Unique Fabricating, Inc. - Quarter Report: 2022 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, 2022


☐			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 29, 2022, the registrant had 11,733,147 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 3 1 , 202 2 (unaudited) and as of December 31, 202 1 (unaudited)	2
		Condensed Consolidated Statements of Operations for the three mont hs ended March 3 1 , 202 2 (unaudited) and three months ended March 3 1 , 202 1 (unaudited)	3
		Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 3 1 , 202 2 (unaudited) and the three months ended March 3 1 , 202 1 (unaudited)	4
		Condensed Consolidated Statements of Cash Flows for the three months ended March 3 1 , 202 2 (unaudited) and the thre e months ended March 3 1 , 202 1 (unaudited)	5
		Notes to Condensed Consolidated Financial Statements (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
	Item 4.	Controls and Procedures	24
Part II.	Other Information
	Item 1.	Legal Proceedings	25
	Item 1A.	Risk Factors	25
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
	Item 3.	Defaults Upon Senior Securities	25
	Item 4.	Mine Safety Disclosures	25
	Item 5.	Other Information	25
	Item 6.	Exhibits	26
		Signatures	27

Table of Contents

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

UNIQUE FABRICATING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited – dollars in thousands)


	March 31, 2022		December 31, 2021
Assets
Current assets
Cash and cash equivalents	$	752	$	742
Accounts receivable, net of reserves of approximately $1.1 million and $1.3 million at March 31, 2022 and December 31, 2021, respectively	26,566		23,469
Inventory, net	13,477		13,770
Prepaid expenses and other current assets:
Prepaid expenses and other	3,099		3,270
Refundable taxes	4,342		3,738

Total current assets	48,236		44,989
Property, plant, and equipment, net	21,981		22,567
Goodwill	16,996		16,996
Intangible assets	4,700		5,161
Other assets
Operating leases	9,757		9,776
Investments, at cost	1,054		1,054
Deposits and other assets	775		755
Deferred tax asset	2,379		2,379
Total assets	$	105,878	$	103,677
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	14,117	$	10,056
Current maturities of long-term debt	27,713		28,884
Income taxes payable	311		303
Revolver, current maturities	19,336		19,541
Accrued compensation	1,709		1,149
Other accrued liabilities	3,237		3,478
Total current liabilities	66,423		63,411
Long-term debt, net of current maturities	—		—

Other long-term liabilities:

Other liabilities	8,856		9,139
Total liabilities	75,279		72,550
Stockholders’ equity:
Common stock, $0.001 par value: 15,000,000 shares authorized and 11,733,147 and 11,733,147 issued and outstanding at March 31, 2022 and December 31, 2021, respectively	12		12
Additional paid-in-capital	50,390		50,349
Accumulated deficit	(19,803)		(19,234)
Total stockholders’ equity	30,599		31,127
Total liabilities and stockholders’ equity	$	105,878	$	103,677

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,
	2022		2021
Net sales	$	35,312	$	34,798
Cost of sales	30,534		28,936
Gross profit	4,778		5,862
Selling, general, and administrative expenses	4,972		5,814


Operating income (loss)	(194)		48
Other income (expense):

Other, net	(59)		18
Interest expense	(481)		(693)
Other expense, net	(540)		(675)
Loss before income taxes	(734)		(627)
Income tax expense (benefit)	(165)		442
Net loss	$	(569)	$	(1,069)
Net loss per share:
Basic	$	(0.05)	$	(0.11)
Diluted	$	(0.05)	$	(0.11)

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, 2021	11,733,147	$	12	$	50,349	$	(19,234)	$	31,127
Net loss	—	—		—		(569)		(569)
Stock option expense	—	—		41		—		41


Balance - March 31, 2022	11,733,147	$	12	$	50,390	$	(19,803)	$	30,599


	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

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,
	2022		2021
Cash Flows from Operating Activities:
Net loss	$	(569)	$	(1,069)
Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization	1,276		1,644
Amortization of debt issuance costs	56		45
Loss on sale of assets	—		14
Bad debt adjustment	(72)		(118)
Loss (gain) on derivative instrument	(380)		(185)

Stock option expense	41		27
Accrued in-kind interest on long term debt	39		—

Changes in operating assets and liabilities that provided (used) cash:
Accounts receivable	(3,025)		(3,142)
Inventory	293		(1,611)
Prepaid expenses and other assets	(452)		1,317
Accounts payable	4,107		3,485
Other assets and liabilities, net	444		(317)
Net cash provided by operating activities	1,758		90
Cash Flows from Investing Activities:
Capital expenditures	(229)		(1,530)
Proceeds from sale of property, plant, and equipment	—		65
Net cash used for investing activities	(229)		(1,465)
Cash Flows from Financing Activities:
Net change in bank overdraft	(46)		(922)
Payments on term loans and capital expenditure line	(1,228)		(1,007)
Payments on revolving credit facilities	(13,824)		(6,280)
Proceeds from revolving credit facilities	13,579		11,553





Net cash provided by (used for) financing activities	(1,519)		3,344
Cash and Cash Equivalents:
Net increase in cash and cash equivalents	10		1,969
Cash and cash equivalents at beginning of period	742		760
Cash and cash equivalents at end of period	$	752	$	2,729
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	774	$	815
Cash paid for income taxes	$	112	$	226

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 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, 2021.

Going Concern

The Company’s condensed consolidated financial statements are prepared in accordance with U.S. 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.

As of December 31, 2020 and March 31, 2021, the Company was in violation of its financial covenants, as defined in the Company’s Credit Agreement (Note 6). The Company entered into a forbearance agreement, dated April 9, 2021, which allowed the Company to be able to borrow on its revolving line of credit, subject to the terms and conditions to making a revolving credit advance, including availability, and the lenders agreed, subject to the terms of the forbearance agreement, as amended, to forbear from enforcing their rights or seeking to collect payment of the Company’s debt or disposing of the collateral securing the debt. As of September 30, 2021, the Company was also in violation of the required Minimum Consolidated EBITDA covenant (as amended by the Second Amendment to the Forbearance Agreement dated September 21, 2021).

On December 9, 2021, the Company entered into the Third Amendment to Forbearance Agreement with respect to the Amended and Restated Credit Agreement, as amended. The Lenders in the Third Amendment to the Forbearance Agreement, among other things, agreed to forbear with respect to the Minimum Consolidated EBITDA covenant violation and to suspend the Minimum Consolidated EBITDA covenant during the remainder of the forbearance period. The Third Amendment included a new covenant that began on December 15, 2021, which is tested weekly on a rolling basis and requires that the Company’s actual cumulative total cash disbursements for the period being tested not exceed total cash disbursements projected by the Company for the same period by more than 15% at any time during the forbearance period. The Third Amendment also reduced the Revolving Credit Aggregate Commitment from $27 million to $25 million.

As of December 31, 2021, the Company was in violation of the required Minimum Liquidity covenant, as provided in the Second Amendment to the Forbearance Agreement. As a result, on February 4, 2022, the Company entered into the Fourth Amendment to Forbearance Agreement. The Lenders in the Fourth Amendment to the Forbearance Agreement agreed to waive the Minimum Liquidity covenant violation.

On February 25, 2022, the Company entered into the Fifth Amendment to Forbearance Agreement, which extends the Forbearance Period from February 28, 2022, to March 11, 2022. The Company used the short-term extension of its Forbearance Agreement, provided by the Fifth Amendment, to conduct negotiations of a longer extension with the Lenders.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On March 11, 2022, the Company entered into the Sixth Amendment to Forbearance Agreement, which extends the Forbearance Period from March 11, 2022, to May 30, 2022. The Company intends to use the latest extension of its Forbearance Agreement, provided by the Sixth Amendment, to pursue a cure or waiver of financial covenant defaults and amended credit agreement

The defaults, if not waived by our lenders, allows the lenders to accelerate the maturity of the debt, making it immediately due and payable. Accordingly, all debt subject to the Credit Agreement, totaling $47.0 million, has been classified as current as of March 31, 2022. The Company does not have sufficient cash and cash equivalents on hand or available liquidity to repay such debt or meet its obligations as they become due through twelve months from date of issuance of these condensed consolidated financial statements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

In response to these conditions, the Company is discussing with its bank lenders entering into an amendment and waiver to cure the covenant defaults. There is not any assurance that the lenders will waive such non compliance or agree to an amendment to the current provisions. Even if the lenders were to agree to waive the failures to comply as of December 31, 2020, March 31, 2021, and September 30, 2021, there cannot be any assurance that, at any future date at which compliance is measured, we will be able to comply with the covenants contained in the forbearance agreement, as amended, given the industry-wide and other challenges that we face, as described elsewhere herein, or that our lenders would waive a default if that were to occur. Furthermore, 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. 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 condensed 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:

Customer and Credit — During the three months ended March 31, 2022 and March 31, 2021, the Company’s net sales were principally derived from customers engaged in the North American automotive industry. The following table presents the Company's sales directly to General Motors Company (“GM”), Yanfeng Automotive Interiors, Stellantis N.V. (formerly Fiat Chrysler Automobiles), and Ford Motor Company (“Ford”) as a percentage of total net sales:


	Three Months Ended March 31,
		2022		2021
General Motors Company		9	%	7	%
Yanfeng Automotive Interiors		10	%	7	%
Stellantis N.V.		8	%	6	%
Ford Motor Company		5	%	5	%

Furthermore, the Company had additional sales to the customers listed in the above table indirectly through other customers.

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 and Canada:


	Three Months Ended March 31,
		2022		2021
Mexico		25	%	23	%
Canada		9	%	10	%

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Three Months Ended March 31,
		2022		2021
Mexico		26	%	24	%
Canada		9	%	10	%

Labor Markets — At March 31, 2022, 49% of our employees were working in the United States, 48% were working in Mexico, and 3% were working in Canada. In the United States manufacturing facilities, 29% were covered under a collective bargaining agreement which expires in August 2022 while another 15% were covered under a separate collective bargaining agreement that expires in February 2023.

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.

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. In January 2021, the FASB issued ASU 2021-01 - Reference Rate Reform (Topic 848). The amendments in this ASU clarify that certain option expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. 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:


	Three Months Ended March 31,
			2022		2021
		(dollars in thousands)
Net Sales
Transportation			$	31,449	$	31,244
Appliance			3,124		3,135
Other			739		419
Total			$	35,312	$	34,798

General Recognition Policy

Revenue is recognized by the Company once all performance obligations under the terms of a contract with a Company's customer is 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.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

4. Inventory

Inventories consist of the following:


	March 31, 2022		December 31, 2021
	(dollars in thousands)
Raw materials	$	9,472	$	9,242
Work in progress	1,195		990
Finished goods	2,810		3,538
Total inventory	$	13,477	$	13,770

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 $1.4 million at March 31, 2022 and $1.2 million at December 31, 2021.

Included in inventory are assets located in Mexico with a carrying amount of $3.7 million at March 31, 2022 and $4.0 million at December 31, 2021, and assets located in Canada with a carrying amount of $1.2 million at March 31, 2022 and $1.1 million at December 31, 2021.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Property, Plant, and Equipment, Net

Property, plant, and equipment, net consists of the following:


	March 31, 2022		December 31, 2021		Depreciable Life – Years
	(dollars in thousands)
Land	$	538	$	538
Buildings	7,630		7,630		23 – 40
Shop equipment	26,108		26,049		7 – 10
Leasehold improvements	1,283		1,283		3 – 10
Office equipment	3,048		3,047		3 – 7
Mobile equipment	50		50		3
Construction in progress	1,724		1,554
Total cost	40,381		40,151
Less: Accumulated depreciation	18,400		17,584
Net property, plant, and equipment, net	$	21,981	$	22,567

Depreciation expense was $0.8 million for the three months ended March 31, 2022, and $0.7 million for the three months ended March 31, 2021.

Included in property, plant, and equipment, net are assets located in Mexico with a carrying amount of $3.5 million and $3.5 million at March 31, 2022 and December 31, 2021, respectively, and assets located in Canada with a carrying amount of $0.4 million and $0.4 million at March 31, 2022 and December 31, 2021, respectively.

6. Long-term Debt

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


	March 31, 2022		December 31, 2021
	(dollars in thousands)
US Term Loan, payable to lenders in quarterly installments of $0.8 million through November 7, 2023 with a lump sum due at maturity. The effective interest rate was 5.5% per annum at March 31, 2022 and December 31, 2021. At March 31, 2022, the balance of the US Term Loan is presented net of a debt discount of $113 thousand from costs paid to or on behalf of the lenders.	$	19,607	$	20,383
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 5.5% per annum at March 31, 2022 and December 31, 2021. At March 31, 2022, the balance of the CA Term Loan is presented net of a debt discount of $49 thousand from costs paid to or on behalf of the lenders.	7,082		7,437
Capital expenditure line payable to lenders in quarterly installments of 12.5% per annum through November 7, 2023 with a lump sum due at maturity. The effective interest rate was 5.5% per annum at March 31, 2022 and December 31, 2021.	1,024		1,064
Total debt excluding Revolver	$	27,713	$	28,884

As of March 31, 2022 and December 31, 2021, the fair value of the Company’s debt approximates book value based on the variable terms.

Credit Agreement

On November 8, 2018, Unique Fabricating NA, Inc. (the “US Borrower”) and Unique-Intasco Canada, Inc. (the “CA Borrower” and together with 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 Credit Agreement is a five-year agreement and provided for

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

borrowings up to an aggregate principal amount of $73.0 million. The 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 $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 Credit Agreement has a maturity date for all borrowings of November 7, 2023.

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 Credit Agreement. The Seventh Amendment to the Credit Agreement added a 1.0% LIBOR Floor and 2.0% Base Rate Floor.

The First Amendment to the Forbearance Agreement increased the per annum interest rate from 4.25% to 4.50% for the duration of the Forbearance Period. Furthermore, the First Amendment imposes Payment in Kind (“PIK”) additional interest of 0.5% per annum on all outstanding debt subject to the Credit Agreement, which is payable on May 30, 2022, currently the termination date of the Forbearance Agreement, or earlier in the event of a Forbearance Termination event, as defined.

As of March 31, 2022, $19.6 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 5.50% percent per annum at March 31, 2022, and is secured by substantially all of the Company’s assets. At March 31, 2022, the maximum additional available borrowings under the Revolver was $5.2 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.

The Company’s financial results for the six months ended December 31, 2020 and the nine months ended March 31, 2021 resulted in violations of one or more 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 Credit Agreement. The Company entered into a Forbearance Agreement, providing a period commencing on April 9, 2021 and through and including June 15, 2021, during which the Company was able to borrow on its Revolver, subject to the terms and conditions to making a revolving credit advance, including availability, and the Lenders 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.

On June 14, 2021, the Company entered into the First Amendment to the Forbearance Agreement, which among other things, extended the forbearance period from June 15, 2021 to February 28, 2022 and waived the testing of the Maximum Total Leverage Ratio and Minimum Debt Service Coverage ratios for the duration of the Forbearance Period. The First Amendment also substituted Minimum Liquidity and Minimum Consolidated EBITDA requirements which would be tested monthly beginning with the month ending July 31, 2021. During the extended period, the Company was able to borrow under the revolving line of credit, subject to availability and satisfaction of certain other conditions.

On September 21, 2021, the Company entered into the Second Amendment to Forbearance Agreement, which among other things, made changes to the calculations of financial covenants, contained revised requirements for Minimum Liquidity and Minimum Consolidated EBITDA, as defined, for the monthly periods through and including February 28, 2022, and revised the Revolving Credit Aggregate Commitment from $30 million to $27 million.

On December 9, 2021, the Company entered into the Third Amendment to Forbearance Agreement. As previously reported, the Company was in violation of the required Minimum Consolidated EBITDA Covenant (as amended by the Second Amendment to the Forbearance Agreement) as of September 30, 2021. The Lenders in the Third Amendment to the Forbearance Agreement, among other things, agreed to forbear with respect to the Minimum Consolidated EBITDA covenant violation and to suspend the Minimum Consolidated EBITDA covenant during the remainder of the forbearance period. The Third Amendment includes a new covenant tested weekly on a rolling basis, beginning December 15, 2021, and required that the Company’s actual cumulative total cash disbursements for the period being tested to not exceed total cash disbursements projected by the Company for the same period by more than 15% at any time during the forbearance period. The Third Amendment also reduced the Revolving Credit Aggregate Commitment from $27 million to $25 million.

As of December 31, 2021, the Company was in violation of the required minimum Liquidity covenant, as provided in the Second Amendment to the Forbearance Agreement, dated September 21, 2021. As a result, on February 4, 2022, the Company entered into the Fourth Amendment to Forbearance Agreement. The Lenders in the Fourth Amendment agreed to waive the minimum Liquidity covenant violation. The Company did have the required minimum liquidity by the conclusion of the first week of 2022.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2022 and December 31, 2021, unamortized debt issuance costs were $0.2 million and $0.2 million, respectively, while amounts paid to or on behalf of lenders presented as unamortized debt discounts were $0.2 million and $0.2 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 $0.1 million for the three months ended March 31, 2022, and $0.1 million for the three months ended March 31, 2021.

Covenant Compliance

The Amended and Restated Credit agreement, as further amended and forbore by the Forbearance Agreement, as 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 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. However, testing of the Total Leverage Ratio is suspended during the Forbearance Period.

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. However, testing of the Minimum Debt Service Coverage Ratio is suspended during the Forbearance Period.

Projected Cash Disbursements

The Third Amendment to the Forbearance Agreement establishes a financial covenant limiting the Company’s cash disbursements for the duration of the Forbearance Period. Commencing on December 15, 2021, the cumulative total cash disbursements may not exceed the Company’s projected total cash disbursements for the same cumulative period by more than 15%.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Future Maturities

The loan covenant defaults mentioned previously, if not waived by our lenders, allows the lenders to accelerate the maturity of the debt, making it immediately due and payable. Accordingly, all debt subject to the Credit Agreement has been classified as current as of March 31, 2022:


	Future Maturities
	(dollars in thousands)
2022	$	47,426

Total	47,426
Discounts	(162)
Debt issuance costs	(215)
Total debt, net	$	47,049

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, 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 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 an 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 expiring. Since June 28, 2019, the notional amount then decreased each quarter by $0.2 million until September 30, 2020 when the notional amount increased to $17.5 million due to the interest rate swap from 2017 expiring. The notional amount then decreased 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, 2022, the fair value of all swaps was in a net liability position of $0.2 million and is included in other long term liabilities in the condensed consolidated balance sheets. At December 31, 2021, the fair value of the swap was $0.6 million. The Company paid $0.1 million in net monthly settlements with respect to the interest rate swaps for the three months ended March 31, 2022 and the three months ended March 31, 2021. Both the change in fair value and the net monthly settlements were included in interest expense in the condensed consolidated statements of operations.

8. 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

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2021	846,731	$	4.00	7.6	$	—
Granted	—	$	—	0	$	—
Exercised	—	$	—	0	$	—
Forfeited or expired	13,647	$	4.51	0	$	—
Outstanding at March 31, 2022	833,084	$	4.00	7.4	$	—
Vested and exercisable at March 31, 2022	390,129	$	4.81	6.4	$	—

————————————

(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 $1.90 as of March 31, 2022 and $1.96 as of December 31, 2021.

The Company recorded stock-based compensation expense of $41 thousand for the three months ended March 31, 2022, respectively, and $27 thousand for the three months ended March 31, 2021, respectively. Stock compensation expense is included in the condensed consolidated statements of operations, as a component of selling, 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, 2022, there was $577 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 3.6 years.

9. 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 for the three months ended March 31, 2022, was $(0.2) million, compared to income tax expense of $0.4 million for the three months ended March 31, 2021. During the three months ended March 31, 2022, the effective tax rate was 22%. The differences between the effective tax rates and the statutory rate of 21% were primarily related to a mix of earnings in jurisdictions which have higher income tax rates than the U.S.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10. 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, 2022 were immaterial. Prior to March 31, 2022, the Company signed a lease extension for one of the buildings in Queretaro, Mexico. This extension led to the Company recognizing an additional ROU asset and related liability of $0.4 million.

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

Classification

March 31, 2022

(dollars in thousands)

Right-of-Use-Assets

Operating

Operating leases

9,757

Liabilities

Current

Operating

Other accrued liabilities

1,736

Non-current

Operating

Other liabilities

8,661

Total lease liabilities

10,397

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

Classification

Three Months Ended March 31, 2022

(dollars in thousands)

Lease cost

Cost of sales, selling expenses and general and administrative expense

669

Maturities of the Company’s lease liabilities as of March 31, 2022 are as follows:


	Lease Liability Maturities
	(dollars in thousands)
2022 (remainder)	$	1,846
2023	1,931
2024	1,840
2025	1,702
2026	1,472
Thereafter	4,225
Total lease payments	13,016
Less: interest	2,619
Present value of lease payments	$	10,397

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 lease commencement date in determining the present value of lease payments. Remaining lease term and discount rates are as follows:


	March 31, 2022
Weighted average remaining lease term (years)	6.8
Weighted average discount rate	6.5	%

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

Three Months Ended March 31, 2022

(dollars in thousands)

Cash paid for amounts included in the measurement of lease liabilities

Operating cash outflows from operating leases

713

11. 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, 2022 and $0.1 million for the three months ended March 31, 2021.

12. 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 $300 thousand 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 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 (“Taglich”). The Company incurred management fees of $56 thousand for the three months ended March 31, 2021, however, the Forbearance Agreement suspended any further management fee payments until the expiration of the Forbearance Period. 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.

Beginning in February 2021, the Company began utilizing the services of Engauge Workforce Solutions LLC (“Engauge”), a manufacturing and distribution staffing agency. Ms. Kim Korth, a member of the Company’s Board of Directors, is also the Managing Director of Engauge. In March 2021, the Company entered into an agreement with Engauge for its services. The agreement is for an initial term of 12 months and will continue on a month-to-month basis after the initial term. The Company may terminate the agreement, without penalty, following the initial term with 60 days written notice. The Company has incurred fees for Engauge’s services for the three months ended March 31, 2022 of $350 thousand.

13. 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.

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 variable and fixed interest rates, the scheduled balance of principal outstanding, yield curves and other information readily available in the market. Please refer to Note 7 for more information on the Company’s interest rate swap.

The Company assess goodwill for impairment on at least an annual basis, and more frequently whenever events or changes in circumstances indicate a potential impairment. The goodwill impairment analysis is based on Level 3 inputs, including forecasted EBITDA margins and future cash flows.

14. 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.

The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted loss per share:


	Three Months Ended March 31,
	2022		2021
	(dollars in thousands, except per share amounts)
Numerator:
Net income (loss)	$	(569)	$	(1,069)
Denominator:
Weighted average shares outstanding, basic	11,733,147		9,779,147
Dilutive effect of stock-based awards	—		—
Weighted average share outstanding, diluted	11,733,147		9,779,147

Basic loss per share	$	(0.05)	$	(0.11)
Diluted loss per share	$	(0.05)	$	(0.11)

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UNIQUE FABRICATING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2022 and March 31, 2021, 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,
	2022	2021
Number of options	833,084	726,500
Exercise price of options	$2.08 - $12.50	$2.36 - $12.58
Warrants(1)	156,320
Exercise price of warrants	$3.12

_________________________________

(1) Includes warrants to purchase 156,320 shares of common stock issued to the placement agent of the Company's equity issuance in September 2021 with an exercise price of $3.12 per share of common stock and which expire on September 21, 2026.

15. 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, 2021 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/off-road 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.

Table of Contents

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 the Company 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, the Company’s products improve the interior comfort of a vehicle, increasing perceived vehicle quality and the overall experience of its passengers. The Company’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.

Recent Developments

Coronavirus

The COVID-19 pandemic’s adverse impact on the global economy has persisted through the beginning of 2022. The supply chain constraints, increasing raw material costs, and limited labor availability have continued to hinder the results of our operations, cash flows, and financial position. While the COVID-19 pandemics effects on the global economy are not expected to be permanent, the duration of the lingering consequences cannot be accurately estimated.

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, 2022 and March 31, 2021

Net Sales


	Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
	(dollars in thousands)
Net sales	$	35,312	$	34,798

Net sales for the quarter ended March 31, 2022 were approximately $35.3 million compared to $34.8 million for the quarter ended March 31, 2021, representing a increase of 1.5%. The net sales increase in 2022 was primarily driven by our cost recovery efforts to pass input cost increases to our customers by increasing selling prices, which were not yet implemented in the first quarter of 2021.

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, 2022				Three Months Ended March 31, 2021
	Amount		As % of net sales		Amount		As % of net sales
	(dollars in thousands)
Materials	$	18,991	53.8	%	$	18,104	52.0	%
Direct labor and benefits	5,694		16.1	%	5,243		15.1	%
Manufacturing overhead	5,091		14.4	%	4,845		13.9	%
Sub-total	29,776		84.3	%	28,192		81.0	%
Depreciation	758		2.1	%	744		2.1	%
Cost of Sales	$	30,534	86.5	%	$	28,936	83.2	%
Gross Profit	$	4,778	13.5	%	$	5,862	16.8	%

Cost of sales as a percentage of net sales for the quarter ended March 31, 2022 increased compared to the quarter ended March 31, 2021. The increase in cost of sales was primarily the result of higher raw material and freight costs driven by price increases from our vendors. Labor costs have increased compared to the first quarter of 2021 due to utilizing additional contract labor.

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Gross Profit

Gross profit as a percentage of net sales, or gross margin, for the three months ended March 31, 2022 was 13.5% compared to 16.8% for the three months ended March 31, 2021. Gross profit and gross margin in the three months ended March 31, 2022, were both negatively impacted by higher raw material. freight, and labor costs as compared to the three months ended March 31, 2021. These higher manufacturing input costs were partially offset by the impact of our cost recovery efforts.

Selling, General and Administrative Expenses


	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021
	(dollars in thousands)
Selling, general, and administrative expenses, excluding depreciation and amortization expenses	$	4,452		$	4,914
Depreciation and amortization	520			900
Selling, general, and administrative expenses	$	4,972		$	5,814
Selling, general, and administrative expenses as a percentage of net sales	14.1		%	16.7		%

Selling, general, and administrative expenses for the quarter ended March 31, 2022 decreased $0.8 million to $5.0 million compared to $5.8 million for the quarter ended March 31, 2021. The decrease in selling, general, and administrative expenses during the first quarter of 2022 was driven by reduced intangible asset amortization as certain assets reached the end of their useful lives, and reduced salary expenses, slightly offset by an increase in professional fees related to credit agreement forbearance amendments.

Operating Income (Loss)

Operating Income (loss) for the three months ended March 31, 2022 was $(0.2) million, or 0.5% of net sales, compared to an operating income of $48 thousand, or 0.1% of net sales, for the three months ended March 31, 2021. The reduction in operating profit was primarily attributable to the increased raw material, freight, and labor costs, partially offset by the reduction in selling, general, and administrative expenses.

Non-Operating Expense

Non-operating expense for the three months ended March 31, 2022 was $0.5 million compared to non-operating expense of $0.7 million for the three months ended March 31, 2021. Non-operating expense was lower in 2022 due to favorable mark-to-market adjustments on our interest rate swap.

Loss Before Income Taxes

As a result of the foregoing factors, our net loss before income taxes increased $0.1 million to a loss of $0.7 million for the three months ended March 31, 2022 compared to loss of $0.6 million in 2021.

Income Tax Provision

During the three months ended March 31, 2022, income tax benefit was $0.2 million, and the effective income tax rate was 22%, compared to income tax expense of $0.4 million for the three months ended March 31, 2021. The differences between the effective tax rate and the statutory tax rate of 21% were primarily due a mix of earnings in jurisdictions which have higher income tax rates than the U.S.

Net Loss

Net loss for the three months ended March 31, 2022 was $0.6 million compared to a net loss of $1.1 million for the three months ended March 31, 2021.

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, 2022 and December 31, 2021, we had a cash balance of $0.8 million and $0.7 million, respectively. As of March 31, 2022 and December 31, 2021, we had $5.2 million and $2.2 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 expires at the end of May 2022, including our compliance with its terms.

Our Debt

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The Company’s financial results for the six months ended December 31, 2020 and the nine months ended March 31, 2021 resulted in violations of one or more 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 entered into a Forbearance Agreement, providing for a period commencing on April 9, 2021 and through and including June 15, 2021, during which the Company was able to borrow on its Revolver, subject to the terms and conditions to making a revolving credit advance, including availability, and the Lenders 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.

On June 14, 2021, the Company entered into the First Amendment to the Forbearance Agreement, which among other things, extended the forbearance period from June 15, 2021 to February 28, 2022, and waived the testing of the Maximum Total Leverage Ratio and Minimum Debt Service Coverage ratios for the duration of the Forbearance Period. The First Amendment also substituted Minimum Liquidity and Minimum Consolidated EBITDA requirements, which were tested monthly beginning with the month ending July 31, 2021.

On September 21, 2021, the Company entered into the Second Amendment to the Forbearance Agreement, which among other things, made changes to the calculations of financial covenants, contained revised requirements for Minimum Liquidity and Minimum Consolidated EBITDA, as defined, for the monthly periods through and including February 28, 2022, and revised the Revolving Credit Aggregate Commitment from $30 million to $27 million.

On December 9, 2021, the Company entered into the Third Amendment to the Forbearance Agreement. The Lenders in the Third Amendment to the Forbearance Agreement, among other things, agreed to forbear with respect to a Minimum Consolidated EBITDA covenant violation as of September 30, 2021, and to suspend compliance with the Minimum Consolidated EBITDA covenant during the remainder of the forbearance period. The Third Amendment included a new covenant which has been tested weekly on a rolling basis, beginning December 15, 2021, and requires that the Company’s actual cumulative total cash disbursements for the period being tested to not exceed total cash disbursements projected by the Company for the same period by more than 15% at any time during the forbearance period. The Third Amendment also reduced the maximum amount that may be borrowed under the revolving line of credit to $25 million from $27 million.

As of December 31, 2021, the Company was in violation of the required Minimum Liquidity covenant, as provided in the Second Amendment to the Forbearance Agreement, dated September 21, 2021. As a result, on February 4, 2022, the Company entered into the Fourth Amendment to Forbearance Agreement. The Lenders in the Fourth Amendment agreed to waive the Minimum Liquidity covenant violation. The Company did have the required Minimum Liquidity by the conclusion of the first week of 2022.

On February 25, 2022, the Company entered into the Fifth Amendment to Forbearance Agreement, which extended the Forbearance Period from February 28, 2022, to March 11, 2022. The Company used the short-term extension of its Forbearance Agreement, provided by the Fifth Amendment, to conduct negotiations of a longer extension with the Lenders.

On March 11, 2022, the Company entered into the Sixth Amendment to Forbearance Agreement, which extends the Forbearance Period from March 11, 2022, to May 30, 2022.

During the extended Forbearance Period, the Company expects it will continue to be able to borrow under the revolving line of credit, subject to availability and satisfaction of certain other conditions. The Company has used and intends to use the forbearance period to continue negotiations with the Lenders to enter into an amendment and waiver to cure the defaults, extend, if possible, extend the maturity of the Credit Agreement and to investigate other sources of financing, including to augment availability under the Credit Agreement. There can be no assurance that the Company will be successful in these efforts. 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.

Capital Expenditures

In 2022, we plan to spend approximately $2.3 million in capital expenditures, of which $0.2 million was spent through March 31, 2022, primarily to add new production equipment as we expand our production capabilities, upgrade existing equipment, and improve our information technology hardware throughout our facilities.

Dividends

Our payment of dividends on our common stock in the future will be determined by our board of directors in its sole discretion and will depend on business conditions, our financial condition, earnings, liquidity, and capital requirements. Our Credit Agreement currently prohibits payment of dividends and contains financial covenants which may have the effect of precluding or limiting the amounts that we can pay as dividends.

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Cash Flow Data

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


	Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
	(dollars in thousands)
Cash flows provided by (used in):
Operating activities	$	1,758	$	90
Investing activities	$	(229)	$	(1,465)
Financing activities	$	(1,519)	$	3,344

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; loan forgiveness; 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, 2022, net cash provided by operating activities was $1.8 million, compared to net cash provided by operating activities of $0.1 million for the three months ended March 31, 2021. The increase in cash provided by operating activities was primarily attributable to an increased focus on managing our inventory levels to be more closely aligned with our customer release schedules.

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, 2022 and March 31, 2021, we made capital expenditures of $0.2 million and $1.5 million, respectively. We plan to spend a total of approximately $2.3 million in capital expenditures during 2022, including the $0.2 million spent through March 31, 2022.

Financing Activities

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

During the three months ended March 31, 2022, we had net cash used by financing activities of $1.5 million compared to $3.3 million cash provided by financing activities during the three months ended March 31, 2021. The increase in cash outflows during the three months ended March 31, 2022 was driven by increased repayments of borrowings under the Company’s line of credit.

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 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 condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statements of stockholders’ equity or condensed consolidated cash flows.

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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 for the year ended December 31, 2021. 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, the Company entered into interest rate swaps. Effective November 30, 2018, as required under the Amended and Restated Credit Agreement, the Company entered into an 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, 2022, the fair value of all swaps was in a net liability position of $0.2 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.

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,” at 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 the Company’s disclosure controls and procedures were effective as of March 31, 2022 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 that 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.

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Changes in Internal Control over Financial Reporting

There were no changes during the three months ended March 31, 2022 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

Item 1A. Risk Factors

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.

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

None.

Item 3. Defaults Upon Senior Securities

The Company’s financial results for the six months ended December 31, 2020, nine months ended March 31, 2021, and nine months ended September 30, 2021 have resulted in violations of certain of its financial covenants, as defined in the Company’s Credit Agreement. Please refer to Note 6 for further discussion of the defaults.

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.

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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 12, 2022

By:

/s/ Brian P. Loftus

Brian P. Loftus

Chief Financial Officer
(Principal Financial and Accounting Officer)