect of working capital changes. The primary factors affecting cash inflows and outflows are accounts receivable, inventory, prepaid expenses and other assets, and accounts payable and accrued interest.

During the three months ended March 31, 2021, net cash provided by operating activities was $0.1 million, compared to net cash provided by operating activities of $2.2 million for the three months ended March 31, 2020. The decrease in cash provided by operating activities was primarily attributable to increases in accounts receivable. The increases are driven by the conversion of prepaid tooling in the quarter and higher sales in March of this year compared to the end of the first quarter of 2020 due to the uncertainty surrounding the COVID-19 pandemic.

Investing Activities

Cash provided by or used in investing activities consists principally of purchase and sale of property, plant and equipment.

During the three months ended March 31, 2021 and March 31, 2020, we made capital expenditures of $1.5 million and $0.3 million, respectively. We plan to spend a total of approximately $4.0 million in capital expenditures during 2021, including the $1.5 million spent through March 31, 2021.

Financing Activities

Cash flows provided by or used in financing activities consists primarily of borrowings and payments under our senior credit facilities, debt issuance costs, proceeds from any exercise of stock options and warrants, and distribution of cash dividends.

During the three months ended March 31, 2021, we had net cash provided by financing activities of $3.3 million compared to a use of $1.4 million during the three months ended March 31, 2020. Driving the cash inflows during the three months ended March 31, 2021 was proceeds from the Company’s line of credit, please refer to Note 6 for additional discussion of our debt.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.

Indemnification Agreements

In the normal course of business, we provide customers with indemnification provisions of varying scope against claims of intellectual property infringement by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations. In addition, we have entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to indemnify them against certain

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liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders’ equity or consolidated cash flows.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect amounts reported in those statements. We have made our best estimates of certain amounts contained in our consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. However, application of our accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. Management believes that the estimates, assumptions, and judgments involved in the accounting policies that have the most significant impact on our consolidated financial statements are discussed in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K. There have been no material changes to our critical accounting policies or uses of estimates since the date of our Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

Refer to Note 2 to the condensed consolidated financial statements in Part I Item 1 of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate and foreign exchange risks.

Interest Rate Fluctuation Risk

Our borrowings under our Credit Agreement bear interest at fluctuating rates. In order to mitigate, in part, the potential effects of the fluctuating rates, effective June 30, 2016, we entered into a interest rate swap with a notional amount initially of $16.68 million, which decreased by $0.32 million each quarter until June 30, 2017, and began decreasing by $0.43 million each quarter until June 29, 2018, when it began decreasing by $0.53 million per quarter until the swap terminated on June 28, 2019. The interest rate swap required the Company to pay a fixed rate of 1.055 percent per annum while receiving a variable rate per annum based upon the one month LIBOR rate for a net monthly settlement based on the notional amount in effect. This swap terminated an old swap that we entered into on January 17, 2014 under our old senior credit facility. See Note 7 of our consolidated financial statements for further information.

Effective October 2, 2017, as required under the Second Amendment to the Credit Agreement, as discussed in Note 7 of our consolidated financial statements, the Company entered into another interest rate swap that requires the Company to pay a fixed rate of 1.093% percent per annum while receiving a variable interest rate per annum based on one month LIBOR for a net monthly settlement based on the notional amount in effect. The notional amount at the effective date was $1.90 million which decreased by $0.10 million each quarter until it expired on September 30, 2020.

Effective November 30, 2018, as required under the Amended and Restated Credit Agreement, the Company entered into another interest rate swap that requires the Company to pay a fixed rate of 3.075 per annum while receiving a variable interest rate per annum based on one month LIBOR for a net monthly settlement based on the notional amount in effect. The notional amount at the effective date was $5.0 million which increased by $0.04 million each quarter until June 29, 2018 when the notional amount increased to $17.5 million due to the interest rate swap from 2016 described above expiring. The notional amount then decreased each quarter by $0.1 million until September 30, 2020 when the notional amount increased to $17.5 million due to the interest rate swap from 2017 above expiring. The notional amount then decreases each quarter by $0.4 million until December 31, 2021, then decreases each subsequent quarter by $0.6 million until it expires on November 8, 2023.

At March 31, 2021, the fair value of all swaps was in a net liability position of $1.01 million and is included in other accrued liabilities and other long term liabilities in the condensed consolidated balance sheets.

We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our operating results or financial condition.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended ("Exchange Act") referred to herein as “Disclosure Controls,” as the end of the quarter covered by this report. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, due to the material weaknesses in our internal control over financial reporting previously identified and described more fully under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, the Company’s disclosure controls and procedures were not effective as of March 31, 2021 to ensure information required to be disclosed by our Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. Our management establishes and maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) to ensure that the information we disclose under the Exchange Act is properly and timely reported. We provide this information to our Chief Executive Officer and Chief Financial Officer as appropriate to allow for timely decisions.

Notwithstanding the conclusion by our CEO and CFO that our Disclosure Controls as of March 31, 2021 were not effective, and notwithstanding the material weaknesses in our internal control over financial reporting described more fully under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, management believes that the consolidated financial statements and related financial information included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows as of the date presented, and for the periods ended on such dates, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Internal Controls Over Financial Reporting

A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis.

As previously identified and described more fully under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, the Company identified deficiencies that constitute material weaknesses related to limited finance staffing levels that are not commensurate with the Company’s complexity and its financial accounting and reporting requirements. The material weaknesses continued to exist as of the end of the period covered by this Quarterly Report.

Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting

The Company continues to take action on the remediation plan more fully described under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. While the Company is moving forward with these remediation activities, additional work needs to be done in this area. To that end, the Company plans to hire a third party firm to conduct a risk and gap analysis on the Company’s internal control over financial reporting. Accordingly, we concluded that the material weaknesses have not yet been remediated as of March 31, 2021.

Changes in Internal Control over Financial Reporting

Other than the ongoing steps being taken to remediate the material weaknesses described above and under “Item 9A. Controls and Procedures-Internal Control Over Financial Reporting” in the 2020 Form 10-K, there were no changes during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable

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Item 1A. Risk Factors

The Company’s cash flows from operations and borrowings under our Amended and Restated Credit agreement, may not be sufficient to cover the Company’s liquidity needs.

Our principal sources of liquidity are cash flows from operations and borrowings under our Amended and Restated Credit Agreement from our senior lenders. As of March 31, 2021 we had $2.9 million, available to be borrowed under our revolving credit facility and approximately of $2.7 million cash and cash equivalents. Our ability to borrow, however, under the revolving line of credit is dependent on the forbearance agreement which currently expires in June 2021. The Company intends to use the forbearance period to continue negotiations with the Lenders to enter into an amendment and waiver to cure the defaults. Until such time as an amendment is granted, and there is no guarantee that an amendment will be granted, the Company must manage it’s liquidity needs with cash flows from operations and remaining availability subject to the Amended and Restated Credit Agreement. There can be no assurance that such sources will be sufficient to fund our operating and other requirements.

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

None

Item 3. Defaults Upon Senior Securities

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

Exhibit Index


Exhibit No.						Description
31.1*						Certification of the Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of the Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**						Certification of the Chief Executive Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification of the Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS+						XBRL Instance Document
101.SCH+						XBRL Taxonomy Extension Schema Document
101.CAL+						XBRL Taxonomy Calculation Linkbase Document
101.DEF+						XBRL Taxonomy Definition Linkbase Document
101.LAB+						XBRL Taxonomy Label Linkbase Document
101.PRE+						XBRL Taxonomy Presentation Linkbase Document

* Filed herewith.

** Pursuant to Item 601(b)(32)(ii) of Regulation S-K(17 C.F.R 229.601(b)(32)(ii)), this certification is deemed furnished, not filed, for purposes of section 18 of the Exchange Act, nor is it otherwise subject to liability under that section. It will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except if the registrant specifically incorporates it by reference.

+ Filed electronically with the report.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

UNIQUE FABRICATING, INC.

Date:

May 13, 2021

By:

/s/ Brian P. Loftus

Brian P. Loftus

Chief Financial Officer
(Principal Financial and Accounting Officer)