UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | Quarterly Report Pursuant to Section 13 | ||||
For the quarterly period ended October 1, 2017June 30, 2021
or
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 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;reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x ☒No o☐
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 x ☒No o
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o ☐No x☒
As of November 3, 2017July 30, 2021, the registrant had 9,757,5639,779,147 shares of common stock outstanding.
UNIQUE FABRICATING, INC.
FORM 10-Q
TABLE OF CONTENTS
| Page | |||||||||||
1
Part I – FINANCIAL INFORMATION
UNIQUE FABRICATING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited – dollars in thousands)
| June 30, 2021 | December 31, 2020 | |||||||||||||
| Assets | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | 924 | $ | 760 | ||||||||||
| Accounts receivable, net of reserves of approximately $1.0 million and $1.2 million at June 30, 2021 and December 31, 2020, respectively | 25,643 | 23,759 | ||||||||||||
| Inventory, net | 15,300 | 11,951 | ||||||||||||
| Prepaid expenses and other current assets: | ||||||||||||||
| Prepaid expenses and other | 3,127 | 5,643 | ||||||||||||
| Refundable taxes | 4,102 | 4,027 | ||||||||||||
| Total current assets | 49,096 | 46,140 | ||||||||||||
| Property, plant, and equipment, net | 23,100 | 22,383 | ||||||||||||
| Goodwill | 22,111 | 22,111 | ||||||||||||
| Intangible assets | 6,175 | 7,605 | ||||||||||||
| Other assets | ||||||||||||||
| Operating leases | 9,274 | 10,415 | ||||||||||||
| Investments, at cost | 1,054 | 1,054 | ||||||||||||
| Deposits and other assets | 498 | 579 | ||||||||||||
| Deferred tax asset | 893 | 893 | ||||||||||||
| Total assets | $ | 112,201 | $ | 111,180 | ||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 12,329 | $ | 10,892 | ||||||||||
| Current maturities of long-term debt | 36,943 | 35,864 | ||||||||||||
| Income taxes payable | 451 | 204 | ||||||||||||
| Revolver, current maturities | 17,537 | 11,494 | ||||||||||||
| Accrued compensation | 1,396 | 792 | ||||||||||||
| Other accrued liabilities | 3,936 | 4,551 | ||||||||||||
| Total current liabilities | 72,592 | 63,797 | ||||||||||||
| Long-term debt, net of current maturities | 0 | 2,999 | ||||||||||||
| Other long-term liabilities: | ||||||||||||||
| Other liabilities | 9,039 | 10,519 | ||||||||||||
| Total liabilities | 81,631 | 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 June 30, 2021 and December 31, 2020, respectively | 10 | 10 | ||||||||||||
| Additional paid-in-capital | 46,409 | 46,126 | ||||||||||||
| Accumulated deficit | (15,849) | (12,271) | ||||||||||||
| Total stockholders’ equity | 30,570 | 33,865 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 112,201 | $ | 111,180 | ||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Balance Sheets (unaudited)Statements.
2
| October 1, 2017 | January 1, 2017 | ||||||
| Assets | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 1,016,308 | $ | 705,535 | |||
| Accounts receivable – net | 28,972,129 | 26,887,945 | |||||
| Inventory – net | 17,031,955 | 16,731,608 | |||||
| Prepaid expenses and other current assets: | |||||||
| Prepaid expenses and other | 3,771,880 | 2,087,069 | |||||
| Refundable taxes | 900,767 | 783,139 | |||||
| Total current assets | 51,693,039 | 47,195,296 | |||||
| Property, plant, and equipment – net | 22,959,606 | 21,197,922 | |||||
| Goodwill | 28,871,179 | 28,871,179 | |||||
| Intangible assets– net | 20,666,921 | 23,758,342 | |||||
| Other assets | |||||||
| Investments – at cost | 1,054,120 | 1,054,120 | |||||
| Deposits and other assets | 312,913 | 266,369 | |||||
| Deferred tax asset | 399,405 | 193,577 | |||||
| Total assets | $ | 125,957,183 | $ | 122,536,805 | |||
| Liabilities and Stockholders’ Equity | |||||||
| Current liabilities | |||||||
| Accounts payable | $ | 13,404,097 | $ | 13,451,816 | |||
| Current maturities of long-term debt | 3,506,248 | 2,405,446 | |||||
| Income taxes payable | 84,383 | 610,825 | |||||
| Accrued compensation | 3,195,607 | 2,734,155 | |||||
| Other accrued liabilities | 1,117,899 | 1,065,740 | |||||
| Other liabilities | — | 168,880 | |||||
| Total current liabilities | 21,308,234 | 20,436,862 | |||||
| Long-term debt – net of current portion | 28,364,454 | 28,029,041 | |||||
| Line of credit-net | 22,065,563 | 20,176,058 | |||||
| Deferred tax liability | 3,964,663 | 3,836,281 | |||||
| Total liabilities | 75,702,914 | 72,478,242 | |||||
| Stockholders’ Equity | |||||||
| Common stock, $0.001 par value – 15,000,000 shares authorized and 9,757,563 and 9,719,772 issued and outstanding at October 1, 2017 and January 1, 2017, respectively | 9,758 | 9,720 | |||||
| Additional paid-in-capital | 45,677,445 | 45,525,237 | |||||
| Retained earnings | 4,567,066 | 4,523,606 | |||||
| Total stockholders’ equity | 50,254,269 | 50,058,563 | |||||
| Total liabilities and stockholders’ equity | $ | 125,957,183 | $ | 122,536,805 | |||
UNIQUE FABRICATING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited – dollars in thousands, except per share amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net sales | $ | 30,896 | $ | 14,975 | $ | 65,694 | $ | 49,636 | ||||||||||||||||||
| Cost of sales | 26,280 | 13,134 | 55,216 | 42,204 | ||||||||||||||||||||||
| Gross profit | 4,616 | 1,841 | 10,478 | 7,432 | ||||||||||||||||||||||
| Selling, general, and administrative expenses | 6,081 | 6,343 | 11,895 | 12,227 | ||||||||||||||||||||||
| Restructuring expenses | 0 | 273 | 0 | 1,193 | ||||||||||||||||||||||
| Operating income (loss) | (1,465) | (4,775) | (1,417) | (5,988) | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Other, net | 21 | 18 | 39 | (6) | ||||||||||||||||||||||
| Interest expense | (769) | (623) | (1,462) | (2,289) | ||||||||||||||||||||||
| Other expense, net | (748) | (605) | (1,423) | (2,295) | ||||||||||||||||||||||
| Loss before income tax expense (benefit) | (2,213) | (5,380) | (2,840) | (8,283) | ||||||||||||||||||||||
| Income tax expense (benefit) | 296 | (1,058) | 738 | (1,659) | ||||||||||||||||||||||
| Net loss | $ | (2,509) | $ | (4,322) | (3,578) | $ | (6,624) | |||||||||||||||||||
| Net loss per share: | ||||||||||||||||||||||||||
| Basic | $ | (0.26) | $ | (0.44) | $ | (0.37) | $ | (0.68) | ||||||||||||||||||
| Diluted | $ | (0.26) | $ | (0.44) | $ | (0.37) | $ | (0.68) | ||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Statements of Operations (Unaudited)
Statements.
| Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||||||||
| Net sales | $ | 41,231,366 | $ | 44,753,565 | $ | 133,606,501 | $ | 126,784,289 | |||||||
| Cost of sales | 32,256,440 | 33,503,217 | 102,858,323 | 96,842,757 | |||||||||||
| Gross profit | 8,974,926 | 11,250,348 | 30,748,178 | 29,941,532 | |||||||||||
| Selling, general, and administrative expenses | 7,268,812 | 6,949,034 | 22,455,833 | 20,668,621 | |||||||||||
| Restructuring expenses | — | — | — | 35,054 | |||||||||||
| Operating income | 1,706,114 | 4,301,314 | 8,292,345 | 9,237,857 | |||||||||||
| Non-operating income (expense) | |||||||||||||||
| Other income, net | 39,673 | (1,511 | ) | 83,748 | (25,203 | ) | |||||||||
| Interest expense | (770,149 | ) | (525,167 | ) | (2,089,056 | ) | (1,739,243 | ) | |||||||
| Total non-operating expense, net | (730,476 | ) | (526,678 | ) | (2,005,308 | ) | (1,764,446 | ) | |||||||
| Income – before income taxes | 975,638 | 3,774,636 | 6,287,037 | 7,473,411 | |||||||||||
| Income tax expense | 260,532 | 1,254,437 | 1,856,684 | 2,520,389 | |||||||||||
| Net income | $ | 715,106 | $ | 2,520,199 | $ | 4,430,353 | $ | 4,953,022 | |||||||
| Net income per share | |||||||||||||||
| Basic | $ | 0.07 | $ | 0.26 | $ | 0.45 | $ | 0.51 | |||||||
| Diluted | $ | 0.07 | $ | 0.25 | $ | 0.45 | $ | 0.50 | |||||||
| Cash dividends declared per share | $ | 0.15 | $ | 0.15 | $ | 0.45 | $ | 0.45 | |||||||
3
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 | ||||||||||||||||||||
| Net loss | — | — | — | (2,509) | (2,509) | ||||||||||||||||||||||||
| Stock option expense | — | — | 256 | — | 256 | ||||||||||||||||||||||||
| Balance - June 30, 2021 | 9,779,147 | $ | 10 | $ | 46,409 | $ | (15,849) | $ | 30,570 | ||||||||||||||||||||
| 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 | ||||||||||||||||||||
| Net loss | — | — | — | (4,322) | (4,322) | ||||||||||||||||||||||||
| Stock option expense | — | — | 32 | — | 32 | ||||||||||||||||||||||||
| Balance - June 30, 2020 | 9,779,147 | $ | 10 | $ | 46,066 | $ | (13,185) | $ | 32,891 | ||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)Statements.
4
| Number of Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||
| Balance - January 3, 2016 | 9,591,860 | $ | 9,592 | $ | 44,352,188 | $ | 3,651,344 | $ | 48,013,124 | |||||||||
| Net income | — | — | — | 4,953,022 | 4,953,022 | |||||||||||||
| Stock option expense | — | — | 126,733 | — | 126,733 | |||||||||||||
| Exercise of warrants and options for common stock | 48,808 | 48 | 103,941 | — | 103,989 | |||||||||||||
| Common stock issued for purchase of Intasco USA, Inc. | 70,797 | 71 | 890,655 | 890,726 | ||||||||||||||
| Cash dividends paid | — | — | — | (4,354,106 | ) | (4,354,106 | ) | |||||||||||
| Balance - October 2, 2016 | 9,711,465 | $ | 9,711 | $ | 45,473,517 | $ | 4,250,260 | $ | 49,733,488 | |||||||||
| Number of Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||
| Balance - January 1, 2017 | 9,719,772 | $ | 9,720 | $ | 45,525,237 | $ | 4,523,606 | $ | 50,058,563 | |||||||||
| Net income | — | — | — | 4,430,353 | 4,430,353 | |||||||||||||
| Stock option expense | — | — | 115,245 | — | 115,245 | |||||||||||||
| Exercise of warrants and options for common stock | 37,791 | 38 | 36,963 | — | 37,001 | |||||||||||||
| Cash dividends paid | — | — | — | (4,386,893 | ) | (4,386,893 | ) | |||||||||||
| Balance - October 1, 2017 | 9,757,563 | $ | 9,758 | $ | 45,677,445 | $ | 4,567,066 | $ | 50,254,269 | |||||||||
UNIQUE FABRICATING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited – dollars in thousands)
| Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net loss | $ | (3,578) | $ | (6,624) | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 2,953 | 3,458 | |||||||||
| Amortization of debt issuance costs | 103 | 74 | |||||||||
| Loss on sale of assets | (12) | 108 | |||||||||
| Bad debt adjustment | (194) | 554 | |||||||||
| Loss (gain) on derivative instrument | (185) | 598 | |||||||||
| Stock option expense | 283 | 55 | |||||||||
| Deferred income taxes | 0 | (1,864) | |||||||||
| Accounts receivable | (1,690) | 8,464 | |||||||||
| Inventory | (3,349) | (1,694) | |||||||||
| Prepaid expenses and other assets | 2,520 | (1,809) | |||||||||
| Accounts payable | 2,148 | (1,228) | |||||||||
| Other assets and liabilities, net | 88 | 601 | |||||||||
| Net cash provided by (used for) operating activities | (913) | 693 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Capital expenditures | (2,327) | (760) | |||||||||
| Proceeds from sale of property, plant and equipment | 100 | 884 | |||||||||
| Net cash provided by (used for) investing activities | (2,227) | 124 | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Net change in bank overdraft | (711) | (311) | |||||||||
| Payments on term loans and capital expenditure line | (1,989) | (1,474) | |||||||||
| Payments on revolving credit facilities | (16,925) | (12,310) | |||||||||
| Proceeds from revolving credit facilities | 22,929 | 10,727 | |||||||||
| Proceeds from PPP Note | 0 | 5,999 | |||||||||
| Net cash provided by financing activities | 3,304 | 2,631 | |||||||||
| Cash and cash equivalents: | |||||||||||
| Net increase in cash and cash equivalents | 164 | 3,448 | |||||||||
| Cash and cash equivalents at beginning of period | 760 | 650 | |||||||||
| Cash and cash equivalents at end of period | $ | 924 | $ | 4,098 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | 1,569 | $ | 2,219 | |||||||
| Cash paid for income taxes | $ | 353 | $ | 209 | |||||||
The accompanying notes are an integral part of these Condensed Consolidated StatementsStatements.
5
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nature of Business — UFI Acquisition, Inc. (“UFI”), a Delaware corporation, was formed on January 14, 2013, for the purpose of acquiring
Unique Fabricating, Inc. (the “Company”) engineers and its subsidiariesmanufactures 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 (“Unique Fabricating”NVH”) (collectively, the “Company” or “Unique”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”) on March 18, 2013., 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 operating and1 reportable segment to fabricate and broker foam and rubber products, which are primarily sold to original equipment manufacturers (“OEMs”) and tiered suppliersis headquartered in the automotive, appliance, water heater and heating, ventilation and air conditioning (HVAC) industries. In September 2014, UFI changed its name to Unique Fabricating, Inc. which is now the parent company of the consolidated group. As a result of the name change, the subsidiary previously named Unique Fabricating, Inc. became Unique Fabricating NA, Inc.Auburn Hills, Michigan.
Basis of Presentation —
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). TheCertain information furnishedand footnote disclosures normally included in the Consolidated Financial Statements includes normal recurring adjustmentsfinancial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and reflects all adjustments which are, inregulations. In the opinion of management, the accompanying condensed consolidated financial statements contain all material adjustments (consisting only of normal recurring adjustments) necessary forto present fairly the fair presentationconsolidated financial position of such financial statements.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.
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 violations 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 $48.5 million, has been classified as current as of June 30, 2021. On April 9, 2021, the Company and all subsidiaries overits lenders entered into a forbearance agreement through and including June 15, 2021, during which the Company exercises control. All intercompany transactionswas able to borrow on its revolving line of credit, subject to availability and balancesthe satisfaction of certain other conditions, and the Lenders agreed not to accelerate the maturity of the Company’s debt during the forbearance period. On June 14, 2021 the Company entered into the First Amendment to Forbearance Agreement, which among other things, extended the forbearance period from June 15, 2021 to February 28, 2022, suspended the testing of the Total Leverage Ratio and the Debt Service Ratio during the forbearance period and included revised requirements for Minimum Liquidity and Minimum Consolidated EBITDA, as defined, for the monthly periods through and including February 28, 2022, beginning with the month ending July 31, 2021. During the extended period, the Company will continue to be able to borrow under the revolving line of credit, subject to availability and the satisfaction of certain other conditions, including compliance with financial covenants. Please refer to Note 6 Long-term Debt for more information.
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, as amended. 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 eliminated upon consolidation.actively pursuing with Citizens Bank, National Association (“Citizens”), acting as lender and Administrative Agent, and the other lenders (collectively, the “Lenders”) a waiver of the violations at December 31, 2020 and March 31, 2021 or amendment of its financial covenants prior to expiration of the Forbearance Agreement as amended. However, these discussions 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.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As described in Note 6 to these condensed consolidated financial statements, the Company’s quarterly periods end onForbearance Agreement, as amended, contains certain financial covenants with which we are required to comply, commencing with the Sunday closestfour-month period ending July 31, 2021, through and including the eleven-month period ending February 28, 2022. There cannot be any assurance that the Company will be able to comply with these covenants contained in the Forbearance Agreement, including as soon as with respect to the endfirst measurement period, given the industry-wide and other challenges that the Company is currently facing, as described elsewhere herein or that our lenders would waive a default if that were to occur.
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 and six months ended June 30, 2021 and June 30, 2020, 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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| General Motors Company | 13 | % | 8 | % | 10 | % | 9 | % | |||||||||||||||
| Yanfeng Automotive Interiors | 7 | % | 5 | % | 7 | % | 7 | % | |||||||||||||||
| Stellantis N.V. | 6 | % | 4 | % | 6 | % | 5 | % | |||||||||||||||
| Ford Motor Company | 2 | % | 4 | % | 4 | % | 5 | % | |||||||||||||||
Furthermore, the Company had additional sales to the customers listed in the above table indirectly through other customers.
Labor Markets — At June 30, 2021, of the calendar quarterly period.Company’s hourly plant employees working in the United States manufacturing facilities, 33% were covered under a collective bargaining agreement which expires in August 2022 while another 13% were covered under a separate collective bargaining agreement that expires in February 2023. The quarterly and year to date periods, which were 13 and 39 weeks during 2017, ended on October 1, 2017, and the quarterly and year to date periods, which were 13 and 39 weeks during 2016, ended on October 2, 2016. Fiscal year 2016 ended on Sunday, January 1, 2017.remaining US employees are not part of a union.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Mexico | 26 | % | 20 | % | 24 | % | 22 | % | |||||||||||||||
| Canada | 10 | % | 12 | % | 10 | % | 9 | % | |||||||||||||||
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Mexico | 26 | % | 17 | % | 25 | % | 21 | % | |||||||||||||||
| Canada | 10 | % | 9 | % | 10 | % | 8 | % | |||||||||||||||
7
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 original maturityoptional 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 three monthsthe standard. The Company has approximately $10.1 million of non-cancelable future rental obligations as of June 30, 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 lessany other reference rate expected to be cashdiscontinued. 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 and cash equivalents.six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
| Transportation | $ | 27,373 | $ | 11,290 | $ | 58,617 | $ | 42,986 | |||||||||||||||
| Appliance | 3,008 | 2,132 | 6,143 | 4,912 | |||||||||||||||||||
| Other | 515 | 1,553 | 934 | 1,738 | |||||||||||||||||||
| Total | $ | 30,896 | $ | 14,975 | $ | 65,694 | $ | 49,636 | |||||||||||||||
Revenue is recognized by the invoiced amountCompany 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 do not bear interest. The allowance for doubtful accountsother products. Revenue is management’s best estimate ofmeasured as the amount of probable credit lossesconsideration the Company expects to receive in exchange for transferring its products. The Company’s payment terms vary by the existingtype and location of its customers and the products offered. The term between invoicing and when payment is due is not significant.
8
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. Management determines the allowance based on historical write-off experience and an understanding of individual customer payment history and financial condition. ManagementThe 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. The allowance for doubtful accounts was $729,077 and $655,312 at October 1, 2017 and January 1, 2017, respectively.
4. Inventory — Inventory is stated at the lower of cost or market, with cost determined on the first in, first out method (FIFO). Inventory acquired as part of a business combination is recorded at its estimated fair value at the time
Inventories consist of the business combination. following:
| June 30, 2021 | December 31, 2020 | ||||||||||
| (dollars in thousands) | |||||||||||
| Raw materials | $ | 9,759 | $ | 7,366 | |||||||
| Work in progress | 1,172 | 1,225 | |||||||||
| Finished goods | 4,369 | 3,360 | |||||||||
| Total inventory | $ | 15,300 | $ | 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 $0.9 million at June 30, 2021 and $0.4 million at December 31, 2020.
Included in inventory are assets located in Mexico with a carrying amount of $3.8 million at June 30, 2021 and $3.1 million million at December 31, 2020, and assets located in Canada with a carrying amount of $1.1 million at June 30, 2021 and $1.1 million at December 31, 2020.
9
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Property, Plant, and Equipment, Net
Property, plant, and equipment, net consists of the asset. In that event,following:
| June 30, 2021 | December 31, 2020 | Depreciable Life – Years | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Land | $ | 538 | $ | 538 | |||||||||||||
| Buildings | 6,923 | 6,923 | 23 – 40 | ||||||||||||||
| Shop equipment | 25,012 | 23,436 | 7 – 10 | ||||||||||||||
| Leasehold improvements | 1,269 | 1,245 | 3 – 10 | ||||||||||||||
| Office equipment | 2,884 | 2,331 | 3 – 7 | ||||||||||||||
| Mobile equipment | 50 | 152 | 3 | ||||||||||||||
| Construction in progress | 2,376 | 2,315 | |||||||||||||||
| Total cost | 39,052 | 36,940 | |||||||||||||||
| Less: Accumulated depreciation | 15,952 | 14,557 | |||||||||||||||
| Net property, plant, and equipment, net | $ | 23,100 | $ | 22,383 | |||||||||||||
Depreciation expense was $0.8 million and $1.5 million for the three and six months ended June 30, 2021, respectively, and $0.7 million and $1.4 million for the three and six months ended June 30, 2020, respectively.
Included in property, plant, and equipment, net are assets located in Mexico with a loss is recognized based oncarrying amount of $3.8 million and $3.7 million at June 30, 2021 and December 31, 2020, respectively, and assets located in Canada with a carrying amount of $0.4 million and $0.4 million at June 30, 2021 and December 31, 2020, respectively.
10
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Long-term Debt
The Company’s long-term debt consists of the amount by which the carrying value exceedsfollowing:
| June 30, 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 5.5% per annum at June 30, 2021. At June 30, 2021, the balance of the US Term Loan is presented net of a debt discount of $0.2 million from costs paid to or on behalf of the lenders. | 21,665 | 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 5.5% per annum at June 30, 2021. At June 30, 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. | 8,145 | 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 5.5% per annum at June 30, 2021. | 1,134 | 1,220 | |||||||||
| Total debt excluding Revolver | 36,943 | 38,863 | |||||||||
| Less current maturities | 36,943 | 35,864 | |||||||||
| Long-term debt – Less current maturities | $ | 0 | $ | 2,999 | |||||||
As of June 30, 2021 and December 31, 2020 the fair value of the long-lived asset.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 resulted in violations of certain of its financial covenants, as defined in the Company’s Credit Agreement. The Company determined that no impairment indicators were presenthas been actively discussing its results and all originally assigned useful lives remained appropriatethe Company’s failure to meet its financial covenants with the Administrative Agent and entered into a forbearance agreement, providing a period commencing on April 9, 2021 and through and including June 15, 2021, during which the 13Company was able to borrow on its Revolver, subject to the terms and 39 weeks ended October 1, 2017conditions to making a revolving credit advance, including availability, and 13 and 39 weeks ended October 2, 2016, respectively.
Credit Agreement
On November 8, 2018, Unique Fabricating NA, Inc. (the “US Borrower”) and accumulated depreciation are removed fromUnique-Intasco Canada, Inc. (the “CA Borrower” and together with the accounts,US Borrower, the “Borrowers”) and any gain or lossCitizens 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 included in net income. Repair and maintenance costs are expensed as incurred.a five year
11
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $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 through November 7, 2023 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 through November 7, 2023 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 Financial Statements 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 ended September 30, 2020 and through and including the quarter ended 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
12
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
On June 14, 2021, the Company entered into a First Amendment to Forbearance Agreement with respect to the Amended and Restated Credit Agreement, as amended, among the Borrowers, certain of their subsidiaries, with the Lenders. The First Amendment to the Forbearance Agreement extends the previously agreed to forbearance period from June 15, 2021 to February 28, 2022. During the extended period, the Company will continue to be able to borrow under the Revolver, subject to availability and the satisfaction of certain other conditions. The First Amendment suspends the testing of the Total Leverage Ratio and the Debt Service Ratio during the forbearance period, contains revised requirements for Minimum Liquidity and Minimum Consolidated EBITDA, as defined, for the monthly periods through and including February 28, 2022, makes changes to the calculations of financial covenants, establishes certain financial reporting requirements to the Lenders, provides an alternative to the LIBOR rate, and requires that the Company engage a financial advisor on or before June 25, 2021. The Company does not hold any intangible assetswill be required to comply with indefinite lives. Identifiable intangible assets recognizedthe revised covenants contained in the First Amendment beginning with July 31, 2021.
The Credit Agreement, as partamended, 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.
The First Amendment to the Forbearance Agreement increased the per annum rate from 4.25% to 4.50% for the duration of the Forbearance Period. Furthermore, the First Amendment requires the calculation of Payment in Kind (“PIK”) additional interest of 0.5% on all outstanding debt subject to the Credit Agreement, which is payable on February 28, 2022 or earlier in the event of a business combinationForbearance Termination event, as defined.
As of June 30, 2021, $17.8 million was outstanding under the Revolver. This amount is gross of debt issuance costs which are recordedfurther described in the next section. The Revolver had an effective interest rate of 5.50% percent per annum at their estimated fair value at the timeJune 30, 2021, and is secured by substantially all of the business combination. Acquired intangible assets subject to amortization are amortized onCompany’s assets. At June 30, 2021, the maximum additional available borrowings under the Revolver was $6.7 million which includes a straight line basis, which approximatesreduction for a $0.1 million letter of credit issued for the pattern in which the economic benefit of the respective intangiblelandlord 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 realized, over their respective estimated useful lives. Amortizable intangible assetsunsecured, 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.
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 reviewed for impairment wheneverconsidered events orof default which grant Lender the right to seek immediate payment of all amounts owing under the PPP Note. As of June 30, 2021, none of the circumstances indicatelisted above exist at the Company.
13
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On August 9, 2021, the Company received notification that the related carrying amount may be impaired.SBA approved the Company’s PPP Loan forgiveness application for the entire PPP Loan, including accrued interest. The remaining useful lives of intangible assets are reviewed to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company determined that no impairment indicators were present and all originally assigned useful lives remained appropriate during the 13 and 39 weeks ended October 1, 2017 and 13 and 39 weeks ended October 2, 2016, respectively.
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 October 1, 2017June 30, 2021 and January 1, 2017,December 31, 2020, unamortized debt issuance costs were $249,439$0.3 million and $301,620,$0.4 million, respectively, while amounts paid to or on behalf of lenders presented as unamortized debt discounts were $260,201$0.2 million and $270,959,$0.3 million, respectively. On April 29, 2016, the Company refinanced its existing term loan and revolving debt facility with new term loans and a new revolving debt facility which are further described in Note 6. The Company reviewed this refinancing for extinguishment accounting and concluded that $60,202 of the $160,111 remaining issuance costs not amortized on the old revolving debt facility qualified for extinguishment and were recognized as a loss on extinguishment immediately. The remaining $99,909 of unamortized issuance costs not extinguished on the old revolving debt facility and all of the $92,508 of remaining unamortized debt discounts on the old term loan did not meet extinguishment accounting and were therefore carried forward to the new revolving debt facility and term loans.
Amortization expense of both debt issuance costs and debt discounts has been recognized as a component of interest expense in the amounts of $47,373$0.1 million and $113,412$0.1 million for the 13three and 39 weekssix months ended October 1, 2017,June 30, 2021, respectively, and $33,019$0.04 million and $94,537$0.1 million for the 13three and 39 weekssix months ended OctoberJune 30, 2020, respectively.
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, 2016, respectively.(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 through February 28, 2022.
Minimum Debt Service Coverage Ratio
14
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Minimum Liquidity
| Cash | $ | 18,250 | |
| Accounts receivable | 2,146,082 | ||
| Inventory | 2,485,781 | ||
| Other current assets | 74,194 | ||
| Property, plant, and equipment | 861,491 | ||
| Identifiable intangible assets | 7,316,694 | ||
| Accounts payable and accrued liabilities | (716,080 | ) | |
| Deferred tax liability | (97,622 | ) | |
| Total identifiable net assets | 12,088,790 | ||
| Goodwill | 9,657,221 | ||
| Total | 21,746,011 | ||
| Thirteen Weeks Ended October 2, 2016 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||
| Net sales | $ | 44,753,565 | $ | 132,630,816 | |||
| Net income | $ | 2,216,205 | $ | 5,244,766 | |||
| Net income per common share – basic | $ | 0.23 | $ | 0.54 | |||
| Net income per common share – diluted | $ | 0.22 | $ | 0.53 | |||
| Date of Determination | Minimum Liquidity | ||||
| July 31, 2021 | $250,000 | ||||
| August 31, 2021 | $250,000 | ||||
| September 30, 2021 | $500,000 | ||||
| October 31, 2021 | $1,000,000 | ||||
| November 30, 2021 | $1,600,000 | ||||
| December 31, 2021 | $1,600,000 | ||||
| January 31, 2022 | $2,800,000 | ||||
| February 28, 2022 | $3,200,000 | ||||
| October 1, 2017 | January 1, 2017 | ||||||
| Raw materials | $ | 9,452,816 | $ | 9,513,980 | |||
| Work in progress | 696,590 | 623,504 | |||||
| Finished goods | 6,882,549 | 6,594,124 | |||||
| Total inventory | $ | 17,031,955 | $ | 16,731,608 | |||
Minimum Consolidated EBITDA
The inventory acquired inFirst Amendment to the 2016 acquisition of Intasco included a fair value adjustment of $318,518 which was all included in cost of goods sold in 2016.
| October 1, 2017 | January 1, 2017 | Depreciable Life – Years | |||||||
| Land | $ | 1,663,153 | $ | 1,663,153 | |||||
| Buildings | 7,606,125 | 7,541,976 | 23 – 40 | ||||||
| Shop equipment | 16,042,895 | 13,003,025 | 7 – 10 | ||||||
| Leasehold improvements | 997,277 | 913,097 | 3 – 10 | ||||||
| Office equipment | 1,391,781 | 1,188,746 | 3 – 7 | ||||||
| Mobile equipment | 223,474 | 218,743 | 3 | ||||||
| Construction in progress | 1,367,955 | 1,425,090 | |||||||
| Total cost | 29,292,660 | 25,953,830 | |||||||
| Accumulated depreciation | 6,333,054 | 4,755,908 | |||||||
| Net property, plant, and equipment | $ | 22,959,606 | $ | 21,197,922 | |||||
Gross Carrying Amount | Accumulated Amortization | Weighted Average Life – Years | |||||||
| Customer contracts | $ | 26,523,065 | $ | 10,751,424 | 8.16 | ||||
| Trade names | 4,673,044 | 1,087,643 | 16.43 | ||||||
| Non-compete agreements | 1,161,790 | 951,071 | 2.53 | ||||||
| Unpatented technology | $ | 1,534,787 | $ | 435,627 | 5.00 | ||||
| Total | $ | 33,892,686 | $ | 13,225,765 | |||||
| Gross Carrying Amount | Accumulated Amortization | Weighted Average Life – Years | |||||||
| Customer contracts | $ | 26,523,065 | $ | 8,240,853 | 8.16 | ||||
| Trade names | 4,673,044 | 868,866 | 16.43 | ||||||
| Non-compete agreements | 1,161,790 | 818,585 | 2.53 | ||||||
| Unpatented technology | 1,534,787 | $ | 206,040 | 5.00 | |||||
| Total | $ | 33,892,686 | $ | 10,134,344 | |||||
| 2017 | $ | 1,029,509 | |
| 2018 | 4,070,321 | ||
| 2019 | 3,945,264 | ||
| 2020 | 3,913,627 | ||
| 2021 | 2,455,712 | ||
| Thereafter | 5,252,488 | ||
| Total | $ | 20,666,921 | |
| October 1, 2017 | January 1, 2017 | ||||||
| US Term Loan, payable to lenders in quarterly installments of $318,750 through March 31, 2018, $425,000 through March 31, 2019, and $531,250 through March 31, 2021, with a lump sum due at maturity. The effective interest rate was 4.7356% per annum at October 1, 2017. At October 1, 2017, the balance of the US Term Loan is presented net of a debt discount of $150,051 from costs paid to or on behalf of the lenders. | $ | 14,368,352 | $ | 15,862,309 | |||
| US Term Loan II, payable to lenders in quarterly installments of $200,000 through March 31, 2021, with a lump sum due at maturity. The effective interest rate was 4.7356% per annum at October 1, 2017. At October 1, 2017, the balance of the US Term Loan II is presented net of a debt discount of $36,119 from costs paid to or on behalf of the lenders. | $ | 3,763,881 | $ | — | |||
| CA Term Loan, payable to lenders in quarterly installments of $281,250 through March 31, 2018, $375,000 through March 31, 2019, and $468,750 through March 31, 2021, with a lump sum due at maturity. The effective interest rate was 4.7356% per annum at October 1, 2017. At October 1, 2017, the balance of the US Term Loan is presented net of a debt discount of $74,031 from costs paid to or on behalf of the lenders. | $ | 13,238,469 | $ | 14,066,732 | |||
| Note payable to the seller of former owner of business Unique acquired in 2014 which is unsecured and subordinated to the New Credit Agreement. Interest accrues monthly at an annual rate of 6.00%. The note payable is due in full on February 6, 2019. | 500,000 | 500,000 | |||||
| Other debt | — | 5,446 | |||||
| Total debt excluding New Revolver | 31,870,702 | 30,434,487 | |||||
| Less current maturities | 3,506,248 | 2,405,446 | |||||
| Long-term debt – Less current maturities | $ | 28,364,454 | $ | 28,029,041 | |||
| Date of Determination | Measurement Period | Minimum Consolidated EBITDA | ||||||||||||
| July 31, 2021 | Trailing 4 months | $300,000 | ||||||||||||
| August 31, 2021 | Trailing 5 months | $1,300,000 | ||||||||||||
| September 30, 2021 | Trailing 6 months | $2,450,000 | ||||||||||||
| October 31, 2021 | Trailing 7 months | $3,400,000 | ||||||||||||
| November 30, 2021 | Trailing 8 months | $4,200,000 | ||||||||||||
| December 31, 2021 | Trailing 9 months | $5,025,000 | ||||||||||||
| January 31, 2022 | Trailing 10 months | $5,925,000 | ||||||||||||
| February 20, 2022 | Trailing 11 months | $6,900,000 | ||||||||||||
Future Maturities
Maturities on the Company’s New 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 | $ | 5,393 | |||
| 2022 | 49,634 | ||||
| 2023 | 0 | ||||
| Total | 55,027 | ||||
| Discounts | (235) | ||||
| Debt issuance costs | (312) | ||||
| Total debt, net | $ | 54,480 | |||
| 2017 | $ | 800,000 | |
| 2018 | 3,800,000 | ||
| 2019 | 5,100,000 | ||
| 2020 | 4,800,000 | ||
| 2021 | 39,945,905 | ||
| Thereafter | — | ||
| Total | 54,445,905 | ||
| Discounts | (260,201 | ) | |
| Debt issuance costs | (249,439 | ) | |
| Total debt – Net | $ | 53,936,265 | |
Interest Rate Swap
The Company holds a derivative financial instrument, in the form of an interest rate swap, as required by its NewCredit 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
15
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 JuneNovember 30, 2016,2018, as required under the NewAmended and Restated Credit Agreement, and as discussed in Note 6, the Company entered into ananother interest rate swap whichthat requires the Company to pay a fixed rate of 1.055 percent per annum while receiving a variable rate per annum based on the one month LIBOR for a net monthly settlement based on the notional amount beginning immediately. This terminated the old swap previously entered into on January 17, 2014. The notional amount at the effective date was $16,681,250 which decreased by $318,750 each quarter until June 30, 2017, and began decreasing by $425,000 per quarter until June 29, 2018, when it will begin decreasing by $531,250 per quarter until it expires on June 28, 2019. At October 1, 2017, the fair value of this new interest rate swap was $120,094, and was included in other long-term assets in the consolidated balance sheets. The Company paid $(6,878) and $13,231, in the aggregate, in net monthly settlements with respect to the interest rate swap for the 13 and 39 weeks ended October 1, 2017. The Company paid $23,291 with respect to the interest rate swap for both the 13 and 39 weeks ended October 2, 2016. Both the change in fair value and the monthly settlements were included in interest expense in the consolidated statements of operations.
2019 Restructurings
Bryan Restructuring
On October 27, 2015,November 7, 2019, the Company announcedmade the planned closure ofdecision to close its manufacturing facility located in Murfreesboro, Tennessee that resulted inBryan, Ohio. Approximately 43 positions were eliminated as a workforce reduction of approximately 30 employees. The planned closureresult of the Murfreesboro facility was effectiveclosure. The Company's decision resulted from its desire to streamline operations and to utilize some of the available excess capacity in the fourth quarterother of 2015 and completed in January 2016. our facilities.
The action was necessary dueCompany moved existing Bryan production to the tight labor market in Murfreesboro and the struggle to staff production levels to meet the ongoing growth strategy for Murfreesboro's respective products manufactured at the plant. In order to ensure the Company's ability to service its customers at the increasing volumes projected for the future, the Company decided to move existing Murfreesboro production including equipment to the Company's other manufacturing facilities in Evansville, IndianaQuerétaro, 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. The restructuring activities described above were completed as of June 30, 2020. The Company has not incurred any restructuring costs in 2021.
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 doesdid 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 $0.5 million and $0.7 million of remaining lease payments for a warehouse near the Evansville, Indiana facility as of June 30, 2021 and December 31, 2020, respectively. The Company has secured a sublease of roughly 11% of the facility.
16
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below summarizes the activity in 2017 as the restructuring and costs associated withliability for the closure were all completed in 2016.six months ended June 30, 2020:
| 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 | 0 | 1,193 | 1,193 | |||||||||||||||||
| Payments made during the year and asset write offs | 400 | 838 | 1,238 | |||||||||||||||||
| Accrual balance at June 30, 2020 | $ | 38 | $ | 470 | $ | 508 | ||||||||||||||
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 required to be 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.
On July 17, 2013 and January 1, 2014,June 11, 2021, the compensation committee of the board of directors approved the issuance of 375,000 and 120,00038,943 non statutory stock option awards respectively, to employees of the Company withCompany. All of the awards have an exercise price of $3.33$3.31 per share with a weighted average grant date fair value of $86,450 and $42,000 respectively. On April 29, 2016 the Company issued 7,200 non statutory stock option awards to employees of the Company with an exercise price of $12.58 and with a weighted average grant date fair value of $20,160. On September 15, 2017 the Company issued 5,000 non statutory stock option awards to employees of the Company with an exercise price of $7.65 and with a weighted average grant date fair value of $7,050. All 4 grants of awards vest 20 percent on the grant date and an additional 20 percent on each of the first, second, third and fourth anniversaries thereafter. Vested awards can only be exercised while the participants are employed by the Company. Upon termination, the Company may repurchase the$1.64 per share. These options vested awards at their fair value (or their exercise price if terminated for cause) prior to their exercise.
| September 15, 2017 | April 29, 2016 | January 1, 2014 | July 17, 2013 | ||||||||
| Expected volatility | 40.00 | % | 40.00 | % | 34.00 | % | 34.00 | % | |||
| Dividend yield | 7.00 | % | 5.00 | % | — | % | — | % | |||
| Expected term (in years) | 7 | 5 | 4 | 4 | |||||||
| Risk-free rate | 1.81 | % | 1.28 | % | 1.27 | % | 0.96 | % | |||
immediately upon issuance.
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 initiallyoriginally 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,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.
our common stock.
The fair value of each of the option awardawards is estimated on the grant date using a Black Scholes option pricing model that uses the weighted average assumptions noted in the following table.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.
On May 4, 2021, the compensation committee of the board of directors approved the issuance of 139,278 non statutory stock option awards to employees of the Company. All of the awards have an exercise price of $4.51 per share with a weighted average grant date fair value of $2.28 per share. 20% of these options vested immediately and the remainder vest in 20% tranches on each of May 4, 2022, 2023, 2024, and 2025, respectively.
| September 15, 2017 | April 29, 2016 | November 20, 2015 | August 17, 2015 | ||||||||
| Expected volatility | 40.00 | % | 40.00 | % | 35.00 | % | 38.00 | % | |||
| Dividend yield | 7.00 | % | 5.00 | % | 5.00 | % | 4.80 | % | |||
| Expected term (in years) | 7 | 5 | 5 | 5 | |||||||
| Risk-free rate | 1.81 | % | 1.28 | % | 1.70 | % | 1.58 | % | |||
On June 11, 2021, the compensation committee of the board of directors approved the issuance of 59,254 non statutory stock option awards to employees of the Company. All of the awards have an exercise price of $3.31 per share with a weighted average grant date fair value of $1.64 per share. These options vested immediately upon issuance.
17
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 | 237,475 | $ | 4.01 | 4.3 | |||||||||||||||||||
| Exercised | 0 | $ | 0 | 0 | |||||||||||||||||||
| Forfeited or expired | 15,000 | $ | 12.50 | 0 | 0 | ||||||||||||||||||
| Outstanding at June 30, 2021 | 948,975 | $ | 4.27 | 7.6 | $ | 444 | |||||||||||||||||
| Vested and exercisable at June 30, 2021 | 454,553 | $ | 5.25 | 6.1 | $ | 169 | |||||||||||||||||
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value(1) | |||||||||
| Outstanding at January 1, 2017 | 629,880 | $ | 6.76 | 7.40 | ||||||||
| Granted | 20,000 | $ | 7.65 | 10.00 | ||||||||
| Exercised | 47,400 | $ | 3.33 | 0 | ||||||||
| Forfeited or expired | — | $ | — | 0 | ||||||||
| Outstanding at October 1, 2017 | 602,480 | $ | 7.06 | 6.82 | $ | 837,447 | ||||||
| Vested and exercisable at October 1, 2017 | 451,160 | $ | 5.92 | 6.46 | $ | 1,141,435 | ||||||
(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 $3.70 as of June 30, 2021 and $5.50 as of December 31, 2020.
The Company recorded stock-based compensation expense of $40,229$256 thousand and $115,245$283 thousand for the 13three and 39 weekssix months ended October 1, 2017,June 30, 2021, respectively, and $40,736$32 thousand and $126,733$55 thousand for the 13three and 39 weekssix months ended October 2, 2016, respectively,June 30, 2020, respectively. Stock compensation expense is included in itsthe 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 $8,232 and $30,774immaterial for the 13 and 39 weeks ended October 1, 2017, respectively, and $13,941 and $43,376 for the 13 and 39 weeks ended October 2, 2016, respectively.
all periods presented.
As of October 1, 2017,June 30, 2021, there was $270,411$689 thousand of total unrecognized compensation cost related to nonvestednon-vested stock option awards under the plans. That cost is expected to be recognized over a weighted average period of 1.984.1 years.
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 13three and 39 weekssix months ended October 1, 2017June 30, 2021 was $260,532$0.3 million and $1,856,684,$0.7 million, respectively, compared to $1,254,437$(1.1) million and $2,520,389$(1.7) million for the 13three and 39 weekssix months ended October 2, 2016,June 30, 2020, respectively.
During the 13three and 39 weekssix months ended October 1, 2017,June 30, 2021, the difference between the actual effective tax rate of 26.7%was 13% and 29.5%26%, respectively,respectively. The differences between the effective tax rates and the statutory rate of 34.0% was21% were primarily due to income earning in jurisdictions with tax rates lower than the U.S. statutory rate, and the domestic production activities deduction, or DPAD benefitvaluation allowance in the U.S. Duringand earnings in Mexico and Canada, which both have higher statutory income tax rates than the 13 and 39 weeks ended October 2, 2016, the effective tax rate and statutory rate were in alignment with each other.U.S.
The Company leases office space, production facilitiesrecords a right-of-use (“ROU”) asset and equipment under operating leases with various expiration dates through the year 2021. Thelease liability for substantially all leases for office space and production facilities requirewhich 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 to pay taxes, insurance, utilities and maintenance costs. Four of the leases for office space and production facilities provide for escalating rents over the life of the respective leases and rentrecognizes lease expense for these leases is recognizedon a straight-line basis over the termlease 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 on a straight line basis, withterm from generally one to 5 years. The exercise of lease renewal options is at the difference between lease paymentsCompany’s sole discretion, and rent expense recorded as deferred rent in other accrued liabilitiesare included in the consolidated balance sheets. Total rent expense chargedlease term only to operations was approximately $550,452the 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 $1,661,082leasehold 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 the 13 and 39 weeks ended October 1, 2017, respectively, and $577,470 and $1,504,775 for the 13 and 39 weeks ended October 2, 2016, respectively.
18
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
during the three and six months ended June 30, 2021 were immaterial. As of June 30, 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 | June 30, 2021 | |||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Right-of-Use-Assets | ||||||||||||||||||||||||||||||||
| Operating | Operating leases | $ | 9,274 | |||||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Current | ||||||||||||||||||||||||||||||||
| Operating | Other accrued liabilities | $ | 1,964 | |||||||||||||||||||||||||||||
| Non-current | ||||||||||||||||||||||||||||||||
| Operating | Other liabilities | 8,168 | ||||||||||||||||||||||||||||||
| Total lease liabilities | $ | 10,132 | ||||||||||||||||||||||||||||||
Lease costs included in the condensed consolidated statements of operations consist of the following:
| Classification | Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Lease cost | Cost of sales, selling expenses and general and administrative expense | $ | 1,307 | ||||||||||||||||||||||||||||||||
Maturity of the Company’s lease liabilities as of June 30, 2021 is as follows:
| Lease Liability Maturities | ||||||||
| (dollars in thousands) | ||||||||
| 2021 (remainder) | $ | 1,446 | ||||||
| 2022 | 2,058 | |||||||
| 2023 | 1,381 | |||||||
| 2024 | 1,296 | |||||||
| 2025 | 1,288 | |||||||
| Thereafter | 5,413 | |||||||
| Total lease payments | 12,882 | |||||||
| Less: interest | 2,751 | |||||||
| Present value of lease payments | $ | 10,132 | ||||||
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:
| June 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| Weighted average remaining lease term (years) | 7.0 | |||||||||||||||||||||||||||||||||||||
| Weighted average discount rate | 6.5 | % | ||||||||||||||||||||||||||||||||||||
19
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2017 | $ | 503,294 | |
| 2018 | 1,892,642 | ||
| 2019 | 1,472,932 | ||
| 2020 | 928,599 | ||
| 2021 | 111,977 | ||
| Thereafter | 18,886 | ||
| Total | $ | 4,928,330 | |
| Six Months Ended June 30, 2021 | ||||||||||||||
| (dollars in thousands) | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Operating cash outflows from operating leases | $ | 1,531 | ||||||||||||
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 100 percenta match on 100% of an employee’s contribution in an amount up to the first 3 percent3% of sucheach employee’s total compensation and 50 percent of the contribution in an amount equal up to50% for the next 2 percent2% of sucheach 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 $81,615$0.1 million and $317,032$0.2 million for the 13three and 39 weekssix months ended October 1, 2017, respectivelyJune 30, 2021 and $96,088$0.1 million and $312,069$0.2 million for the 13three and 39 weekssix months ended October 2, 2016, respectively.June 30, 2020.
Effective March 18, 2013, the Company is under a five yearparty to a management agreement with a firm related to several stockholders. The agreement initially requiredprovided for annual management fees of $300,000$300 thousand and additional fees for assistance provided in connection with acquisitions. Effective upon completion of the Company's initial public offering, by the Company in July 2015, the agreement was amended to reduce the annual management fee by an amount equal to the total,amount, if any, of annual cash retainers and equity awards paidreceived 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. The Company incurred management fees of $56,250 and $168,750$56 thousand for the 13three months ended March 31, 2021, however, the Forbearance Agreement suspended any further management fee payments until the expiration of the Forbearance Period on February 28, 2022. The Company incurred management fees of $56 thousand and 39 weeks ended October 1, 2017, respectively, and $56,250 and $168,750$110 thousand for the 13three and 39 weekssix months ended October 2, 2016. DuringJune 30, 2020, respectively. 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, 2022. The agreement also will terminate on the 39 weeks ended October 2, 2016,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 paid acquisition related fees underbegan utilizing the management agreementservices of $259,900 asEngauge Workforce Solutions LLC (“Engauge”), a resultmanufacturing and distribution staffing agency. Ms. Kim Korth, a member of the Intasco acquisitionCompany’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 April 29, 2016.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 through June 30, 2021 of $228 thousand.
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.
20
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 swapswaps 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. Please refer to Note 7 for more information on the Company’s interest rate swap.
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.
The Company measures its foreign currency forward contract on a recurring basis based primarily on Level 2 inputs usingfollowing table sets forth the present valuereconciliation of future cash flows to be incurred on the contracts. In accordance with market standardsnumerator and conventionsthe denominator of basic and diluted loss per share for valuing such contracts, the transactions reflectthree and six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| (dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net income (loss) | $ | (2,509) | $ | (4,322) | $ | (3,578) | $ | (6,624) | ||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Weighted average shares outstanding, basic | 9,779,147 | 9,779,147 | 9,779,147 | 9,779,147 | ||||||||||||||||||||||
| Dilutive effect of stock-based awards | 0 | 0 | 0 | 0 | ||||||||||||||||||||||
| Weighted average share outstanding, diluted | 9,779,147 | 9,779,147 | 9,779,147 | 9,779,147 | ||||||||||||||||||||||
| Basic loss per share | $ | (0.26) | $ | (0.44) | $ | (0.37) | $ | (0.68) | ||||||||||||||||||
| Diluted loss per share | $ | (0.26) | $ | (0.44) | $ | (0.37) | $ | (0.68) | ||||||||||||||||||
The effect of certain common stock equivalents were excluded from the current directioncomputation of weighted average diluted shares outstanding for the three months and amounts expectedsix months ended June 30, 2020, as inclusion would have resulted in each currency, spot exchange rates at period-end, discount factors and forward interest rate curves for each relevant currency pair and future maturity date. This forward contract expiredanti-dilution. A summary of these anti-dilutive common stock equivalents is provided in the 26 weeks ended October 1, 2017.table below:
| Six Months Ended June 30, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Number of options | 948,975 | 611,480 | ||||||||||||||||||||||||
| Exercise price of options | $2.36 - $12.58 | $2.36 - $12.58 | ||||||||||||||||||||||||
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.
21
UNIQUE FABRICATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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| Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||||||||
| Basic earnings per share calculation: | |||||||||||||||
| Net income | $ | 715,106 | $ | 2,520,199 | $ | 4,430,353 | $ | 4,953,022 | |||||||
| Net income attributable to common stockholders | $ | 715,106 | $ | 2,520,199 | $ | 4,430,353 | $ | 4,953,022 | |||||||
| Weighted average shares outstanding | 9,757,187 | 9,703,791 | 9,748,743 | 9,665,441 | |||||||||||
| Net income per share-basic | $ | 0.07 | $ | 0.26 | $ | 0.45 | $ | 0.51 | |||||||
| Diluted earnings per share calculation: | |||||||||||||||
| Net income | $ | 715,106 | $ | 2,520,199 | $ | 4,430,353 | $ | 4,953,022 | |||||||
| Weighted average shares outstanding | 9,757,187 | 9,703,791 | 9,748,743 | 9,665,441 | |||||||||||
| Effect of dilutive securities: | |||||||||||||||
Stock options(1)(2) | 139,654 | 204,111 | 152,924 | 209,133 | |||||||||||
Warrants(1)(2) | 1,432 | 11,054 | 1,573 | 11,375 | |||||||||||
| Diluted weighted average shares outstanding | 9,898,273 | 9,918,956 | 9,903,240 | 9,885,949 | |||||||||||
| Net income per share-diluted | $ | 0.07 | $ | 0.25 | $ | 0.45 | $ | 0.50 | |||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management'sManagement’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 January 1, 2017December 31, 2020 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC"“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.
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
Overview
Unique is engagedFabricating, Inc. (the “Company” or “Unique”) engineers and manufactures components for customers in the engineeringtransportation, appliance, medical, and manufactureconsumer/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 combinesleverages proprietary manufacturing processes, including die cutting, thermoforming, compression molding, fusion molding, and reaction injection molding to manufacture a long historywide range of organic growth with some more recent strategic acquisitions to diversify both product capabilitiesproducts 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 markets served.packaging. The Company is headquartered in Auburn Hills, Michigan.
23
We primarily operate within the highly competitive and cyclical automotive parts industry. Over
The Company’s financial results for the past seven years the industry has experienced consistent growth as it recovered from the recession of 2009. Many sectorssix months ended December 31, 2020 and nine months ended March 31, 2021 resulted in violations of the supply chain are operating near capacity. Overfollowing financial covenants: (1) Maximum Total Leverage Ratio; (2) Minimum Debt Service Coverage Ratio; and (3) Minimum Consolidated EBITDA; as defined in the sameCompany’s Amended and Restated Credit Agreement. The Company entered into a forbearance agreement, providing a period we have grown our core automotive parts business atcommencing on April 9, 2021 and through June 15, 2021, during which the Company was able to borrow on its Revolver, subject to the terms and conditions to making a faster rate thanrevolving credit advance, including availability. The Lenders agreed, subject to the industryterms 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 Forbearance Agreement, which among other things, extended the forbearance period from June 15, 2021 to February 28, 2022. The First Amendment also suspends the testing of the Total Leverage Ratio and the Debt Service Ratio during the forbearance period and contains revised requirements for Minimum Liquidity and Minimum Consolidated EBITDA for the monthly periods through and including February 28, 2022. During the extended period, the Company will continue to be able to borrow under the revolving line of credit, subject to availability and the satisfaction of certain other conditions. However, entering into the Forbearance Agreement, as amended, will not alleviate the substantial doubt about the Company’s ability to continue as a whole, reflectinggoing concern. As described elsewhere herein, our growthForbearance Agreement, as amended, contains certain financial covenants with which we are required to comply, commencing with the four-month period ending July 31, 2021, through acquisitionsand including the eleven-month period ending February 28, 2022. There cannot be any assurance that we will be able to comply with these covenants contained in the Forbearance Agreement, including as wellsoon as taking market share from competitorswith respect to the first measurement period, given the industry-wide and increasingother challenges that we face, as described elsewhere herein or that our content per vehicle onlenders would waive a default if that were to occur.
The Company intends to use the programs we supply. We expect these trendsforbearance period to continue.
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
24
results of operations and cash flows will depend on the duration and unpredictability of the supply shortages, North American vehicle production schedules and supply chain impacts, as to light truckswhich we cannot be certain at this time.
The Company continues to monitor the COVID-19 pandemic and SUVs has caused overall production levelswill continue to fall, since much light truckfollow health and SUV production is already at capacity. There have been a number of plant shutdowns to reduce excess vehicle inventory levels, particularly in passenger cars. Days’ supply of total light vehiclessafety guidelines issued by various governmental entities in the U.S. at the end of September 2017 was around 64 days, up from 62 days at the end of December 2016 and comparable with September 2016. As Unique is heavily dependent on light vehicle productionjurisdictions where we operate in North America,order to protect our revenues have been impacted by the decline in 2017 production.employees.
Comparison of Results of Operations for the ThirteenThree Months Ended June 30, 2021 and Thirty-Nine Weeks Ended October 1, 2017 and the Thirteen and Thirty-Nine Weeks Ended October 2, 2016June 30, 2020
Net Sales
| Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | ||||||
| (in thousands) | |||||||
| Net sales | $ | 41,231 | $ | 44,754 | |||
| Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | ||||||||||
| (dollars in thousands) | |||||||||||
| Net sales | $ | 30,896 | $ | 14,975 | |||||||
Net sales for the 13 weeksquarter ended October 1, 2017June 30, 2021 were approximately $41.23$30.9 million compared to $44.75$15.0 million for the 13 weeksquarter ended October 2, 2016. The decreaseJune 30, 2020, representing an increase of 106.3%. This increase in net sales forquarter over quarter is driven by the 13 weeks ended October 1, 2017, was primarily attributable to a 11.5% overall declineimpact the COVID-19 pandemic had on 2020 production volumes in the North American vehicleautomotive market. However, our net sales continue to be less than in comparable quarters in recent years preceding the COVID-19 pandemic as a result of decreased demand for our products as automotive OEMs cancelled or reduced planned production in such period as compareddue to production in the 13 weeks ended October 2, 2016. partially offset by increased market penetration.semiconductor and other supply shortages.
Cost of Sales
| Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | ||||||
| (in thousands) | |||||||
| Materials | $ | 20,708 | $ | 22,555 | |||
| Direct labor and benefits | 6,719 | 6,327 | |||||
| Manufacturing overhead | 4,334 | 4,226 | |||||
| Sub-total | 31,761 | 33,108 | |||||
| Depreciation | 495 | 396 | |||||
| Cost of Sales | 32,256 | 33,504 | |||||
| Gross Profit | $ | 8,975 | $ | 11,251 | |||
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 as a percentsales consists of Net Salesthe following major components:
| Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||
| Amount | As % of net sales | Amount | As % of net sales | |||||||||||||||||||||||||
| Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | (dollars in thousands) | ||||||||||||||||||||||||||
| Materials | 50.2 | % | 50.4 | % | Materials | $ | 16,029 | 51.9 | % | $ | 6,983 | 46.6 | % | |||||||||||||||
| Direct labor and benefits | 16.3 | % | 14.1 | % | Direct labor and benefits | 4,688 | 15.2 | % | 2,491 | 16.6 | % | |||||||||||||||||
| Manufacturing overhead | 10.5 | % | 9.5 | % | Manufacturing overhead | 4,846 | 15.7 | % | 3,029 | 20.2 | % | |||||||||||||||||
| Sub-total | 77.0 | % | 74.0 | % | Sub-total | 25,563 | 82.7 | % | 12,503 | 83.5 | % | |||||||||||||||||
| Depreciation | 1.2 | % | 0.9 | % | Depreciation | 717 | 2.3 | % | 631 | 4.2 | % | |||||||||||||||||
| Cost of Sales | 78.2 | % | 74.9 | % | Cost of Sales | $ | 26,280 | 85.1 | % | $ | 13,134 | 87.7 | % | |||||||||||||||
| Gross Profit | 21.8 | % | 25.1 | % | Gross Profit | $ | 4,616 | 14.9 | % | $ | 1,841 | 12.3 | % | |||||||||||||||
Cost of sales as a percentage of net sales for the 13 weeksquarter ended October 1, 2017 increasedJune 30, 2021 decreased compared to 78.2% from 74.9% for the 13 weeksquarter ended October 2, 2016.June 30, 2020. The increasedecrease in cost of sales as a percentage of net sales was primarily attributabledue to increased operating leverage as a result of higher directnet sales with comparable fixed overhead costs. Material costs rose due to price increases from our vendors driven by supply shortages. Direct labor and benefits manufacturing overhead,costs were negatively impacted in 2020 by the continuation of healthcare costs and depreciation as a percentageother benefits during the COVID-19 related shut downs, without employee contributions. During the second quarter of net sales, partially offset by a decrease in
previously mentioned supply shortages.
Gross Profit
25
Selling, General and Administrative Expenses
| Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | ||||||||||
| (dollars in thousands) | |||||||||||
| Selling, general, and administrative expenses, excluding depreciation and amortization expenses | $ | 5,489 | $ | 5,230 | |||||||
| Depreciation and amortization | 592 | 1,113 | |||||||||
| Selling, general, and administrative expenses | $ | 6,081 | $ | 6,343 | |||||||
| Selling, general, and administrative expenses as a percentage of net sales | 19.7 | % | 42.4 | % | |||||||
| Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | ||||||
(in thousands, except SG&A as a % of net sales) | |||||||
| SG&A, exclusive of line items below | $ | 6,168 | $ | 5,846 | |||
| Transaction expenses | — | 10 | |||||
| Subtotal | 6,168 | 5,856 | |||||
| Depreciation and amortization | 1,101 | 1,093 | |||||
| SG&A | $ | 7,269 | $ | 6,949 | |||
| SG&A as a % of net sales | 17.6 | % | 15.5 | % | |||
Operating Loss
Non-Operating Expense
Non-operating expense for the 13 weeksthree months ended October 2, 2016.June 30, 2021 was $0.7 million compared to $0.6 million for the three months ended June 30, 2020. The increase in non-operating expenses is primarily relatedthe result of higher interest expense due to higher borrowings on our Revolver during the decline in sales in the 13 weeks ended October 1, 2017second quarter of 2021 compared to the 13 weeks ended October 2, 2016.2020.
Taxes
As a result of the foregoing factors, operatingour loss before income for the 13 weeks ended October 1, 2017 was $1.71taxes decreased $3.2 million compared to operating income of $4.30$2.2 million for the 13 weeksthree months ended October 2, 2016.
2020.
Income Tax Provision
During the 13 weeksthree months ended October 1, 2017,June 30, 2021, income tax expense was $0.26$0.3 million, and the effective income tax rate was 26.7%(13)%. The difference betweenCompany had higher income tax expense in the actual effective rate and the statutory rate was2021 second quarter due to income earning in jurisdictions with tax rates lower than the U.S. statutory rate, and the domestic production activities deduction, or DPAD benefitvaluation allowance in the U.S. Duringand higher income in certain tax jurisdictions compared to the 13 weeks ended October 2, 2016, incomesecond quarter of 2020. The valuation allowance in U.S. resulted in the non-recognition of tax expense was $1.25 million, and the effective income tax rate was 33.2%. The effective tax rate and statutory rate were in alignment with each otherbenefits for net operating losses at our U.S. locations.
Net Loss
Net loss for the 13 weeksthree months ended October 2, 2016.
Net Sales
| Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||
| (in thousands) | |||||||
| Net sales | $ | 133,606 | $ | 126,784 | |||
| Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | ||||||||||
| (dollars in thousands) | |||||||||||
| Net sales | $ | 65,694 | $ | 49,636 | |||||||
Net sales for the 39 weekssix months ended October 1, 2017June 30, 2021 were approximately $133.61$65.7 million compared to $126.78$49.6 million for the 39 weekssix months ended October 2, 2016. For the 39 weeks ended October 1, 2017, approximately $11.00 millionJune 30, 2020, representing a increase of the growth32.4%. The increase in net sales was attributable to our increased market penetration and new product introductions, including 39 weeks of sales from the Intasco business. The acquisition occurred on April 29, 2016, and only 22 weeks of Intasco sales are included for the 39 weekssix months ended October 2, 2016. This growthJune 30, 2021, was partially offsetprimarily caused by the effects of the COVID-19 pandemic in 2020, which idled our automotive customers’ facilities for the majority of the second quarter of 2020. However, our net sales continue to be less than in comparable periods in recent years prior to the COVID-19 pandemic as a 3.6% overall decrease in North American vehicleresult of decreased demand for our products as automotive OEMs cancelled or reduced planned production in the 39 weeks ended October 1, 2017 period as compareddue to production in the 39 weeks ended October 2, 2016.semiconductor and other supply shortages.
Cost of Sales
26
| Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||
| (in thousands) | |||||||
| Materials | $ | 67,404 | $ | 64,432 | |||
| Direct labor and benefits | 20,202 | 18,673 | |||||
| Manufacturing overhead | 13,852 | 12,572 | |||||
| Sub-total | 101,458 | 95,677 | |||||
| Depreciation | 1,400 | 1,166 | |||||
| Cost of Sales | 102,858 | 96,843 | |||||
| Gross Profit | $ | 30,748 | $ | 29,942 | |||
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 as a percentsales consists of Net Salesthe following major components:
| Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||
| Amount | As % of net sales | Amount | As % of net sales | |||||||||||||||||||||||||
| Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | (dollars in thousands) | ||||||||||||||||||||||||||
| Materials | 50.4 | % | 50.8 | % | Materials | $ | 34,133 | 52.0 | % | $ | 25,587 | 51.5 | % | |||||||||||||||
| Direct labor and benefits | 15.1 | % | 14.8 | % | Direct labor and benefits | 9,931 | 15.1 | % | 8,348 | 16.8 | % | |||||||||||||||||
| Manufacturing overhead | 10.4 | % | 9.9 | % | Manufacturing overhead | 9,757 | 14.9 | % | 7,013 | 14.1 | % | |||||||||||||||||
| Sub-total | 75.9 | % | 75.5 | % | Sub-total | 53,821 | 81.9 | % | 40,948 | 82.5 | % | |||||||||||||||||
| Depreciation | 1.1 | % | 0.9 | % | Depreciation | 1,395 | 2.1 | % | 1,256 | 2.5 | % | |||||||||||||||||
| Cost of Sales | 77.0 | % | 76.4 | % | Cost of Sales | $ | 55,216 | 84.1 | % | $ | 42,204 | 85.0 | % | |||||||||||||||
| Gross Profit | 23.0 | % | 23.6 | % | Gross Profit | $ | 10,478 | 15.9 | % | $ | 7,432 | 15.0 | % | |||||||||||||||
Cost of sales as a percentage of net sales for the 39 weekssix months ended October 1, 2017 increasedJune 30, 2021 decreased to 77.0%84.1% from 76.4%85.0% for the 39 weekssix months ended October 2, 2016.June 30, 2020. The increasemain driver of this decrease in cost of sales as a percentagepercent of net sales was primarily attributableis the increased sales levels in 2021 compared to higherthe first half of 2020. The Company continued to provide health and other employee benefits during the COVID-19 related shut downs in 2020, without employee contributions, which negatively impacted direct labor and benefits manufacturing overhead, and depreciation as a percentage of net sales, partially offset by a decreaseexpenses in costs of material.that period. Material costs decreased to 50.4%have been negatively impacted in the first half of net sales for the 39 weeks ended October 1, 2017 from 50.8% for the 39 weeks ended October 2, 2016. The decline was primarily2021 due to favorable product mix as well as increased costs in 2016 due to the amortization of the markup to fair market value of the inventory acquired in the Intasco acquisition. Direct labor and benefit costs as a percentage of net sales was 15.1% for the 39 weeks ended October 1, 2017 compared to 14.8% for the 39 weeks ended October 2, 2016. Labor and benefit costs as a percentage of net sales increased due to an increase in direct and temporary labor hours as a result of change in product mix, and a decline in the use of temporary employees at one ofprice increases from our facilities in Michigan as required under our collective bargaining agreement, resulting in an increase in benefit related costs during the 39 weeks ended October 1, 2017 when compared to the 39 weeks ended October 2, 2016. Manufacturing overhead costs as a percentage of net sales was 10.4% for the 39 weeks ended October 1, 2017 versus 9.9% for the 39 weeks ended October 2, 2016. Manufacturing overhead costs as a percentage of net sales increased due to an increase in shipping related costs due to a change in product mix and in wages as we upgrade supervision and add production capabilities at some of our facilities. Depreciation costs increased to 1.1% of net sales for the 39 weeks ended October 1, 2017 compared to 0.9% for the 39 weeks ended October 2, 2016. The increase was a result of the investment in new equipment we made to increase our capacity in order to meet expected future demand and to add production capabilities at our manufacturing facilities.
vendors.
Gross Profit
current year.
Selling, General and Administrative Expenses
| Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | ||||||||||
| (dollars in thousands) | |||||||||||
| Selling, general, and administrative expenses, excluding depreciation and amortization expenses | $ | 10,346 | $ | 10,025 | |||||||
| Depreciation and amortization | 1,549 | 2,202 | |||||||||
| Selling, general, and administrative expenses | $ | 11,895 | $ | 12,227 | |||||||
| Selling, general, and administrative expenses as a percentage of net sales | 18.1 | % | 24.6 | % | |||||||
| Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||
(in thousands, except SG&A as a % of net sales) | |||||||
| SG&A, exclusive of line items below | $ | 19,142 | $ | 16,979 | |||
| Transaction expenses | 10 | 859 | |||||
| Subtotal | 19,152 | 17,838 | |||||
| Depreciation and amortization | 3,304 | 2,831 | |||||
| SG&A | $ | 22,456 | $ | 20,669 | |||
| SG&A as a % of net sales | 16.8 | % | 16.3 | % | |||
Operating Loss
Non-Operating Expense
Non-operating expense for the 39 weekssix months ended October 2, 2016.June 30, 2021 was $1.4 million compared to $2.3 million for the six months ended June 30, 2020. The increasedecrease in non-operating expense is primarily the result of one-time consulting and licensing costs associated with the implementation ofdriven by reduced mark to market adjustments on our new ERP system in the 39 weeks ended October 1, 2017interest rate swap compared to the 39 weeks ended October 2, 2016.last year. This reduction was partially offset by higher interest expense due to increased borrowings on our Revolver in 2021.
Before Income Taxes
As a result of the foregoing factors, operatingour loss before income for the 39 weeks ended October 1, 2017 was $8.29taxes decreased $5.4 million compared to operating income of $9.24$2.8 million for the 39 weekssix months ended October 2, 2016.
27
Income Tax Provision
During the 39 weekssix months ended October 1, 2017,June 30, 2021, income tax expense was $1.86$0.7 million, and the effective income tax rate was 29.5%. The difference between the actual effective rate and the statutory rate was due26%, compared to income earning in jurisdictions with tax rates lower than the U.S. statutory rate, and the domestic production activities deduction, or DPAD benefit in the U.S. During the 39 weeks ended October 2, 2016,an income tax expense was $2.52benefit of $1.7 million and thean effective income tax rate was 33.7%. The Company has deferred tax assets associated with timing differences between when an expense is recorded for book purposes versus when it is deductible for tax. The Company has considered evidence both supporting and not supportingof 20% during the determination that the deferred tax assets are more likely than not to be realized, and has not recorded a tax valuation allowance as of October 1, 2017. The Company will continue to evaluate whether the deferred tax assets will be realizable, and if appropriate, will record a valuation allowance against these assets.
six months ended June 30, 2020.
Net incomeIncome
| Thirteen Weeks Ended October 1, 2017 | Thirteen Weeks Ended October 2, 2016 | Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | ||||||||||||
| (in thousands) | |||||||||||||||
| Net income | $ | 715 | $ | 2,520 | $ | 4,430 | $ | 4,953 | |||||||
| Plus: Interest expense, net | 770 | 525 | 2,089 | 1,739 | |||||||||||
| Plus: Income tax expense | 261 | 1,254 | 1,857 | 2,520 | |||||||||||
| Plus: Depreciation and amortization | 1,596 | 1,489 | 4,704 | 3,996 | |||||||||||
| Plus: Non-cash stock award | 40 | 41 | 115 | 127 | |||||||||||
| Plus: Non-recurring integration expenses | 28 | 36 | 32 | 105 | |||||||||||
| Plus: Non-recurring step-up of inventory basis to fair market value | — | 39 | — | 319 | |||||||||||
| Plus: Transaction fees | — | 10 | 23 | 859 | |||||||||||
| Plus: Restructuring expenses | — | — | — | 35 | |||||||||||
| Plus: One-time consulting and licensing ERP system implementation costs | 276 | — | 815 | — | |||||||||||
| Adjusted EBITDA | $ | 3,686 | $ | 5,914 | $ | 14,065 | $ | 14,653 | |||||||
Liquidity and Capital Resources
Our principal sources of liquidity are cash flowflows from operations and borrowings under our New 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 October 1, 2017June 30, 2021 and January 1, 2017,December 31, 2020, we had a cash balance of $1.02$0.9 million and $0.71$0.8 million, respectively. Our excess cash balance is swept daily and applied to reduce borrowings under our revolving line of credit, which remains available for re-borrowing, as needed, subject to compliance with the terms of the facility. As of October 1, 2017June 30, 2021 and January 1, 2017,December 31, 2020, we had $7.58$6.7 million and $9.42$5.7 million, respectively, available to be borrowed under our revolving credit facility, subjectfacility. Our ability to borrowing base restrictions and outstanding lettersborrow, however, under the revolving line of credit. At each such date, we werecredit is dependent on the Forbearance Agreement which expires in February 2022, including our compliance with all debt covenants. We believe thatits terms.
Our Debt
On April 24, 2020, due to the significant impact the COVID-19 pandemic was having on our sourcesbusiness, 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 includingby 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 flowproceeds from operations, existing cash andits 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 sufficientbased upon results for one, two and three quarters, respectively. The Eighth Amendment further adds a Minimum Liquidity requirement to meet our projected cash requirementsbe calculated monthly through June 30, 2021 and Minimum Consolidated EBITDA for at leasteach measurement period, as defined, through June 30, 2021.
The Company’s financial results for the next fifty two weeks.
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
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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 are tested monthly beginning with the month ending July 31, 2021. During the extended period, the Company will continue to be able to borrow under the revolving line of credit, subject to availability and satisfaction of certain other conditions. 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.
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 the First Amendment to the Forbearance Agreement, a non-GAAP measure, for the three months ended June 30, 2021:
| Three Months Ended June 30, 2021 | ||||||||
| (dollars in thousands) | ||||||||
| Net loss | $ | (2,509) | ||||||
| Plus: | ||||||||
| Interest expense | 769 | |||||||
| Income tax expense | 296 | |||||||
| Depreciation and amortization | 1,309 | |||||||
| Non-cash stock awards | 256 | |||||||
Non-recurring expenses (a) | — | |||||||
ERP system implementation consulting and licensing costs (b) | — | |||||||
Forbearance agreement fees (c) | 306 | |||||||
| Consolidated EBITDA, as defined | $ | 427 | ||||||
(a) Represents any other non-recurring, non-cash gains during such opportunities could be materially adversely affected.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) Represents costs and expenses incurred in connection with the Forbearance Agreement and the First Amendment to Forbearance Agreement, in an aggregate amount not to exceed $350,000, including the Lenders’ and Agent’s legal fees and the Financial Advisor’s fees
Refer to Note 6, “Long-term Debt,” in Part 1, Item 1, included within this quarterly report on Form 10-Q for the second quarter ended June 30, 2021 for additional information.
Capital Expenditures
In 2021, we plan to spend approximately $4.0 million in capital expenditures, of which $2.3 million was spent through June 30, 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.
Dividends
Cash Flow Data
The following table presents cash flow data for the periods indicated.presented:
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| Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |||||||||||||||||
| Thirty-Nine Weeks Ended October 1, 2017 | Thirty-Nine Weeks Ended October 2, 2016 | (dollars in thousands) | ||||||||||||||||
| (in thousands) | ||||||||||||||||||
| Cash flow data | ||||||||||||||||||
| Cash flow provided by (used in): | ||||||||||||||||||
| Cash flows provided by (used in): | Cash flows provided by (used in): | |||||||||||||||||
| Operating activities | $ | 5,641 | $ | 5,444 | Operating activities | $ | (913) | $ | 693 | |||||||||
| Investing activities | (3,437 | ) | (23,249 | ) | Investing activities | $ | (2,227) | $ | 124 | |||||||||
| Financing activities | (1,893 | ) | 18,584 | Financing activities | $ | 3,304 | $ | 2,631 | ||||||||||
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; gain or loss on extinguishments of debt;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 drivers offactors affecting cash inflows and outflows are accounts receivable, inventory, prepaid expenses and other assets, and accounts payable and accrued interest.
During the thirty-nine weekssix months ended October 1, 2017,June 30, 2021, net cash providedused by operating activities was $5.64$0.9 million, compared to net cash provided by operating activities of $5.44$0.7 million for the thirty-nine weekssix months ended October 2, 2016.
customer releases.
Investing Activities
Cash provided by or used in investing activities consists principally of purchasespurchase and sale of property, plant and equipment.
We plan to spend a total of approximately $5.30$4.0 million in capital expenditures during 2017,2021, including the $3.47$2.3 million spent to date.
through June 30, 2021.
Financing Activities
Cash flows (used in) provided by or used in financing activities consists primarily of borrowings and payments under our new and old senior credit facility,facilities, debt issuance costs, proceeds from theany exercise of stock options and warrants, and distribution of cash dividends.
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. 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 12 to the condensed consolidated financial statements in Part I Item 1 of this Quarterly Report on Form 10-Q.
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 New 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 decreasesdecreased by $0.32 million each quarter until June 30, 2017, when it will beginand began decreasing by $0.43 million each quarter until June 29, 2018, when it then beginsbegan decreasing by $0.53 million per quarter until the swap terminatesterminated on June 28, 2019. The interest rate swap requiresrequired 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 notes to 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 June 30, 2021, the fair value of all swaps was in a net liability position of $0.9 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.
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 June 30, 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 OfficersOfficer as appropriate to allow for timely decisions.
Internal Controls Over Financial Reporting
As previously identified and procedures,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 participation,Company’s complexity and under the supervision, of our management, including our Chief Executive Officerits financial accounting and Chief Financial Officer. Based on this evaluation, our Chief Executive and Chief Financial Officer have concluded that our disclosure controls and procedures were effectivereporting requirements. The material weaknesses continued to exist as of the end of the period covered by this report.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 hired a third-party firm to assist with the Company’s remediation efforts. The Company, with the assistance of the third-party firm, has completed a gap analysis of its internal control over financial reporting and has begun implementing certain new or redesigned controls. The Company plans to continue working to implement or redesign existing controls as well as begin assessing if the new or redesigned controls implemented as part of its remediation efforts are operating effectively in the coming months. Accordingly, we concluded that the material weaknesses have not yet been remediated as of June 30, 2021.
Changes in Internal Control over Financial Reporting
PART II
– OTHER INFORMATION
Legal Proceedings
Not applicable
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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 June 30, 2021 we had $6.7 million, available to be borrowed under our revolving credit facility and approximately $0.9 million cash and cash equivalents. Our ability to borrow, however, under the revolving line of credit is dependent on our compliance with the Forbearance Agreement which currently expires in February 2022. 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, if any, subject to the Amended and Restated Credit Agreement and the Forbearance Agreement. There have beencan be no material changes fromassurance that such sources will be available to us or sufficient to fund our operating and other requirements.
The Company’s financial performance may not meet the risk factors set forthcovenant requirements in our Annual Report on Form 10-Kthe First Amendment to the Forbearance Agreement.
In June 2021, we entered into the First Amendment to the Forbearance Agreement, which among other things, suspends the testing of the Total Leverage and the Debt Service Ratios during the forbearance period, and contains revised requirements for Minimum Liquidity and Minimum Consolidated EBITDA for the fiscal year ended January 1, 2017 filedmeasurement periods, as defined, commencing with the SEC.period ending July 31, 2021, through and including the period ending February 28, 2022. There cannot be any assurance that we will be able to comply with these covenants contained in the Forbearance Agreement, including as soon as with respect to the first measurement period, 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. If the lenders were to exercise their remedies under the Credit Agreement or the related documents, we could be compelled, in the absence of other remedies, to avail ourselves of the protections of the bankruptcy laws, in which event stockholders would likely lose their entire investment in us.
Unregistered Sales of Equity Securities and Use of Proceeds
None
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. Please refer to Note 6 for further discussion of the defaults.
Not applicable.
Not applicable.
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, | |||||||
32.1** | Certification of the Chief Executive Officer | |||||||
32.2** | ||||||||
| 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.
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: | By: | /s/ | ||||||||||||
| Brian P. Loftus | ||||||||||||||
(Principal Financial and Accounting Officer) | ||||||||||||||
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