Cautionary Note Regarding Forward-Looking Statements Unless otherwise indicated, references to "Jason Industries ," the "Company," "we," "our" and "us" in this Quarterly Report on Form 10-Q refer toJason Industries, Inc. and its consolidated subsidiaries. This report contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Specifically, forward-looking statements may include statements relating to our future financial performance, changes in the markets for our products, our expansion plans and opportunities, and other statements preceded by, followed by or that include the words "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target" or similar expressions. These forward-looking statements are based on information available as of the date of this report and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Many of these risks and uncertainties are currently amplified by, and will continue to be amplified by, or in the future may be amplified by, the COVID-19 outbreak and the related governmental restrictions and the adverse impact on the global economy from the outbreak. Some factors that could cause actual results to differ include, among others: •our ability to obtain confirmation of the Plan under the Chapter 11 Cases and successfully consummate the Restructuring (each, as defined herein), including by satisfying the conditions and milestones in the Restructuring Support Agreement (as defined herein); •our ability to improve our liquidity and long-term capital structure and to address our debt service obligations through the Restructuring and the potential adverse effects of the Chapter 11 Cases on our liquidity and results of operations; •our ability to obtain timely approval by the bankruptcy court with respect to the motions filed in the Chapter 11 Cases; •objections to the Company's recapitalization process or other pleadings filed that could protract the Chapter 11 Cases and third party motions which may interfere with Company's ability to consummate the Restructuring or an alternative restructuring; •the length of time that the Company will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases; •increased administrative and legal costs related to the Chapter 11 process; •potential delays in the Chapter 11 process due to the effects of the COVID-19 pandemic; •the effects of the Restructuring and the Chapter 11 Cases on the Company and the interests of various constituents; •our substantial level of indebtedness and related debt service obligations and restrictions, including those expected to be imposed by covenants in any exit financing, that may limit our operational and financial flexibility; •our ability to continue as a going concern and our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of such going concern, the Restructuring and the Chapter 11 Cases; •the COVID-19 pandemic, which has had, and is expected to continue to have, a significant impact on our operations, including, but not limited to, weakened demand for our products, supply chain disruptions, and the inability of certain of our customers to timely meet their obligations to us; •our ability to access additional capital and/or the capital markets; •level of demand for our products; •competition in our markets; •volatility in the prices of raw materials and our ability to pass along increased costs; 30
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•our ability to successfully complete divestitures and integrate acquisitions; •our ability to grow and manage growth profitably; •changes in applicable laws or regulations; •our ability to attract and retain qualified personnel; •the impact of proposed and potential regulations related to theU.S. Tax Cuts and Jobs Act and the CARES Act; •the possibility that we may be adversely affected by other economic, business, trade, inflation and/or competitive factors; and •other risks and uncertainties indicated in this report, as well as those disclosed in the Company's other filings with theSecurities and Exchange Commission (the "SEC"), including those discussed under "Risk Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K/A for the year endedDecember 31, 2019 , which may be amended or supplemented in Part II, Item 1A, "Risk Factors," of our subsequently filed Quarterly Reports on Form 10-Q (including this report). Introductory Note The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the audited consolidated financial statements for the year endedDecember 31, 2019 , including the notes thereto, along with the related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Annual Report on Form 10-K/A. This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains certain financial measures, in particular EBITDA and Adjusted EBITDA, which are not presented in accordance with GAAP. These non-GAAP financial measures are being presented because management believes that they provide readers of this MD&A with additional insight into the Company's operational performance relative to comparable prior periods presented and relative to its competitors. EBITDA and Adjusted EBITDA are key measures used by the Company to evaluate its performance. The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. Readers of this MD&A should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. Reconciliations of EBITDA and Adjusted EBITDA to net income, the most comparable GAAP measure, are provided in this MD&A. Fiscal Year Our fiscal year ends onDecember 31 . Throughout the year, we report our results using a fiscal calendar whereby each three month quarterly reporting period is approximately thirteen weeks in length and ends on a Friday. The exceptions are the first quarter, which begins onJanuary 1 , and the fourth quarter, which ends onDecember 31 . For 2020, our fiscal quarters are comprised of the three months endedMarch 27 ,June 26 ,September 25 , andDecember 31 . In 2019, our fiscal quarters were comprised of the three months endedMarch 29 ,June 28 ,September 27 , andDecember 31 . Throughout this MD&A, we refer to the period fromJanuary 1, 2020 throughMarch 27, 2020 as the "first quarter of 2020" or the "first quarter endedMarch 27, 2020 ". Similarly, we refer to the period fromJanuary 1, 2019 throughMarch 29, 2019 as the "first quarter of 2019" or the "first quarter endedMarch 29, 2019 ." Overview We are a global industrial manufacturing company with significant market share positions in each of our two segments: industrial and engineered components. We provide critical components and manufacturing solutions to customers across a wide range of end markets, industries and geographies through our global network of 22 manufacturing facilities and nine sales offices, administrative and/or warehouse facilities throughoutthe United States and 13 foreign countries. We have embedded relationships with long standing customers, superior scale and resources, and specialized capabilities to design and manufacture specialized products on which our customers rely. We focus on markets with long-term sustainable growth characteristics and where we are, or have the opportunity to become, the industry leader. Our industrial segment focuses on the production of industrial brushes, polishing buffs and compounds, abrasives, and roller technology products that are used in a broad range of industrial and infrastructure applications. The engineered components segment designs, engineers, and manufactures seating products used in heavy industry (construction, agriculture, and material handling), turf care, and power sports applications. During the three months endedMarch 27, 2020 andMarch 29, 2019 , approximately 34% and 35% of our sales, respectively, were derived from customers outside ofthe United States . As a diversified, global business, our operations are affected by worldwide, regional and industry-specific economic and political factors. Our geographic and industry diversity, as well as the wide range of our products, help mitigate the impact of industry or economic fluctuations. Given the broad range of 31
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products manufactured and industries and geographies served, management primarily uses general economic trends to predict the overall outlook for our Company. Our individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and the outlook for the future. During 2019, we determined that both the North American fiber solutions business and the Metalex business within the engineered components segment met the criteria to be classified as discontinued operations. As a result, our prior period results of operations, financial position and notes to the financial statements have been recast to be presented on a continuing operations basis, except where noted. OnAugust 30, 2019 andDecember 13, 2019 , we completed the divestitures of our North American fiber solutions business and our Metalex business, respectively. OnFebruary 27, 2020 , we acquired selected assets of Matchless, a North American manufacturer of high-quality polishing buffs, compounds, and chemicals. Through the acquisition of Matchless, we expanded our product line offerings withinNorth America . The business has been integrated into our industrial segment. Impact of COVID-19 COVID-19 was first identified in late 2019, continued to spread throughout the world in early 2020 and was eventually declared a pandemic by theWorld Health Organization by the end of the first quarter of 2020. The COVID-19 pandemic has resulted in national, state and local government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, border closings, restrictions on public gatherings, quarantining of peoplewho may have been exposed to the virus, shelter-in-place restrictions, and limitations or shutdowns of business operations. The Company has significant operations worldwide, including inthe United States ,Mexico andGermany , and each of these countries has been affected by the outbreak and taken measures to try to contain it, resulting in disruptions and closures at some of our manufacturing facilities and support operations. These measures have impacted and may further impact our workforce and operations, the operations of our customers and distributors, and those of our vendors and suppliers. There is considerable uncertainty regarding the impact, and expected duration, of such measures and potential future measures, and restrictions on our access to our facilities or on our support operations or workforce, or similar limitations for our vendors and suppliers. The Company continues to monitor and respond to the COVID-19 pandemic closely and the top priority remains the health, safety and well-being of our employees, their families and the communities in which we operate. As a result of the significant decline in demand for the Company's products as well as disruptions resulting from restrictions imposed by local governments to contain the virus, we have experienced periodic and in some cases extended closures of our manufacturing facilities primarily during the second quarter. Within the industrial and engineered components segments, some of the markets and customers the Company serves are considered essential businesses and therefore some of our plants remained open in those jurisdictions with such essential designations. As of the date of this filing, the Company's manufacturing operations have generally resumed production at levels supporting current market demand as local restrictions have been lifted. As the Company navigates through operating during the COVID-19 pandemic, it has modified business practices where practicable to ensure the safety of our employees such as but not limited to, developing social distancing plans for employees, expanding the number of work from home employees for roles that can work remotely and restricting employee travel. The Company's financial results began to be impacted by COVID-19 late in the first quarter of 2020, and COVID-19 has created significant uncertainty in the future economic outlook of the Company's businesses. While the Company's expectations for operating results in 2020 have been lowered to reflect the new economic environment, the Company's businesses are taking cost countermeasures, such as reductions in executive and salaried compensation, travel restrictions and employee furloughs, to manage operating expenses and preserve liquidity. The Company also began deferring certain lease payments for real property leases in the second quarter. Going Concern The condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company faces significant challenges and uncertainties related to the COVID-19 pandemic. As a result, the Company's available capital resources are expected to be consumed more rapidly than previously forecasted due to (a) significantly increased economic and demand uncertainty that has resulted in decreases in actual and expected future sales of the Company's products; (b) significant disruptions to the Company's ability to operate its manufacturing facilities due to restrictions placed on business operations, which has resulted in decreases in actual and future expected sales of the Company's products; (c) the effect of the COVID-19 pandemic on the Company's ability to obtain parts and materials from the Company's suppliers, which has resulted in decreases in actual and expected future sales of the Company's products; (d) the costs of continuing to staff critical production and fulfillment functions despite the significant declines in sales; (e) restructuring actions which are increasing operating expenses; (f) costs related to the strategic alternatives process, including executive and salaried retention agreements; and (g) other items affecting the Company's forecasted level of expenditures and use of cash resources. These factors will adversely impact the Company's ability to make a mandatory prepayment inAugust 2020 on its First Lien Term Loans of the net proceeds from the 2019 sale of the Fiber Solutions business, of which$48.4 million was remaining after permitted reinvestments as ofMarch 27, 2020 . AtMarch 27, 2020 the Company had$76.1 million of total liquidity, including 32
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$72.0 million of available cash (including$48.4 million of net proceeds from the 2019 sale of the Fiber Solutions business and$12.5 million held at our non-U.S. operations) and$4.1 million available under revolving loan facilities outside theU.S. See "Senior Secured Credit Facilities" in the "Liquidity and Capital Resources" section of this MD&A for further discussion of mandatory prepayments of debt. OnMarch 31, 2020 ,Jason Incorporated (the "Borrower"), a subsidiary of the Company, elected to defer making the interest payment of approximately$2.3 million due onMarch 31, 2020 to lenders under the Second Lien Credit Agreement (as defined in "Senior Secured Credit Facilities" in the "Liquidity and Capital Resources" section of this MD&A). This resulted in an event of default under the Second Lien Credit Agreement, with a cross-default under the FirstLien Credit Agreement (as defined in "Senior Secured Credit Facilities" in the "Liquidity and Capital Resources" section of this MD&A). Under the Intercreditor Agreement, the lenders under the Second Lien Credit Agreement are not able to exercise their rights and remedies in connection with such default for 180 days. As ofMarch 27, 2020 ,$89.9 million of principal amount of loans was outstanding under the Second Lien Credit Agreement. OnMarch 31, 2020 , the Company made its quarterly interest and amortization payments to the lenders under the First Lien Credit Agreement and following these payments$283.7 million of principal amount of loans was outstanding under the First Lien Credit Agreement as of such date. As a result of the event of default, the Company is not able to draw on its Revolving Credit Facility (as defined in "Senior Secured Credit Facilities" in the "Liquidity and Capital Resources" section of this MD&A). Also onMarch 31, 2020 , the Borrower and certain of the Company's other subsidiaries entered into a forbearance agreement with certain lenders under the Borrower's First Lien Credit Agreement, which was subsequently amended and restated onApril 30, 2020 ,May 14, 2020 ,June 2, 2020 andJune 3, 2020 (as amended and restated, the "Amended and Restated Forbearance Agreement"). Pursuant to the Amended and Restated Forbearance Agreement, the Forbearing Lenders agreed to forbear from exercising their rights and remedies during the Amended and Restated Forbearance Period (as described below) as a result of the failure by the Borrower to make the interest payment due onMarch 31, 2020 to lenders under the Second Lien Credit Agreement. The Amended and Restated Forbearance Period terminated onJune 5, 2020 . OnJune 5, 2020 the Company entered into a Restructuring Support Agreement (the "Restructuring Support Agreement") with certain creditors representing more than 75% of its outstanding indebtedness under its First Lien Credit Agreement. The Restructuring Support Agreement contemplates agreed-upon terms for a pre-packaged financial restructuring plan to be filed in cases commenced under chapter 11 of title 11 of the United States Code. See the "Restructuring Support Agreement" section of this MD&A below for further discussion of the terms of the Restructuring Support Agreement. The impact of the COVID-19 pandemic on the Company's forecasted liquidity and the factors resulting from the event of default, cross-default and terms of the Restructuring Support Agreement raise substantial doubt about the Company's ability to continue as a going concern for the one-year period from the date of issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Restructuring Support Agreement OnJune 5, 2020 , the Company and certain of its direct and indirect subsidiaries (collectively, the "Company Parties") entered into a Restructuring Support Agreement with certain creditors (the "Consenting Creditors") under its First Lien Credit Agreement, originally dated as ofJune 30, 2014 (the "First Lien Credit Agreement"). The Restructuring Support Agreement contemplates agreed-upon terms for a pre-packaged financial restructuring plan (the "Plan"). The Consenting Creditors as of the Agreement Effective Date (as defined in the Restructuring Support Agreement) represent in excess of 75% of outstanding principal amount of term loans under the First Lien Credit Agreement. Under the Restructuring Support Agreement, the Consenting Creditors have agreed, subject to certain terms and conditions, to support a financial restructuring (the "Restructuring") of the existing debt of, existing equity interests in, and certain other obligations of the Company Parties, pursuant to the Plan to be filed in cases commenced under chapter 11 (the "Chapter 11 Cases") of title 11 of the United States Code (the "Bankruptcy Code"). The Plan will be implemented in accordance with the restructuring term sheet attached to and incorporated into the Restructuring Support Agreement (the "Term Sheet") (such transactions described in, and in accordance with the Restructuring Support Agreement and the Term Sheet, the "Restructuring Transactions") which, among other things, contemplates: •the Consenting Creditors will consent to the Company's use of cash collateral to fund the Chapter 11 Cases, provided that such use is in accordance with the cash collateral order; •(i) if lenders holding 100% of the outstanding principal amount of term loans under the First Lien Credit Agreement are Consenting Creditors, the Company shall make a voluntary prepayment in an amount equal to$10 million ; or (ii) if lenders holding less than 100% of the outstanding principal amount of term loans under the First Lien Credit Agreement are Consenting Creditors, the Company shall purchase term loans from such Consenting Creditors in an amount equal to$10 million ; 33
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•the Company shall pay a forbearance fee to the Consenting Creditors equal to 4.00% of the principal amount of term loans outstanding under the First Lien Credit Agreement held by Consenting Creditors, of which (i) 2.00% shall be paid in cash by the 10th business day following the Agreement Effective Date; provided that any forbearance fee previously paid in cash by the Company to a Consenting Creditor in connection with the forbearance agreements shall be credited against such 2.00% cash portion owed to such Consenting Creditor pursuant to the Restructuring Support Agreement; and (ii) 2.00% shall be paid on the earlier of (A) the date of termination of the Restructuring Support Agreement or (B) the effective date of the chapter 11 plan; provided that if such fee is paid on the effective date of the plan, such fee shall be paid as a portion of the recovery under the plan and for the avoidance of doubt, shall not be a cash fee; •on the effective date of the chapter 11 plan, the reorganized Company will enter into an asset-based or similar new exit facility that (i) provides availability of at least$20 million for revolving borrowing after permitting for any amounts on account of outstanding letters of credit and (ii) has aggregate total commitments of not less than$30 million ; •the holders of claims under the First Lien Credit Agreement shall receive their pro rata share of and interest in: (i) a$75 million new first lien credit facility; (ii) a$50 million new junior convertible term loan; (iii) 90% of the new equity, subject to dilution on account of the new warrants, the management incentive plan and the new junior convertible term loan; and (iv) if applicable, the irrevocable right to offer the entirety of their pro rata distribution of both the new equity and new junior convertible term loan to one more members designated by the Consenting Creditors. •the holders of claims under the Second Lien Credit Agreement shall receive: (i) if such class of holders timely votes to accept the plan, their pro rata share of (x) 10% of the new equity, subject to dilution on account of the new warrants, the management incentive plan, and the new junior convertible term loan, and (y) new warrants for 10% of the new equity, subject to dilution on account of the management incentive plan and the new junior convertible term loan; or (ii) if such class of holders rejects the plan, no distribution; •all general unsecured claims will be paid in full or otherwise provided such treatment as to render such claims unimpaired; and •all preferred and common equity interests in the Company shall be cancelled and released without any distribution. In accordance with the Restructuring Support Agreement, the Consenting Creditors agreed, among other things, to: (i) use commercially reasonable efforts to support the Restructuring Transactions as contemplated by, and within the timeframes outlined in, the Restructuring Support Agreement and the definitive documents governing the Restructuring Transactions; (ii) not object to, delay or impede the acceptance, implementation, or consummation of the Restructuring Transactions in accordance with the Restructuring Support Agreement; (iii) vote and consent to accept the Plan; and (iv) except as permitted in the Restructuring Support Agreement, not transfer any ownership (including any beneficial ownership as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) held by each Consenting Creditor. In accordance with the Restructuring Support Agreement, the Company Parties agreed, among other things, to: (i) support and take all steps necessary and desirable to consummate the Restructuring Transactions in accordance with the Restructuring Support Agreement; (ii) not take any action, that is inconsistent in any material respect, or that would reasonably be expected to prevent, interfere with, delay, frustrate or impede approval, implementation and consummation of the Restructuring Transactions; (iii) to the extent any legal or structural impediment arises that would prevent, hinder, or delay the consummation of the Restructuring Transactions contemplated in the Restructuring Support Agreement or the Plan, (a) support and take all steps reasonably necessary and desirable to address any such impediment and (b) negotiate in good faith appropriate additional or alternative provisions to address any such impediment, in consultation with the Consenting Creditors; (iv) obtain any and all required governmental, regulatory and/or third-party approvals for the Restructuring Transactions; (v) negotiate in good faith and execute and deliver the Definitive Documents (as defined in the Restructuring Support Agreement) and any other required agreements to effectuate and consummate the Restructuring Transactions as contemplated by this Agreement; (vi) operate their business in the ordinary course of business in a manner consistent with the Restructuring Support Agreement, provided, however, that the Company board may determine in good faith that operation of the business in the ordinary course is not advisable due to potential health or safety concerns related to the COVID-19 emergency; (vii) seek additional support for the Restructuring Transactions from their other material stakeholders to the extent reasonably prudent and (viii) actively oppose and object to the efforts of any person seeking to object to, delay, impede, or take any other action to interfere with the acceptance, implementation, or consummation of the Restructuring Transactions (including, if applicable, the timely filing of objections or written responses in the Chapter 11 Cases) to the extent such opposition or objection is reasonably necessary or desirable to facilitate implementation of the Restructuring Transactions. 34
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The Restructuring Support Agreement may be terminated upon the occurrence of certain events set forth in the Definitive Documents, including the failure to meet specified milestones specified in the Restructuring Term Sheet. The Company expects to continue to operate its businesses serving customers without interruption during the course of the restructuring proceedings, and while the Plan remains subject to court approval, the Company expects that all trade creditors, employees, sales agents and unsecured creditors will be paid in full and on time in the normal course of business.
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