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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                      to                     

Commission File Number 001-37382

 

 

FENIX PARTS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   46-4421625
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer 
Identification Number)

 

One Westbrook Corporate Center, Suite 920

Westchester, Illinois

  60154
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: 708-407-7200

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period and the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

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

At September 14, 2015, the registrant had issued and outstanding an aggregate of 19,766,386 shares of Common Stock.

 

 

 


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties. Forward-looking statements include all statements that do not relate solely to historical or current facts, and you can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “trends,” “plans,” “estimates,” “projects” or “anticipates” or similar expressions that concern our strategy, plans, expectations or intentions. All statements made relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, it is very difficult to predict the effect of known factors, and, of course, it is impossible to anticipate all factors that could affect our actual results. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be realized. Important factors could affect our results and could cause results to differ materially from those expressed in our forward-looking statements, including but not limited to the factors discussed in the section entitled “Risk Factors” in Fenix Parts Inc.’s prospectus dated May 14, 2015 (the “Prospectus”), as filed with the Securities and Exchange Commission (the “SEC”).


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FENIX PARTS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

         Page No.  

PART I—Financial Information

     5   

Item 1.

 

Financial Statements

     5   
  Fenix Parts, Inc.   
 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

     5   
 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2015 and the three months ended June 30, 2014 and the Period from January 2, 2014 (Inception) to June 30, 2014

     7   
 

Unaudited Condensed Consolidated Statements of Shareholders’ Equity (Deficit) for the six months ended June 30, 2015 and the Period from January 2, 2014 (Inception) to June 30, 2014

     8   
 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June  30, 2015 and the Period from January 2, 2014 (Inception) to June 30, 2014

     9   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     10   
  Beagell Group (Designated Accounting Co-Predecessor)   
 

Unaudited Condensed Combined Balance Sheet as of December 31, 2014

     25   
 

Unaudited Condensed Combined Statements of Operations for the Period from April 1, 2015 to May  18, 2015, the three months ended June 30, 2014, the Period from January 1, 2015 to May 18, 2015 and the six months ended June 30, 2014

     26   
 

Unaudited Condensed Combined Statements of Shareholders’ Equity for Period from January  1, 2015 to May 18, 2015 and the six months ended June 30, 2014

     27   
 

Unaudited Condensed Combined Statements of Cash Flows for the Period from January 1, 2015 to May  18, 2015 and the six months ended June 30, 2014

     28   
 

Notes to Unaudited Condensed Combined Financial Statements

     29   
  Standard (Designated Accounting Co-Predecessor)   
 

Unaudited Condensed Combined Balance Sheet as of December 31, 2014

     35   
 

Unaudited Condensed Combined Statements of Operations and Comprehensive Loss for the Period from April  1, 2015 to May 18, 2015, the three months ended June 30, 2014, the Period from January 1, 2015 to May 18, 2015, and the six months ended June 30, 2014

     36   
 

Unaudited Condensed Combined Statements of Shareholders’ Equity for the Period from January  1, 2015 to May 18, 2015 and the six months ended June 20, 2014

     37   
 

Unaudited Condensed Combined Statements of Cash Flows for the Period from January 1, 2015 to May  18, 2015 and the six months ended June 30, 2014

     38   
 

Notes to Unaudited Condensed Combined Financial Statements

     39   


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Item 2.

 

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

     46   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     56   

Item 4.

 

Controls and Procedures

     56   

PART II—Other Information

     56   

Item 1.

 

Legal Proceedings

     56   

Item 1A.

 

Risk Factors

     56   

Item 2.

 

Changes in Securities and Use of Proceeds

     57   

Item 3

 

Defaults upon Senior Securities

     57   

Item 4

 

Mine Safety Disclosures

     57   

Item 5.

 

Other Information

     57   

Item 6.

 

Exhibits

     58   

SIGNATURES

     59   


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PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Fenix Parts, Inc.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     June 30, 2015     December 31, 2014  
ASSETS     

CURRENT ASSETS

    

Cash and cash equivalents

   $ 19,044,308      $ 453,047   

Accounts receivable, net of allowance

     4,099,226        —     

Inventories

     39,020,905        —     

Prepaid expenses and other current assets

     1,285,402        50,000   

Deferred stock offering costs

     —          346,369   
  

 

 

   

 

 

 

Total current assets

     63,449,841        849,416   

PROPERTY AND EQUIPMENT

    

Leasehold improvements

     1,130,075        —     

Vehicles

     2,581,655        —     

Machinery and equipment

     7,991,524        —     

Accumulated depreciation and amortization

     (337,061     —     
  

 

 

   

 

 

 

Property and equipment, net

     11,366,193        —     

OTHER NON-CURRENT ASSETS

    

Goodwill

     69,797,910        —     

Intangible assets, net

     34,104,475        —     

Indemnification receivable

     4,243,851        —     

Other non-current assets

     62,518        —     

Investment in related party

     397,000        —     
  

 

 

   

 

 

 

Total non-current assets

     108,605,754        —     
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 183,421,788      $ 849,416   
  

 

 

   

 

 

 

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.

 

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Fenix Parts, Inc.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     June 30, 2015     December 31, 2014  
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)     

CURRENT LIABILITIES

    

Account payable

   $ 2,947,818      $ 1,673,259   

Accrued expenses and other current liabilities

     3,590,636        303,731   

Sales return reserve

     747,087        —     

Amounts due to related parties

     4,235,001        —     

Deferred warranty revenue – current

     195,025        —     

Deferred income tax liabilities

     3,344,999        —     

Deferred rent

     60,080        —     

Current portion of long-term debt

     625,000        —     

Current portion of related party long-term debt

     100,000        —     
  

 

 

   

 

 

 

Total current liabilities

     15,845,646        1,976,990   

NON-CURRENT LIABILITIES

    

Deferred warranty revenue, net of current portion

     65,763        —     

Long-term related party debt, net of current portion

     100,000        —     

Long-term debt, net of current portion

     8,835,306        —     

Deferred income tax liabilities

     14,695,635        —     

Amounts due to related parties, net of current portion

     1,344,000        —     

Reserve for uncertain tax positions

     4,618,608        —     

Contingent consideration liabilities

     11,033,000        —     
  

 

 

   

 

 

 

Total non-current liabilities

     40,692,312        —     
  

 

 

   

 

 

 

TOTAL LIABILITIES

     56,537,958        1,976,990   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

SHAREHOLDERS’ EQUITY (DEFICIT)

    

Common stock, $0.001 par value; 30,000,000 shares authorized; 19,475,837 shares issued and outstanding at June 30, 2015; 2,429,333 shares issued and outstanding at December 31, 2014

     19,476        2,429   

Additional paid-in capital

     130,519,498        3,616,571   

Accumulated other comprehensive loss

     (705,185     —     

Accumulated deficit

     (11,349,959     (4,746,574
  

 

 

   

 

 

 

Total Fenix Parts, Inc. shareholders’ equity before noncontrolling interest

     118,483,830        —     
  

 

 

   

 

 

 

Noncontrolling interest

     8,400,000        —     
  

 

 

   

 

 

 

Total shareholders’ equity (deficit)

     126,883,830        (1,127,574
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

   $ 183,421,788      $ 849,416   
  

 

 

   

 

 

 

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.

 

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Fenix Parts, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

    

 

Three Months Ended

    Six Months Ended
June 30, 2015
    Period from January 2,
2014 (Inception) to
June 30, 2014
 
     June 30, 2015     June 30, 2014      

Net revenues

   $ 11,470,896     $  —       $ 11,470,896      $  —    

Cost of goods sold

     10,008,151        —         10,008,151       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,462,745        —         1,462,745    

Operating expenses

     9,014,831       627,629       11,644,039       627,814  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (7,552,086 )     (627,629 )     (10,181,294 )     (627,814 )

Interest expense

     (21,870     —          (21,870     —    

Interest income

     17,101        —          17,104        —    

Other (expense) income, net

     (1,721,442     369       (1,721,442     370  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

     (9,278,297 )     (627,260 )     (11,907,502 )     (627,444 )

Benefit for income taxes

     (5,304,117 )     —         (5,304,117 )     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (3,974,180 )     (627,260 )     (6,603,385 )     (627,444 )

Foreign currency translation adjustment

     (705,185     —         (705,185     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net comprehensive loss

   $ (4,679,365   $ (627,260 )   $ (7,308,570   $ (627,444 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share available to common shareholders (Note 2)

        

Basic & Diluted

   $ (0.33   $ (0.29   $ (0.91   $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing earnings per share

        

Basic & Diluted

     11,388,524        2,156,400        7,003,537        2,007,028   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.

 

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Fenix Parts, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

 

   

 

Common Stock

    Additional paid-in
capital
    Accumulated
other
comprehensive
income
    Accumulated
deficit
    Noncontrolling
interest
    Total
shareholders
equity (deficit)
 
    Shares     Amount            

Balance at January 1, 2015

    2,429,333      $ 2,429      $ 3,616,571      $ —        $ (4,746,574   $ —        $ (1,127,574

Shareholder contributions prior to initial public offering

    319,594        320        2,077,041        —          —          —          2,077,361   

Net proceeds from initial public offering

    13,800,000        13,800        101,264,806        —          —          —          101,278,606   

Issuance of Fenix shares for Combination Consideration

    2,874,971        2,875        22,996,893        —          —          —          22,999,768   

Issuance of Fenix Canada preferred shares for Combination Consideration

    —          —          —          —          —          8,400,000        8,400,000   

Compensation for pre-IPO services

    20,000        20        216,780        —          —          —          216,800   

Leesville retention bonus

    31,939        32       
285,224
  
    —          —          —          285,256   

Share based awards

    —          —          62,183        —          —          —          62,183   

Foreign currency translation adjustment

    —          —          —          (705,185     —          —          (705,185

Net loss

    —         —         —          —          (6,603,385     —          (6,603,385
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

    19,475,837      $ 19,476      $ 130,519,498      $ (705,185   $ (11,349,959   $ 8,400,000      $ 126,883,830   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 2, 2014 (inception)

    —       $ —       $ —       $ —        $ —       $ —        $ —    

Shareholder contributions

    2,086,000        2,086        2,008,214        —          —         —          2,010,300   

Net loss

    —         —         —         —          (627,444     —          (627,444
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

    2,086,000      $ 2,086      $ 2,008,214      $ —        $ (627,444   $ —        $ 1,382,856   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.

 

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Fenix Parts, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six months ended
June 30, 2015
    Period from
January 2, 2014
(Inception) to
June 30, 2014
 

Cash flows from operating activities

    

Net loss

   $ (6,603,385   $ (627,444

Adjustments to reconcile net loss to net cash used in operating activities

    

Depreciation and amortization

     710,004        —     

Share-based compensation expense

     478,239        —     

Deferred income tax benefit

     (5,323,471     —     

Provision for uncertain tax positions

     10,869        —     

Amortization of inventory fair value adjustment

     2,717,203        —     

Change in fair value of contingent consideration

     808,856        —     

Make whole provision for pre-IPO investors

     1,827,085        —     

Change in assets and liabilities, net of acquired businesses

    

Accounts receivable

     (4,099,148     —     

Inventories

     (701,137     —     

Prepaid expenses and other assets

     (253,664     (81,648

Accounts payable

     (1,055,042     99,279   

Accrued expenses and other liabilities

     682,860        303,413   

Deferred warranty revenue

     260,789        —     

Due to related parties

     3,791,001        —     
  

 

 

   

 

 

 

Net cash used in operating activities

     (6,748,941     (306,400
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (70,300     —     

Investment in related party

     (397,000     —     

Purchases of Founding Companies, net of cash acquired

     (85,363,354     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (85,830,654     —     
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from initial public offering

     102,672,000        —     

Proceeds from other issuances of common stock

     250,276        2,010,300   

Deferred stock offering costs

     (1,393,394     —     

Borrowings on term loan

     10,000,000        —     

Payments on debt

     (125,000     —     

Deferred debt issuance cost

     (428,000     —     

Proceeds from other debt financing

     213,306        —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     111,189,188        2,010,300   
  

 

 

   

 

 

 

Effect of foreign exchange fluctuations on cash and cash equivalents

     (18,332     —     
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     18,591,261        1,703,900   

Cash and cash equivalents, beginning of period

     453,047        —    
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 19,044,308      $ 1,703,900   
  

 

 

   

 

 

 

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 8,151      $ —     
  

 

 

   

 

 

 

Noncash transaction (Note 3)

    

Equity issued for purchases of Founding Companies

   $ 33,733,000      $ —     
  

 

 

   

 

 

 

Accrued Contingent consideration to be paid in cash

   $ 8,620,000      $ —     
  

 

 

   

 

 

 

The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.

 

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Fenix Parts, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business and Basis of Presentation

Fenix Parts, Inc. (“Fenix”) was founded on January 2, 2014 (“inception”) to acquire and combine companies in the automobile recycling and resale industry. Fenix Parts Canada, Inc. (“Fenix Canada”), a wholly-owned subsidiary of Fenix, was established on September 24, 2014 primarily to facilitate the acquisition and combination of companies in the automobile recycling and resale industry in Canada. Through November 2014, Fenix and Fenix Canada (collectively, the “Company”) entered into Combination Agreements to acquire (in transactions referred to as the “Combinations”) eleven corporate entities that operate eight businesses (the “Founding Companies”), contingent upon, among other things, the closing of an initial public offering (“IPO”). On May 19, 2015, the Company completed the IPO and closed on the Combinations with the Founding Companies, including those Founding Companies that are designated as accounting co-predecessors, Beagell Group and Standard. The Company raised the cash portion of the Combination Consideration in its IPO as well as from additional funding from indebtedness. The unaudited condensed consolidated financial statements of the Company included herein reflect only Fenix’s operations and financial position before the IPO and Combinations with the Founding Companies. The operations of the Founding Companies are reflected in the consolidated statements of operations from May 19, 2015 to June 30, 2015.

The Company, subsequent to the Combinations, is in the business of auto recycling, which is the recovery and resale of original equipment manufacturer (“OEM”) and aftermarket parts, components and systems, such as engines, transmissions, radiators, trunks, lamps and seats (referred to as “products”) reclaimed from damaged, totaled or low value vehicles. The Company purchases its vehicles primarily at auto salvage auctions. Upon receipt of vehicles, the Company inventories and then dismantles the vehicles and sells the recycled components. The Company’s customers include collision repair shops (body shops), mechanical repair shops, auto dealerships and individual retail customers. The Company also generates a portion of its revenue from the sale as scrap of the unusable parts and materials, from the sale of used cars and motorcycles and from the sale of extended warranty contracts.

Through September 30, 2014, the Company’s chief executive and chief financial officers were not taking salaries and no compensation expense has been recorded related to services provided by these employees through that date. Pursuant to letter arrangements that commenced on October 1, 2014, these executives’ compensation was accrued for payment after the closing of the IPO.

Basis of Presentation

These unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures typically included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Fenix Parts, Inc. and the notes thereto as of and for the period ended December 31, 2014 included in the Company’s prospectus dated May 14, 2015. The Company continues to follow the accounting policies set forth in those consolidated financial statements. Management believes that these consolidated interim financial statements include all adjustments, normal and recurring in nature, that are necessary to present fairly the financial position of the Company as of June 30, 2015 and the results of its operations and cash flows for the periods ended June 30, 2015 and 2014. Interim results are not necessarily indicative of annual results. All significant intercompany balances and transactions have been eliminated. References below to the six months ended June 30, 2014 refer to inception (January 2, 2014) through June 30, 2014.

 

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Note 2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue from the sale of vehicle replacement products and scrap and, to a lesser extent, used cars and motorcycles, when they are shipped or picked up by the customers and ownership has transferred, subject to an allowance for estimated returns and discounts that management estimates based upon historical information. Management analyzes historical returns (often pursuant to standard warranties on the sold products) and allowances activity by comparing the items to the original invoice amounts and dates. The Company uses this information to project future returns and allowances on products sold. If actual returns and allowances deviate significantly from the Company’s historical experience, there could be an impact on its operating results in the period of occurrence. The Company has recorded a reserve for estimated returns and discounts of approximately $747,000 and $0 at June 30, 2015 and December 31, 2014, respectively.

The Company presents taxes assessed by governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenue on the combined statements of operations and are shown as current liabilities on the combined balance sheets until remitted. Revenue also includes amounts billed to customers for shipping and handling.

Revenue from the sale of separately priced extended warranty contracts is reported as deferred revenue and recognized ratably over the term of the contracts or over five years for life-time warranties. Revenue from such extended warranty contracts was approximately $31,000 for the post-Combinations period ended June 30, 2015.

Cost of Goods Sold

Cost of goods sold primarily includes a) amounts paid for the purchase of vehicles, scrap, parts for resale and related products, b) related auction, storage and towing fees, and c) other costs of procurement and dismantling, primarily labor and overhead allocable to dismantling operations or, in the case of car and motorcycle sales, to preparing the vehicle for sale.

Operating Expenses

Operating expenses for the automobile recycling business are primarily comprised of a) salaries and benefits of employees that are not related to the procurement and dismantling of vehicles, b) facility costs such as rent, utilities, insurance, repairs and taxes not allocated to dismantling operations, c) selling and marketing costs, d) costs to distribute products and scrap and e) other general and administrative costs. Operating expenses for the periods presented also include corporate office costs and costs related to the business combinations.

Concentrations

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The majority of cash and cash equivalents are maintained with several major financial institutions. The Company maintains its cash in bank deposit accounts which, at times, may exceed the insurance limits of the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts. Concentrations of credit risk with respect to accounts receivable are limited because a large number of customers make up the Company’s customer base. The Company controls credit risk through credit approvals, credit limits and monitoring procedures.

The Company primarily obtains its recycled OEM and related products from damaged, totaled or low value vehicles purchased at salvage auto auctions. Since the Combinations with the Founding Companies, substantially all of the vehicles purchased by the Company for dismantling were acquired at auctions run by two salvage auto auction companies.

Accounts Receivable and Allowance for Doubtful Accounts

In the normal course of business, the Company extends credit to customers after a review of each customer’s credit history. The Company recorded a reserve for uncollectible accounts of approximately $171,000 at June 30, 2015 and $0 as of December 31, 2014. The reserve is based upon management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable and historical experience. Receivables are written off once collection efforts have been exhausted. Recoveries of accounts receivable previously written off are recorded when received.

 

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Inventories

Inventories consist entirely of recycled OEM and aftermarket products, including car hulls and other materials that will be sold as scrap and, to a lesser extent, used cars and motorcycles for resale. Inventory costs for recycled OEM parts are established based upon the price the Company pays for a vehicle, including auction, storage and towing fees, as well as expenditures for buying and dismantling vehicles. After dismantling, the cost assigned to the salvaged parts and scrap is determined using the average cost of sales percentage at the Company and applying that percentage to the Company’s inventory at expected selling prices. The average cost to sales percentage is derived from the Company’s historical vehicle profitability for salvage vehicles purchased at auction or procured from other sources. With respect to self-service inventories, costs are established by calculating the average sales price per vehicle, including its scrap value and part value, applied to the total vehicles on-hand. Inventory costs for used cars and motorcycles for resale are established based upon the price the Company pays for these items.

For all inventories, carrying value is recorded at the lower of cost or market and is reduced to reflect the age of the products and current anticipated demand. If actual demand differs from the Company’s estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged against operations. Renewals and betterments that materially extend the useful life of an asset are capitalized. As property and equipment are sold or retired, the applicable cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss thereon is recognized. Depreciation and amortization expense is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease and reasonably assurance renewal periods, if shorter. Depreciation and amortization expense totaled approximately $323,000 for the post-Combinations period ended June 30, 2015.

Estimated useful lives of property and equipment acquired after May 19, 2015 are as follows:

 

Vehicles

     5 years   

Machinery and equipment

     3-10 years   

Leasehold improvements

     10-15 years or term of lease, if shorter   

For property and equipment the Company acquired in the Combinations, the average estimated remaining useful lives are as follows:

 

Vehicles

     3-4 years   

Machinery and equipment

     4-5 years   

Leasehold improvements

     5-6 years or term of lease, if shorter   

The Company evaluates the recoverability of the carrying amount of property and equipment and amortizable intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable based on an analysis of undiscounted cash flows. There were no such events or changes in the three and six month periods ended June 30, 2015 and 2014.

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company is required to perform an annual impairment review, and more frequently under certain circumstances. Under the qualitative goodwill impairment assessment standard, management evaluates whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If it is determined that it is more likely than not, the Company proceeds with the next step of the impairment test, which compares the fair value of the reporting unit to its carrying value. If the Company determines through the impairment process that goodwill has been impaired, the Company will record the impairment charge in its results of operations. The Company has elected to perform its annual evaluation of impairment as of December 31. There were no impairment charges related to goodwill during the post-Combination period ended June 30, 2015.

 

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Intangible Assets

Intangible assets subject to amortization consist of tradenames, customer relationships and non-compete agreements. Amortization expense is calculated using the straight-line method over the estimated useful lives of the assets of: 5 years for tradenames; and 5 years for noncompete covenants. Amortization expense is calculated using the accelerated method over the estimated useful life of the asset of 15 years for customer relationships. Amortization expense for intangible assets was $387,000 for the post-Combination period ended June 30, 2015.

Indemnification Receivable

In conjunction with the Combinations, the Company recorded an indemnification receivable of $4,243,851, which represents recoverable amounts from the former owners of certain of the Founding Companies if the Company is required to make certain income tax or other payments as defined in the relevant Combination agreements after the Combinations.

Refundable Purchase Price Consideration

In conjunction with the Combinations, the Company entered into operating facility lease agreements with affiliates of the equity holders of the Founding Companies. Based on preliminary independent valuations of the market rental rates compared to the contractual rental rates for these properties, the excess is reflected in the intangible assets as additional Combination Consideration refundable over the term of the related lease. The effect of discounting these payments at 10% is reflected in other non-current assets. The Company amortizes these net assets over the life of the leases so that aggregate rent expense in the statements of operations reflects market rental rates as of the date of Combination; a corresponding net interest income element is also recorded to reflect the passage of time impact on the net asset.

Fair Value Measurements

Fair value of financial assets and liabilities are defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date (exit price). The Company is required to classify fair value measurements in one of the following categories:

 

    Level 1 - inputs which are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

    Level 2 - inputs which are defined as inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.

 

    Level 3 - inputs are defined as unobservable inputs for the assets or liabilities. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

Certain assets and liabilities are required to be recorded at fair value on either a recurring or non-recurring basis; however, the Company had no assets or liabilities that require recurring fair value measurements at December 31, 2014. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. At June 30, 2015, the fair value of contingent consideration recorded in the consolidated financial statements was valued using Level 3 inputs.

The Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The Company’s debt is carried at cost and approximates fair value due to its variable or fixed interest rates, which are consistent with the interest rates in the market.

The Company may be required, on a non-recurring basis, to adjust the carrying value of the Company’s property and equipment, intangible assets and goodwill. When necessary, these valuations are determined by the Company using Level 3 inputs. These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence that impairment may exist. There have been no indicators of impairment during 2015.

Deferred Stock Offering Costs

The Company incurred approximately $1,393,000 and $346,000 of legal, accounting, and other costs directly related to its IPO through May 19, 2015 and December 31, 2014, respectively. The Company also incurred $7,728,000 of underwriting cost. Such costs were applied against the gross proceeds from the IPO upon its closing.

 

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Income Taxes

Income taxes are accounted for under the asset and liability method where deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis and for tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include historical cumulative losses, the forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

The Company recognizes the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions that are more likely than not to be realized. The Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. As of June 30, 2015 and December 31, 2014, the Company has not identified any uncertain tax positions that relate to Fenix. The Company did assume, on an indemnifiable basis, certain uncertain tax positions reserves in the Combinations. The Company’s policy is to include interest and penalties associated with income tax obligations in income tax expense. The Company’s right to indemnification under certain Combination Agreements related to these uncertain tax positions is subject to a threshold of 1% of the purchase price and a cap of 40% of the purchase price paid in the Combinations.

Foreign Currency

The assets and liabilities of Fenix Canada, whose functional currency is the Canadian dollar, are translated into US dollars at period-end exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the period. The adjustments resulting from translating the Canadian financial statements are reflected as a component of accumulated other comprehensive loss within shareholders’ equity (deficit). Foreign currency transaction gains and losses are recognized in net earnings based on differences between foreign exchange rates on the transaction date and the settlement or period end date.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shares by the weighted average common shares outstanding during the period using the two-class method. The Fenix Canada preferred shares are considered participating securities and therefore share in the net income (loss) of the period since being issued on May 19, 2015. Diluted earnings (loss) per share would include the impact of outstanding common share equivalents as if those equivalents were exercised or converted into common shares if such assumed exercise or conversion were dilutive. Contingently issuable shares are excluded from basic and diluted earnings per share until issuance is no longer contingent.

The calculations of loss per share are as follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  

Basic Loss per Common Share:

           

Net loss

   $ (3,974,180    $ (627,260    $ (6,603,385    $ (627,444

Net loss allocable to Fenix Canada preferred shares

     (175,132      —           (238,560      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss available to common shares

   $ (3,799,048    $ (627,260    $ (6,364,825    $ (627,444
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding

     11,388,524         2,156,400         7,003,537         2,007,028   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted Loss per Common Share

   $ (0.33    $ (0.29    $ (0.91    $ (0.31
  

 

 

    

 

 

    

 

 

    

 

 

 

As a result of the net loss for the three and six months ended June 30, 2015 and 2014, the Company used basic weighted-average common shares outstanding in the calculation of diluted loss per share for each of these periods, since the inclusion of any stock equivalents would be anti-dilutive.

The following outstanding equity instruments as of June 30, 2015 are not included in the computation of diluted loss per share as the effect of including such stock options and restricted stock awards in the computation would be anti-dilutive:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
         2015              2014              2015              2014      

Stock options

     470,000        —           470,000        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Leesville bonus shares

     271,112         —           271,112         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company has 11,667 common shares and 280,000 shares of Fenix Canada preferred stock held in escrow relating to contingent consideration agreements with certain Founding Companies. These shares are not included in basic EPS or in the shares used to calculate the net loss attributable to Fenix Canada preferred shares until the issuance is no longer contingent on future events.

 

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Recent Accounting Pronouncements

Under the JOBS Act, the Company meets the definition of an “emerging growth company.” The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11, Simplifying the Measurement of Inventory, to reduce the complexity in accounting for inventory. This ASU requires entities to measure inventory at the lower of cost or net realizable value. This guidance for public entities is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting the new standard.

In April 2015, the FASB issued ASU No. 2015-3 which amends Accounting Standards Codification (“ASC”) Topic 835, Interest, to require presentation of certain debt issuance costs as a direct deduction from the carrying amount of a debt liability, consistent with debt discounts. The Company early adopted this ASU for the period ended June 30, 2015 and it did not have a material impact on the consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which modifies the evaluation of VIEs, and affects the consolidation analysis of reporting entities involved with VIEs. This guidance for public entities is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact of adopting the new standard.

In August 2014, the FASB issued ASU 2014-15 which amends ASC Topic 205, Presentation of Financial Statements, to describe management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This guidance will be effective for our fiscal year ended December 31, 2016. The Company does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The guidance in this Update supersedes nearly all existing revenue recognition guidance under U.S. GAAP and creates a single, principle-based revenue recognition framework that is codified in a new FASB ASC Topic 606. The core principle of this guidance is for the recognition of revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new revenue standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted only as of annual reporting periods beginning after December 31, 2016. The new standard allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the transition method that will be elected and the potential effects of the adoption of the new standard on its consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, which amends FASB ASC Topic 205, Presentation of Financial Statements and FASB ASC Topic 360, Property, Plant, and Equipment. This standard amends the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This guidance is effective on a prospective basis for annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company adopted this standard effective January 1, 2015. Adoption did not have any impact on the Company’s consolidated financial statements.

Note 3. Combinations with Founding Companies

On May 19, 2015, the Company closed on the Combinations with the Founding Companies, all of which are engaged in the business of automobile recycling. These Combinations were accounted for under the acquisition method of accounting. The Company acquired the stock of the U.S. Founding Companies for cash or a combination of cash and shares of its common stock, and acquired substantially all of the assets of the Canadian Founding Companies for cash or cash and shares of exchangeable preferred stock of Fenix Canada. The consideration for the Combinations was determined by arms-length negotiations between the Company and representatives of each Founding Company.

 

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The Founding Companies include Don’s Automotive Mall, Inc., Gary’s U-Pull It, Inc., Horseheads Automotive Recycling, Inc. (collectively, the “Beagell Group”); Standard Auto Wreckers Inc., End of Life Vehicles Inc., Goldy Metals Incorporated, Goldy Metals (Ottawa) Incorporated (collectively, “Standard”); and Eiss Brothers, Inc. (“Eiss Brothers”), Green Oak Investments LLC dba GO Auto Recycling (“GO Auto”), Jerry Brown, Ltd (“Jerry Brown”) and Leesville Auto Wreckers, Inc. (“Leesville” and together with Eiss Brothers, GO Auto and Jerry Brown, the “Other Founding Companies”). For accounting and reporting purposes, Fenix has been identified as the accounting acquirer and Beagell Group and Standard have been identified as accounting co-predecessors to Fenix.

The following table shows the estimated calculation of the total Combination Consideration (the following dollar amounts in tables and notes are in thousands)

 

           Beagell
Group
     Standard     Eiss
Brothers
    Go Auto     Jerry
Brown
    Leesville     Total  

Base Fenix share consideration

     (a )   $ 10,822       $ —       $ 2,338      $ 2,667      $ 5,333      $ 1,840      $ 23,000   

Base Fenix Canada share consideration

     (b )     —          8,400        —         —         —         —         8,400   

Base cash consideration

     (c )     19,663         30,450        6,137        4,000        6,511        11,727        78,488   

Working capital and other adjustments

     (c )     1,161         1,762        810        (81 )     (1,377 )     1,132        3,407   

Incremental inventory payments

     (d )     —          450        —         —         550        —         1,000   

Incremental capital expenditure payments

     (e )     —          —         —         —         2,415        —         2,415   

Nonsubstantive consulting fee payments

     (f )     890         50        —         —         847        —         1,787   

Key employee cash bonuses

     (g )     —          —         —         —         —         2,575        2,575   

Incremental off market lease payments

     (h )     1,980         (2,230     (700 )     (140 )     (170 )     (210     (1,470

Investment in Founding Company affiliate

     (i )     —          —         —         450        —         —         450   

Contingent consideration

     (j )     —          7,683        320        —         2,433        —         10,436   
    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Combination Consideration

     $ 34,516       $ 46,565      $ 8,905      $ 6,896      $ 16,542      $ 17,064      $ 130,488   
    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Of this aggregate Combination Consideration, $88,135 was paid in cash on the closing date, $33,733 represents stock consideration and $8,620 represents discounted cash payments to be made up to 15 years after the Combinations.

 

(a) The Company issued 2,874,971 shares of Fenix common stock as Combination Consideration valued at the public offering price of $8.00 per share.
(b) The Company issued 1,050,000 exchangeable preferred shares of Fenix’s subsidiary, Fenix Parts Canada, Inc. (“Exchangeable Preferred Shares”) as Combination Consideration valued at the public offering price of common stock of $8.00 per share. Because these shares do not entitle the holders to any Fenix Canada dividends or distributions, no earnings or losses of Fenix Canada are attributable to those holders. However, these shares do participate in the net income (but not in net losses) of the consolidated company for earnings (loss) per share computations.
(c) The base cash component of the Combination Consideration for each Combination is still subject to certain adjustments. For each Founding Company (in some cases, other than Standard Auto Wreckers, Inc.), the cash component of the Combination Consideration was (i) reduced by the Founding Company’s indebtedness as of closing (ii) increased by the Founding Company’s cash and qualifying inventory as of closing and (iii) increased by the Founding Company’s capital expenditures during the six months prior to closing. All of these estimated adjustments are based on information provided by the Founding Companies at closing and are subject to further adjustment as additional information is obtained. Any differences in actual cash, qualifying inventory, debt or capital expenditures as of and for the six months prior to the actual closing date will have a corresponding change to total Combination Consideration and to goodwill.
(d) Represents additional consideration for certain excess or specific inventories based on the applicable Founding Company inventory listings as of closing and subject to adjustment through September 2015 as additional information is obtained.

 

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(e) Represents a construction reimbursement for capital expenditures in connection with a new building located on land that the Company leases subject to further adjustment through September 2015 as additional information is obtained.
(f) Represents contractual payments to certain equity holders of the Founding Companies and their related parties over the next 1 to 15 years. These equity holders and their related parties are not employed by us and do not provide any substantive services to us.
(g) Represents cash bonuses paid at closing to key employees for past service.
(h) In conjunction with the Combinations, the Company entered into operating facility lease agreements with affiliates of the equity holders, generally variable interest entities that were consolidated into the Founding Companies prior to the Combinations but are not consolidated by the Company after the Combinations. Based on independent valuations of the market rental rates compared to the actual rental rates for these properties, the excess is reflected as Combination Consideration refundable over the term of the related lease. The effect of discounting these payments at 10% is reflected in the amounts presented. The related balance as of June 30, 2015 of $1,403 is reflected on the condensed consolidated balance sheet as part of Intangible asset and will be offset to cash rent expense over the life of the leases.
(i) Represents the payment of $250 in cash at closing and a $200 promissory note payable over two years for a 5% membership interest in an affiliate of Go Auto. The Company also received an option to purchase the remaining 95% membership interest.
(j) Represents the estimated fair value of contingent consideration arrangements with certain Founding Company equity holders. Under these arrangements, the equity holders of Standard and Eiss can earn up to an aggregate of $7,875 in cash and 11,667 shares of Fenix common stock and 280,000 Exchangeable Preferred Shares. The shareholders of Jerry Brown’s can earn an uncapped amount of additional cash if certain EBITDA and revenue targets are met. The fair value is based on independent valuations considering our the Company’s projections for the relevant Founding Companies, the respective target levels, the relative weighting of various future scenarios and a discount rate of approximately 5.0%. The changes in the fair value of this initial liability resulted in a $809 change to operating expenses in the statement of operations for the post-Combinations period ended June 30, 2015.

 

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The Company has not completed the allocation of the Combination Consideration to the assets acquired and liabilities assumed in the Combinations. The following table shows preliminary amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:

 

     Beagell     Standard     Eiss     Go     JB     Leesville     Total  

Cash and other current

     10,358        15,265        6,637        1,859        6,301        5,643        46,063   

Property and equipment

     4,476        4,408        364        203        1,663        641        11,754   

Other non current assets

     1,983        1,445        —          450        1,746        —          5,625   

Intangible assets

     5,670        13,200        3,380        3,590        2,510        6,470        34,820   

Current liabilities

     (1,770     (2,008     (255     (754     (3,368     (654     (8,808

Deferred income taxes, net

     (2,017     (527     —          —          (1,829     (203     (4,577

Reserve for uncertain tax positions

     (5,866     (6,469     (3,298     —          (3,564     (4,297     (23,494

Non-current liabilities

     (563     —          —          —          (767     —          (1,330
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net identifiable assets acquired

     12,271        25,314        6,827        5,348        2,692        7,601        60,053   

Goodwill

     20,264        24,496        2,766        1,740        11,526        9,643        70,435   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net assets acquired

     32,535        49,810        9,593        7,088        14,218        17,244        130,488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in the preliminary allocation reflected above are the various preliminary valuations described below which are primarily based on Level 3 inputs:

 

(i) Inventory was marked up to 90% of its estimated selling price representing the inventory’s cost and estimated related profit margin. Selling costs and related profit margin were estimated at all Founding Companies to be 10%. The acquired inventory is expected to be sold within six to nine months.

 

(ii) Assumptions for property and equipment valuation, which are based on cost and market approaches, are primarily data from industry databases and dealers on current costs of new equipment and information about the useful lives and age of the equipment. The remaining useful life of property and equipment was determined based on historical experience using such assets, and varies from 3-6 years depending on the Founding Company and nature of the assets. The Company’s independent valuation specialist is assisting the Company in determining the final valuation of the property and equipment acquired on the Combination date. Any change in the valuation resulting from the Company’s independent valuation specialist’s finalization of its analysis cannot be determined at this point. All property and equipment is being depreciated using the straight-line method.

 

(iii) The table below summarizes the aggregate intangible assets acquired:

 

     Amount      Weighted
average
life (years)
     Amortization
method
 

Trade names

   $ 5,670        5         Straight line   

Customer relationships

     25,970        15         Accelerated   

Covenants not to compete

     1,710        5         Straight line   

Off market lease payments

     1,470         15         Straight line   
  

 

 

       
   $ 34,820        
  

 

 

       

 

(iv) The table above represent balances as of the date the companies were acquired and will not agree to the June 30, 2015 balance sheet due to normal operating activities. The goodwill fluctuated due to changes in foreign currency exchange rates for our Canadian operations.

 

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The fair value of trade names and customer relationships are based on a number of significant assumptions. Trade names are valued using a “relief from royalty” method, which models cash savings from owning intangible assets as compared to paying a third party for their use. Descriptions of the inputs into this method, and the estimates or ranges of these inputs used for all of the Combinations are as follows:

 

Compound annual revenue growth rate over term of use

     3.0%-6.2

Percentage of revenue attributable to trade name in forecast year

     20%-100

Royalty rate

     2.0

Discount rate

     11.5%-14.0

Tax rate

     38.6%-40.9

The expected useful life of trade names is based on the Company’s planned timeframe for using the existing trade names the Company purchased in the Combinations. The Company amortizes such trade names using the straight-line method as no other method of amortization is more representative of the Company’s usage of these assets.

Customer relationships are valued using an income approach called the multi-period excess earnings method, a form of discounted cash flow that estimates revenues and cash flows derived from the use of the intangible asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as other intangible assets or property and equipment, that contributed to the generation of the cash flows to arrive at cash flows attributable solely to the intangible asset being valued. Descriptions of the inputs into this method, and the estimates or ranges of these inputs used for all of the Combinations are as follows:

 

Compound annual revenue growth rate in forecast period

     2.1%-3.1

Annual customer attrition rate

     10.0

Gross margin in forecast period

     29.9%-48.1

Contributory asset charges as a percentage of revenue

     0.0%-2.6

Discount rate

     12.5%-16.0

Tax rate

     38.6%-40.9

The expected useful life of customer relationships is established as 15 years, which is the period over which these assets are expected to reasonably contribute to future cash flows. The Company amortizes such customer relationships using an accelerated method that reflects a greater relative contribution to future cash flows in the earlier years of the assets’ useful lives.

 

(iv) The Company may recover amounts from the equity holders of certain of the Founding Companies if the Company is required to make certain income tax or other payments as defined in the relevant Combination agreements after the Combinations.

 

(v) The Combination agreement between the Company and GO Auto contains a provision pursuant to which the Company purchased a 5% ownership of Go Pull-It LLC, an entity under common control with GO Auto, and the right to purchase the remaining 95% of Go Pull-It LLC for either a fixed price through the end of 2016 or, after that, a price based on a formula that is primarily dependent on the EBITDA of Go Pull-It LLC. The amount reflected above for the purchase right is based on a business valuation of Go Pull-It LLC, which inputs include but are not limited to, revenue growth, gross margin, operating expenses, income tax rate, working capital and property and equipment requirements, and an appropriate discount rate.

 

(vi) The Company recorded deferred income taxes relating to the difference between financial reporting and tax bases of assets and liabilities acquired in the Combinations in nontaxable transactions. The Company also eliminated historical deferred income taxes of Founding Companies acquired in taxable transactions.

The preliminary allocations described above could change materially as the Company finalizes its assessment of the allocation and the fair value of the net tangible and intangible assets acquired, some of which are dependent on the completion of valuations being performed by independent valuation specialists.

The Combination Agreements with the Founding Companies also included provisions for the Company to begin leasing properties from the Founding Companies’ former owners and their related parties after closing and the Company commenced these leases on May 19, 2015. Many of these properties were consolidated into the historical results of the Founding Companies but were not acquired by Fenix in the Combinations and are not consolidated by Fenix after the closing.

 

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The following table shows the pro forma revenue and earnings of Fenix Parts, Inc. as if the Combinations with the Founding Companies had occurred on January 1, 2014 (in thousands):

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  

Revenue

   $ 25,591       $ 27,294       $ 50,270       $ 54,114   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (3,312    $ (695    $ (6,536    $ (444
  

 

 

    

 

 

    

 

 

    

 

 

 

Significant adjustments to the historical revenue of the Founding Companies for the pro forma revenue presentation include the elimination of revenue between Founding Companies, for which there is a corresponding decrease in pro forma cost of goods sold, and the elimination of revenue from the sale of warranties that are not recognized by Fenix in the periods after the Combinations.

Significant adjustments to expenses include effects of shares transferred from founding investors to later investors, incremental amortization of acquired intangible assets, rent expense associated with leases with the former owners of the Founding Companies, compensation related to certain bonuses paid to employees of a Founding Company and related income tax effects.

Note 4. Long-Term Obligations

On May 6, 2015, the Company entered into a $35.0 million senior secured credit facility with BMO Harris Bank N.A. under which it borrowed $10.0 million and utilized $5.9 million of letters of credit on the closing date of the Combinations, May 19, 2015. The credit facility consists of $25.0 million that is available as a revolving credit facility, allocated $20.0 million in U.S. dollars, with a $7.5 million sublimit for letters of credit, and $5.0 million in either Canadian Dollars or U.S. Dollars, with a $2.5 million sublimit for letters of credit. The remaining $10.0 million is available as a term loan. The Company has the right from time to time, as long as no default is occurring, to request an increase in the amount of the revolving credit facility by up to an aggregate of $20.0 million. Proceeds of the credit facility are expected to be used for capital expenditures, working capital, permitted acquisitions, and general corporate purposes. The term of the revolving credit facility and the term loan facility is five years.

 

     June 30,  

(in thousands)

   2015  

Obligations:

  

Term loan

   $ 9,460   

Go Pull-It note

     200   
  

 

 

 
     9,660   

Less current maturities

     725   
  

 

 

 
   $ 8,935   
  

 

 

 

The term loan balance above includes a reduction for debt issuance costs of $428,000 as of June 30, 2015.

As of June 30, 2015, there was a $5.9 million letter of credit outstanding related to the Combinations.

The credit facility is secured by a first-priority perfected security interest in substantially all of the Company’s assets as well as all of the assets of its domestic subsidiaries, who also guaranty the borrowings. In addition, the Company pledged all of the stock in its domestic subsidiaries as security and 66% of the stock of its direct, Canadian subsidiary, Fenix Canada (other than its exchangeable preferred shares).

The Company’s U.S. borrowings under the credit facility bear interest at fluctuating rates determined quarterly, at the Company’s election in advance for any applicable interest period, by reference to the “base rate” plus the applicable margin within the relevant range of margins provided in the term sheet. The base rate is the highest of (i) the rate BMO Harris Bank N.A. announces as its “prime rate,” (ii) 0.50% above the rate on overnight federal funds transactions or (iii) the London Interbank Offered Rate (LIBOR) for an interest period of one month plus 1.00%. The applicable margin is based on our total leverage ratio. The initial margin for interest rates on borrowings under the credit facility is 2.00% on LIBOR loans and 1.00% on base rate loans.

The Canadian borrowings under the credit facility bear interest at fluctuating rates determined quarterly, at the Company’s election in advance for any applicable interest period, by reference to the “Canadian base rate” plus the applicable margin within the relevant range of margins provided in the term sheet. The Canadian base rate is the higher of (i) the rate the Bank of Montreal announces as its “reference rate,” or (ii) the Canadian Dollar Offered Rate (CDOR) for an interest period equal to the term of any applicable borrowing plus 0.50%. The applicable margin is based on our total leverage ratio. The initial margin for interest rates on borrowings under the credit facility is 1.00% on base rate loans.

 

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The credit agreement contains customary events of default, including the failure to pay any principal, interest or other amount when due, violation of certain of our affirmative covenants or any negative covenants or a breach of representations and warranties and, in certain circumstances, a change of control. Upon the occurrence of an event of default, payment of indebtedness may be accelerated and the lending commitments may be terminated.

The credit agreement contains several debt covenants with which the Company must comply on a quarterly or annual basis, including a maximum Funded Debt to EBITDA Ratio (or “Leverage Ratio”, as defined in the Facilities) of 2.75:1.00 based on the four trailing quarterly periods. Maximum funded debt as it relates to the Leverage Ratio is defined as all borrowed funds, outstanding standby letters of credit and bank guarantees as of the end of the most recent fiscal quarter. The Company must also comply with a minimum Fixed Charge Coverage Ratio of 1.20:1.00 based on the four trailing quarterly periods. Fixed charge coverage is defined as the ratio of EBITDA less unfinanced capital expenditures for the four trailing quarterly periods, dividends, repurchases and other restricted payments, cash taxes, and cash interest. EBITDA includes after tax earnings with add backs for interest expense, income taxes, depreciation and amortization and stock compensation expenses. In addition, the credit agreement covenants include a minimum tangible net worth of $102.6 million plus fifty percent of net income for each fiscal quarter. As of June 30, 2015, the Company was in compliance with all financial covenants specified by the credit agreement.

Note 5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of following:

 

     June 30,
2015
     December 31,
2014
 

Accounting, consulting and legal fees

   $ 1,572,540       $ 48,431   

Employee compensation

     1,066,978         175,000   

Other

     951,118         80,300   
  

 

 

    

 

 

 

Total accrued expenses and other current liabilities

   $ 3,590,636       $ 303,731   
  

 

 

    

 

 

 

As described in Note 1, through May 19, 2015, Fenix had focused on arranging for the completion of an IPO and the acquisition of eight businesses. As part of that process, and as provided for in the Combination Agreements, Fenix was obligated to fund accounting, auditing and various other costs associated with the Founding Companies’ efforts to provide historical audited financial statements and to meet other requirements associated with the IPO. The majority of the Company’s operating expenses and accrued expenses and other current liabilities through the IPO date related to these activities.

Note 6. Income Taxes

From its Inception through May 2015, the Company generated pre-tax losses. A full valuation allowance was established as of March 31, 2015 and December 31, 2014 against this potential benefit because the uncertainty of the Company’s future prospects at those balance sheet dates resulted in it being more likely than not that the deferred income tax asset relating to the benefit would not be realized. However, upon the successful closing of the Combinations in May 2015 and the concurrent recognition of significant deferred income tax liabilities, as well as the expectation of future pre-tax income from the acquired operating companies, the Company concluded that it was more likely than not that the deferred tax assets generated by prior losses will be realized, and accordingly, recorded an income tax benefit from reversing the allowance of approximately $1,800,000 upon the closing of the Combinations. The Company’s effective tax rate was (57.2%) and (44.5)% for the three and six months periods ending June 30, 2015 respectively. This effective rate differs from the statutory rate due to the effects of the state and Canada income taxes and changes in the valuation allowance.

The Company’s uncertain tax position reserves, including related interest and penalties of $1 million, were approximately $4.6 million as of June 30, 2015 and were all originally assumed as part of the Combinations. If any portion of the Company’s unrecognized tax benefits is recognized, it could impact the Company’s effective tax rate. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations, and changes in tax law. The uncertain tax positions primarily relate to the timing of certain deductions for income tax purposes by certain Founding Companies and the continued qualification of one Beagell entity for its historical Subchapter S election. Under certain conditions, any payments - including of interest and penalties - made by the Company for assumed uncertain tax positions are indemnified by the previous equity holders of the Founding Companies. As such, changes in these reserves will usually be offset by similar changes in the indemnification receivable.

Note 7. Common Stock

Fenix was formed and initially capitalized in January 2014 by a group of investors, including the chief executive and the chief financial officers, who paid nominal cash consideration for an aggregate of 1.8 million shares of Fenix common stock. In March and April 2014, Fenix issued and sold an aggregate of 402,000 shares of common stock for a purchase price of $5.00 per share. During the period of September 2014 through April 2015, Fenix issued and sold an aggregate of 546,927 shares of common stock for an ultimate purchase price of $6.50 per share. Of these shares, 20,000 were issued to certain investors for no cash consideration in order to effectively convert their $7.50 per share investments to $6.50 per share investments. Such issuances resulted in a charge to the Company’s earnings in January 2015 of approximately $131,000.

 

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The Company completed its IPO on May 19, 2015 and its 2,000-for-1 common stock split immediately before the closing of the IPO. As a result, all share and per share information presented in the Company’s consolidated financial statements has been adjusted to retroactively reflect the common stock split. The Company raised approximately $110.4 million in gross proceeds from the IPO by selling 13.8 million shares at $8.00 per share and netted $101.3 million in the IPO after paying the underwriter’s discount and other offering costs. The number of shares sold includes 1.8 million sold pursuant to an overallotment agreement with the underwriters.

The agreements that relate to the common stock sales in March, April and September 2014 included provisions that obligated the holders of the common stock issued in January 2014 to compensate the investors in the later sales if the IPO price of Fenix common stock was less than $10.00 per share. As the IPO price was $8.00 per share, the initial investors transferred 237,231 of their shares to the later investors equal in value to the aggregate difference in value between the IPO price of $8.00 per share and $10.00 per share, resulting in a charge of $1.8 million to other expense in the statement of operations in the post-Combinations period ended June 30, 2015. The later investors were also granted registration rights.

Note 8. Stock-Based Compensation

The Company’s 2014 Incentive Stock Plan (“Plan”) was adopted in January 2015. The Plan permits grants of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards (in the form of equity or cash bonuses), dividend equivalents on full value awards and other awards (which may be based in whole or in part on the value of its common stock or other property). Directors, salaried employees, and consultants of the Company and its commonly-controlled affiliates are eligible to participate in the Plan. The number of shares originally reserved for share-based awards under the Plan equaled 2,750,000 shares. As of June 30, 2015, the Company had 2,280,000 shares available for share-based awards under the Plan.

Stock-based compensation is included in operating expenses in the consolidated statements of operations and was approximately $62,000 for the three and six month periods ended June 30, 2015.

Stock Options

Stock options granted to employees under the Plan have a 10-year life and typically vest in equal installments on each of the first four anniversary dates of the grant. The Company calculates stock compensation expense for employee option awards based on the grant date fair value of the award, less expected annual forfeitures, and recognizes expense on a straight-line basis over the four-year service period of the award. Stock options granted to board members vest immediately on the first anniversary of the award date. Stock compensation for these awards is based on the grant date fair value of the award and is recognized on a straight-line basis over the one-year service period of the award.

The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of employee and director stock options. The principal variable assumptions utilized in valuing options and the methodology for estimating such model inputs include: (1) risk-free interest rate – an estimate based on the yield of zero–coupon treasury securities with a maturity equal to the expected life of the option; (2) expected volatility – an estimate based on the historical volatility of similar companies’ Common Stock for a period equal to the expected life of the option; and (3) expected life of the option – an estimate based on industry historical experience including the effect of employee terminations.

Based on the results of the model, the weighted-average fair value of the stock options granted during the six-month period ended June 30, 2015 were as follows using the following assumptions:

 

     May 13,
2015
Management
Grant
    May 13,
2015
Director
Grant
    June 15,
2015
Director
Grant
 

Weighted average fair value

   $ 2.67      $ 2.47      $ 3.33   

Expected dividend yield

     0.0     0.0     0.0

Risk-free interest rate

     1.84     1.68     1.81

Expected volatility

     30.0     30.0     30.0

Expected life of option

     6.3 years        5.5 years        5.5 years   

 

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Table of Contents

Stock option activity for the Company’s Plan for the six months ended June 30, 2015 was as follows:

 

     Number
of
Options
     Weighted-
Average
Exercise Price
Per Share
     Weighted-
Average
Remaining
Contractual
Term in Years
     Aggregate
Intrinsic
Value
 

Outstanding on January 1, 2015

     —         $ —          

Granted

     470,000        8.23        

Exercised

     —           —          

Expired or forfeited

     —           —          
  

 

 

          

Outstanding on June 30, 2015

     470,000      $ 8.23        9.9      $ 842,000   
  

 

 

          

Exercisable on June 30, 2015

     —         $ —          —        $ —     

At June 30, 2015, there is $1,203,000 of unrecognized compensation costs related to stock option awards to be recognized over a weighted average period of 3.3 years.

Leesville Bonus Shares

The Company issued 271,112 restricted shares of common stock at the closing of the combinations. The shares vest twelve months after the grant date. Compensation expense of approximately $285,000 was recorded in the three months ended June 30, 2015 related to the vesting of 31,939 shares.

Other awards

During the three months ended June 30, 2015, the Company issued 20,000 total unregistered common shares to two current employees in payment of their fees for pre-combination services when they were consultants of the company. Compensation expense of approximately $131,000 was recorded in the three months ended June 30, 2015 for these awards based on the share price on the date of grant.

During the six months ended June 30, 2015, the Company accrued $86,000 in compensation expense for pre-IPO services. The total expense was $217,000.

Note 9. Commitments and Contingencies

Operating Leases

Rental expense for operating leases was approximately $320,000 during the post-Combination period ended June 30, 2015. The Company leases properties from the former owners of the Founding Companies and other related parties. These parties also own Fenix common stock and Fenix Canada preferred stock, but no individual former owner or controlled group of such owners own more than 8% of Fenix common stock, on an as converted basis.

Environmental and Related Contingencies

The Company is subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. The Company currently expects that the resolution of any potential contingencies arising from compliance with these laws and regulations will not materially affect the Company’s financial position, results of operations or cash flows.

Note 10. Related Party Transactions

As described in Note 3, the Company has operating leases with legal entities that are controlled by former owners of the Founding Companies, who are also shareholders in Fenix and Fenix Canada and in certain cases are also in management at Fenix. One of the lessors is controlled by a Board member of Fenix. These leases, which generally have a term of 15 years with renewal options, relate to 16 distinct properties on which the Company conducts its automobile recycling business in the United States and Canada. These leases commenced on the closing of the Combinations on May 19, 2015. The scheduled payments under these leases over their original terms total $35.8 million. The Company records rent expense in the statements of operations based on market rental rates, which totaled approximately $320,000 for the three and six months ended June 30, 2015.

Because these leases were entered into upon the closing of the Combinations, any difference between their contractual payments and then-current market rental rates is accounted for as a net refundable purchase price which served to reduce the aggregate Combinations Consideration by $1,470,000. This net asset is being amortized over the terms of the leases as additional rent expense so that the amount in the statements of operations reflects the market rental expense.

Also as described in Note 3, the Company holds a 5% investment, and an option to purchase the remaining 95%, interest in Go Pull-It LLC, an entity in which certain Fenix management also hold an equity investment. Go Pull-It LLC is a variable interest entity (“VIE”)

 

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Table of Contents

and the Company is not the primary beneficiary of that VIE because it does not have the power to direct the significant activities of the VIE. That power is held by the former owners of Go Auto. The Company has not and does not expect to provide any financial support to the VIE outside of the 5% investment. The 5% investment and option are valued at $397,000 in the consolidated balance sheet and this represents the maximum exposure of the Company to losses of this VIE.

The Company leases computer equipment from a company that is 50% owned by a member of management and $3,000 was paid for this lease in the post Combination period ended June 30, 2015. The Company also sells inventory to related parties. Net revenues for these sales were approximately $14,000 in the post Combination period June 30, 2015.

Note 11. Employee Benefit Plans

The Founding Companies provide defined contribution plans covering eligible employees, which includes matching and discretionary profit sharing contributions. The Company has continued these plans and contributed approximately $83,000 to them in the post-Combination period ended June 30, 2015.

Note 12. Subsequent Events

On July 8, 2015, the Board of Directors approved the grant of 107,877 stock options to each to the Company’s CEO and CFO that vest one year from the grant date and 100,000 stock options to the Company’s Chief Operating Officer that vest over four years. On that date, the Board also approved grants totaling 404,000 stock options and 150,000 shares of restricted stock to 13 other key employees that vest over 4 or 5 years. All grants were made under the Plan. The stock option exercise price was fixed at the market value of Fenix common stock on that date. The total fair value of these awards is $3,545,000 which will be recorded to stock-based compensation expense over the vesting period.

On August 14, 2015, the Company completed its acquisition of the stock of Ocean County Auto Wreckers, Inc. (“Ocean County”) in Bayville, New Jersey for an aggregate purchase price of $3,210,000 in cash and 59,709 shares of Fenix common stock. The cash portion of the purchase price is approximately $2,624,000. The purchase price is subject to working capital adjustments. The Company also entered into a lease with the owners of Ocean County for use of the premises on which the Company will conduct its automotive recycling business. This acquisition complements the Company’s other auto recycling operations in Northeast United States. As of the filing date of these financial statements, the Company has not completed a preliminary allocation of the purchase price to the fair market values of acquired tangible and intangible assets and assumed liabilities.

 

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Table of Contents

Beagell Group

UNAUDITED CONDENSED COMBINED BALANCE SHEET

 

     December 31,
2014
 
ASSETS   

CURRENT ASSETS

  

Cash and cash equivalents

   $ 2,769,876  

Accounts receivable, net of allowance

     1,188,214  

Inventories

     6,736,469  

Prepaid expenses and other current assets

     99,402  

Related party receivables

     333,270  
  

 

 

 

Total current assets

     11,127,231  

PROPERTY AND EQUIPMENT

  

Land

     731,959  

Land improvements

     187,183  

Buildings

     1,564,293  

Vehicles

     2,136,646  

Machinery and equipment

     5,177,043  

Leasehold improvements

     973,179  

Office furniture and fixtures

     323,712  

Accumulated depreciation and amortization

     (6,993,860 )
  

 

 

 

Property and equipment, net

     4,100,155  

OTHER NON-CURRENT ASSETS

  

Cash surrender value of life insurance policies

     593,671  

Goodwill

     180,000  
  

 

 

 

Total other non-current assets

     773,671  
  

 

 

 

TOTAL ASSETS

   $ 16,001,057  
  

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

CURRENT LIABILITIES

  

Accounts payable

   $ 480,949  

Accrued expenses and other current liabilities

     1,009,147  

Deferred warranty revenue – current

     410,673  

Current portion of long-term debt

     68,196  
  

 

 

 

Total current liabilities

     1,968,965  

NON-CURRENT LIABILITIES

  

Deferred warranty revenue - long-term

     10,656  

Long-term debt, net of current portion

     62,118  

Reserve for uncertain tax positions

     1,969,055  
  

 

 

 

Total non-current liabilities

     2,041,829  
  

 

 

 

Total liabilities

     4,010,794  

COMMITMENTS AND CONTINGENCIES

  

SHAREHOLDERS’ EQUITY

  

Common stock, no par value

     —    

Additional paid-in capital

     748,493  

Retained earnings

     8,971,722  
  

 

 

 

Total Beagell Group shareholders’ equity

     9,720,215  

Noncontrolling interest

     2,270,048  
  

 

 

 

Total shareholders’ equity

     11,990,263  
  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 16,001,057  
  

 

 

 

The accompanying notes to the unaudited condensed combined financial statements are an integral part of these statements.

 

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Table of Contents

Beagell Group

UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS

 

     Period from
April 1, 2015 to
May 18, 2015
     Three Months
Ended
June 30,
2014
     Period from
January 1, 2015 to
May 18, 2015
     Six Months
Ended

June 30,
2014
 

Net revenues

   $ 4,050,182       $ 7,786,912       $ 11,107,071       $ 15,209,543   

Cost of goods sold

     2,532,493         5,247,770         7,395,359         10,269,786   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     1,517,689         2,539,142         3,711,712         4,939,757   

Operating expenses

     1,417,009         1,906,142         3,183,803         3,460,425   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     100,680         633,000         527,909         1,479,332   

Other income

     63,513         17,980         63,695         47,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     164,193         650,980         591,604         1,527,003   

Income tax expense

     18,565         115,363         75,402         155,847   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     145,628         535,617         516,202         1,371,156   

Net income attributable to noncontrolling interest

     103,362         137,763         279,481         272,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME ATTRIBUTABLE TO BEAGELL GROUP

   $ 42,266       $ 397,854       $ 236,721       $ 1,098,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying notes to the unaudited condensed combined financial statements are an integral part of these statements.

 

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Table of Contents

Beagell Group

UNAUDITED CONDENSED COMBINED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

     Common stock     

Additional

paid-in

     Retained     Non controlling    

Total

shareholders’

 
     Shares      Amount      capital      earnings     interest     equity  

Balance at January 1, 2015

     3,424       $ —        $ 748,493       $ 8,971,722      $ 2,270,048      $ 11,990,263   

Net income

     —          —          —          236,721        279,481        516,202   

Shareholder distributions

     —          —          —          (1,798,900 )     (60,000 )     (1,858,900 )
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at May 18, 2015

     3,424       $ —        $ 748,493       $ 7,409,543      $ 2,489,529      $ 10,647,565   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     Common stock     

Additional

paid-in

     Retained     Non controlling    

Total

shareholders’

 
     Shares      Amount      capital      earnings     interest     equity  

Balance at January 1, 2014

     3,412       $ —        $ 727,973       $ 8,578,003      $ 2,340,578      $ 11,646,554   

Net income

     —          —          —          1,098,220        272,936        1,371,156   

Shareholder distributions

     —          —          —          (584,078     (200,000 )     (784,078
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

     3,412       $ —        $ 727,973       $ 9,092,145      $ 2,413,514      $ 12,233,632   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes to the unaudited condensed combined financial statements are an integral part of these statements.

 

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Beagell Group

UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS

 

     Period from January 1,
2015 to May 18,
2015
    Six Months
Ended
June 30,
2014
 

Cash flows from operating activities

    

Net income

   $ 516,202      $ 1,371,156   

Adjustments to reconcile net income to net cash provided by operating activities

    

Depreciation and amortization expense

     277,183        435,226   

Provision for uncertain tax positions

     86,000        143,801   

Gain on disposal of property and equipment

     (61,658     (17,589

Change in assets and liabilities

    

Accounts receivable

     (134,875     196,805   

Inventories

     114,002        (607,586

Prepaid expenses and other current assets

     (103,812     (60,866

Account payable

     233,192        110,964   

Accrued expenses and other liabilities

     (306,112 )     330,081   

Deferred warranty revenue

     (142,884     74,017   
  

 

 

   

 

 

 

Net cash provided by operating activities

     477,238        1,976,009   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from disposal of property and equipment

     160,643        33,375   

Liquidation of (premium payments on) life insurance policies

     593,671        (34,915

Payments received on related party receivables

     333,270        —    

Capital expenditures

     (284,690     (144,517
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     802,894        (146,057
  

 

 

   

 

 

 

Cash flows from financing activities

    

Payments of debt

     (26,032     (188,275

Proceeds from debt

     —         60,000   

Shareholder distributions

     (1,858,900     (784,078
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,884,932     (912,353
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (604,800     917,599   

Cash and cash equivalents, beginning of period

     2,769,876        1,719,740   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 2,165,076      $ 2,637,339   
  

 

 

   

 

 

 

Supplemental cash flow disclosures

    

Cash paid for income taxes

   $ 4,773      $ 660   
  

 

 

   

 

 

 

The accompanying notes to the unaudited condensed combined financial statements are an integral part of these statements.

 

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Table of Contents

Beagell Group

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1. Nature of Operations

The Beagell Group (the “Company”) includes three commonly-controlled companies: Don’s Automotive Mall, Inc. (“Don’s”), Gary’s U-Pull It, Inc. (“Gary’s”) and Horseheads Automotive Recycling, Inc. (“Horseheads”). The Company’s primary business is auto recycling, which is the recovery and resale of original equipment manufacturer (“OEM”) and aftermarket parts, components and systems, such as engines, transmissions, radiators, trunks, lamps and seats (referred to as “products”) reclaimed from damaged, totaled or low value vehicles. The Company purchases its vehicles primarily at auto salvage auctions. Upon receipt of vehicles, the Company inventories and then either a) dismantles the vehicles and sells the recycled components at its full-service facilities or b) allows retail customers to directly dismantle, recover and purchase recycled parts at its self-service facilities. In addition, the Company purchases recycled OEM and related products from third parties for resale and distribution to its customers. The Company’s customers include collision repair shops (body shops), mechanical repair shops, auto dealerships and individual retail customers. The Company also generates a portion of revenue from the sale of scrap of the unusable parts and materials and from the sale of extended warranties.

Don’s sells recycled OEM products through its two full-service dismantling and distribution facilities located in Binghamton, New York and Pennsburg, Pennsylvania. Gary’s and Horseheads sell recycled OEM products through their self-service facilities in Binghamton and Elmira, New York, respectively. Each of the three commonly-controlled companies is a New York corporation.

On May 19, 2015, all three commonly-controlled companies were purchased by Fenix Parts Inc. for an approximate purchase price of $34.5 million, subject to working capital and other adjustments. The Lessors (as defined below) were not purchased, but the owners of the Lessors entered into lease agreements with Fenix Parts, Inc. for certain properties on which the Company conducts its automotive recycling business.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

These unaudited condensed combined financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, without audit, pursuant to the rules and regulations of United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures typically included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed combined financial statements should be read in conjunction with the audited combined financial statements of the Beagell Group and the notes thereto as of and for the year ended December 31, 2014 included in Fenix Parts, Inc.’s prospectus dated May 14, 2015. The Company continues to follow the accounting policies set forth in those combined financial statements. Management believes that these combined interim financial statements include all adjustments, normal and recurring in nature, that are necessary to present fairly the results of its operations and cash flows for period from April 1, 2015 to May 18, 2015, the three months ended June 30, 2014, the period from January 1, 2015 to May 18, 2015, and the six months ended June 30, 2014. Interim results are not necessarily indicative of annual results. All significant intercompany balances and transactions have been eliminated.

The combined financial statements include the accounts of D&B Holdings, LLC and BBHC, LLC - the lessors of the premises from which Don’s operates, Beagell Properties, LLC - the lessor of the premises from which Gary’s operates, and Don’s Independent Salvage Company, LLC - the lessor of the premises from which Horseheads operates (collectively, “the Lessors”). Each of the Lessors are substantially owned by the Company’s shareholders. The Company has determined that each of the Lessors are variable interest entities because the holders of the equity investment at risk in these entities do not have the obligation to absorb their expected losses or receive their residual returns. Furthermore, the Company has determined that it is the primary beneficiary of each Lessor because the Company has the power to direct the activities that most significantly impact the Lessors’ economic performance, namely the operation and maintenance of the significant assets of the Lessors. Accordingly, and pursuant to consolidation requirements under GAAP, the Company consolidates the Lessors. All intercompany transactions are eliminated in consolidation. All of the Lessors operating results are attributable to the noncontrolling interests in the Company’s combined statements of operations and all of their shareholders’ equity is reported separately from the Company’s shareholders’ equity in the Company’s combined balance sheet and combined statements of shareholders’ equity.

Use of Estimates

The preparation of the Company’s combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the combined financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

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Table of Contents

Revenue Recognition

The Company recognizes revenue from the sale of vehicle replacement products and scrap when they are shipped or picked up by the customers and ownership has transferred, subject to an allowance for estimated returns and discounts that management estimates based upon historical information. Management analyzes historical returns (often pursuant to standard warranties on the sold products) and allowances activity by comparing the items returned to the original invoice amounts and dates. The Company uses this information to project future returns and allowances on products sold. If actual returns and allowances deviate from the Company’s historical experience, there could be an impact on its operating results in the period of occurrence. The Company has recorded a reserve for estimated returns, discounts and allowances of approximately $99,000 at December 31, 2014 within accrued expenses and other current liabilities.

The Company presents taxes assessed by governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenue on the combined statements of operations and are shown as a current liability on the combined balance sheet until remitted. Revenue also includes amounts billed to customers for shipping and handling.

Revenue from the sale of separately priced extended warranty contracts is reported as deferred revenue and recognized ratably over the term of the contracts. Revenue from such extended warranty contracts was approximately $65,000 for the period from April 1, 2015 to May 18, 2015, $94,000 for the three months ended June 30, 2014, $189,000 for the period from January 1, 2015 to May 18, 2015 and $120,000 for the six months ended June 30, 2014.

Cost of Goods Sold

Cost of goods sold primarily includes a) amounts paid for the purchase of vehicles, scrap, parts for resale and related products, b) related auction, storage and towing fees, and c) other costs of procurement and dismantling, primarily labor and overhead allocable to dismantling operations.

Operating Expenses

Operating expenses are primarily comprised of a) salaries and benefits of employees that are not related to the procurement and dismantling of vehicles, b) facility costs such as rent, utilities, insurance, repairs and taxes not allocated to dismantling operations, c) selling and marketing costs, d) costs to distribute the Company’s products and scrap and e) other general and administrative costs.

Concentrations

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The majority of cash and cash equivalents are maintained with several major financial institutions. The Company maintains its cash in bank deposit accounts which, at times, may exceed the insurance limits of the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts. Concentrations of credit risk with respect to accounts receivable are limited because a large number of customers make up the Company’s customer base. The Company controls credit risk through credit approvals, credit limits and monitoring procedures.

The Company primarily obtains its recycled OEM and related products from damaged, totaled or low value vehicles purchased at salvage auto auctions. For 2015 and 2014, substantially all of the vehicles purchased by the Company for dismantling were acquired at auctions run by two salvage auto auction companies.

Accounts Receivable and Allowance for Doubtful Accounts

In the normal course of business, the Company extends credit to customers after a review of each customer’s credit history. The Company recorded a reserve for uncollectible accounts of approximately $12,000 as of December 31, 2014. The reserve is based upon management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable and historical experience. Receivables are written off once collection efforts have been exhausted. Recoveries of accounts receivable previously written off are recorded when received.

Inventories

Inventories consist entirely of recycled OEM and aftermarket products, including car hulls and other materials that will be sold as scrap. Inventory costs are established based upon the price the Company pays for a vehicle, including auction, storage and towing fees, as well as expenditures for buying and dismantling vehicles. After dismantling, the cost assigned to the salvaged parts and scrap is determined using the average cost of sales percentage at the Company and applying that percentage to the Company’s inventory at expected selling prices. The average cost to sales percentage is derived from the Company’s historical vehicle profitability for salvage vehicles purchased at auction or procured from other sources. With respect to self-service inventories, costs are established by calculating the average sales price per vehicle, including its scrap value and part value, applied to the total vehicles on-hand.

 

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Table of Contents

For all inventories, carrying value is recorded at the lower of cost or market and is reduced to reflect the age of the products and current anticipated demand. If actual demand differs from the Company’s estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged against operations. Renewals and betterments that materially extend the useful life of an asset are capitalized. As property and equipment are sold or retired, the applicable cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss thereon is recognized. Depreciation and amortization expense is calculated using the straight-line method over the estimated useful lives. Depreciation and amortization expense totaled approximately $96,000 and $209,000 for the period from April 1, 2015 to May 18, 2015 and the three months ended June 30, 2014, respectively. Depreciation and amortization expense totaled approximately $277,000 and $435,000 for the period from January 1, 2015 to May 18, 2015 and the six months ended June 30, 2014, respectively. Approximately $1,426,000 of property and equipment, net of accumulated depreciation and amortization, was held by the Lessors as of December 31, 2014.

Estimated useful lives are as follows:

 

Land improvements

     15 years   

Buildings

     39 years   

Vehicles

     5 years   

Machinery and equipment

     3-10 years   

Leasehold improvements

     10-15 years or term of lease, if shorter   

Office furniture and fixtures

     7 years   

The Company evaluates the recoverability of the carrying amount of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable based on an analysis of undiscounted cash flows. There were no such events or changes in the periods presented.

Cash Surrender Value of Life Insurance Policies

The Company pays the premiums for whole life insurance policies for certain shareholders and key employees. If the Company is the named beneficiary on the policy, it records the premium payments as expenses offset by the increase in cash surrender value of the related policy. If the Company is not the named beneficiary, the premiums are recorded as related party receivables until recouped from the shareholder or employee. As of December 31, 2014, the Company had cash surrender value balance of approximately $594,000, and related party receivables of approximately $333,000. The related party receivables have no stated repayment provisions.

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company is required to perform an annual impairment review, and more frequently under certain circumstances. Under the qualitative goodwill impairment assessment standard, management evaluates whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If it is determined that it is more likely than not, the Company proceeds with the next step of the impairment test, which compares the fair value of the reporting unit to its carrying value. If the Company determines through the impairment process that goodwill has been impaired, the Company will record the impairment charge in its results of operations. The Company has elected to perform its annual evaluation of impairment as of December 31. There were no impairment charges related to goodwill during the periods presented.

Income Taxes

Each of the three commonly-controlled companies has elected to operate under Subchapter S of the Internal Revenue Code. Accordingly, the shareholders report their share of the Company’s federal and most state’s taxable income or loss on their respective individual income tax returns. The Lessors are taxed as partnerships and therefore no provision for federal and state corporate taxes are recorded for the Lessors.

The Company recognizes the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions that are more likely than not to be realized. The Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. The Company’s policy is to include interest and penalties associated with income tax obligations in income tax expense.

 

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Table of Contents

Fair Value Measurements

Fair value of financial assets and liabilities are defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date (exit price). The Company is required to classify fair value measurements in one of the following categories:

 

    Level 1 - inputs which are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

    Level 2 - inputs which are defined as inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.

 

    Level 3 - inputs are defined as unobservable inputs for the assets or liabilities. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

Certain assets and liabilities are required to be recorded at fair value on either a recurring or non-recurring basis; however, the Company has no assets or liabilities that require recurring fair value measurements. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants.

The Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The Company’s debt is carried at cost and approximates fair value due to its variable or fixed interest rates, which are consistent with the interest rates in the market.

The Company may be required, on a non-recurring basis, to adjust the carrying value of the Company’s property and equipment and goodwill. When necessary, these valuations are determined by the Company using Level 3 inputs. These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence that impairment may exist. There have been no indicators of impairment through May 18, 2015 or the year ended December 31, 2014.

Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11, Simplifying the Measurement of Inventory, which requires entities to measure inventory at the lower of cost or net realizable value. This guidance for public entities is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting the new standard.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which modifies the evaluation of VIEs, and affects the consolidation analysis of reporting entities involved with VIEs. This guidance for public entities is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact of adopting the new standard.

In August 2014, the FASB issued ASU No. 2014-15 which amends Accounting Standards Codification (“ASC”) Topic 205, Presentation of Financial Statements, to describe management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This guidance will be effective for the Company’s fiscal year ended December 31, 2016. The Company does not expect adoption of this ASU to have a material impact on its combined financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The guidance in this update supersedes nearly all existing revenue recognition guidance under U.S. GAAP and creates a single, principle-based revenue recognition framework that is codified in a new FASB ASC Topic 606. The core principle of this guidance is for the recognition of revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new revenue standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is not permitted other than as of annual reporting periods beginning after December 15, 2016. The new standard allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the transition method that will be elected and the potential effects of the adoption of the new standard on its combined financial statements.

 

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Table of Contents

In April 2014, FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends FASB ASC Topic 205, Presentation of Financial Statements, and FASB ASC Topic 360, Property, Plant, and Equipment. This standard amends the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This guidance is effective on a prospective basis for annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued or available for issuance. The Company adopted this standard effective January 1, 2015. Adoption did not have a material impact on the Company’s combined financial statements.

Reclassifications

Reclassifications of prior period amounts have been made to conform to the current period presentation. The reclassifications have no impact on net income.

Note 3. Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities are as follows:

 

     December 31,
2014
 

Accrued salaries and employee benefits

   $ 615,558   

Reserve for returns and discounts

     99,454   

Accrued legal fees

     135,659   

Sales taxes payable

     18,812   

Other liabilities

     139,664   
  

 

 

 
   $ 1,009,147   
  

 

 

 

Note 4. Debt

In December 2014, the Company entered into a 2-year non-interest bearing loan, secured by the underlying equipment. Additionally, the Company has two other loans secured by certain equipment purchased with the related proceeds. These loans do not bear interest and are not subject to any financial covenants. Outstanding balances were approximately $130,000 December 31, 2014. The aggregate annual future principal payments as of December 31, 2014 are approximately $68,000 in 2015 and $62,000 in 2016.

The Company has a line of credit with a financial institution which provides for a maximum borrowing of $500,000, of which no amounts were outstanding as of December 31, 2014. Interest on borrowings is to be calculated at 0.5% above the prime rate, which was 3.25% at December 31, 2014.

The Company has a letter of credit facility with a financial institution in the amount of $30,000 at December 31, 2014. The letter of credit supports an insurance policy.

Note 5. Commitments and Contingencies

Operating Lease

The Company is obligated under a non-cancelable operating lease for corporate office space, warehouse and distribution facilities. The facilities are owned by certain shareholders of the Company. Rental expense for the operating lease was approximately $43,000 for the three months ended June 30, 2014 and $79,000 for the six months ended June 30, 2014. In 2015, the entity holding the leased assets is consolidated.

Environmental and Related Contingencies

The Company is subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. The Company currently expects that the resolution of any potential contingencies arising from compliance with these laws and regulations will not materially affect the Company’s financial position, results of operations or cash flows.

 

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Table of Contents

Note 6. Income Taxes

Each of the Company’s commonly-controlled entities described in Note 2 have elected to operate under Subchapter S of the Internal Revenue Code. The Company’s primary uncertain tax position arises from uncertainties regarding the continued qualifications of one of the entities for that Subchapter S election and the related reserves were approximately $1,969,000 at December 31, 2014. It is reasonably possible that the amount of benefits from this uncertain tax position will significantly increase or decrease in the next twelve months; however, no estimate of the range of the amount of the increase or decrease can be readily made.

In addition to the uncertain tax positions described above, the Company has other uncertain tax positions related to the timing of certain deductions for income tax purposes. The related basis differences caused by this timing of deductions for income tax purposes and the timing of expense recognition for financial reporting purposes are reported by the Company’s equity holders. However, interest and penalties are separately recorded for all uncertain tax positions as part of income tax expense and amounted to approximately $8,000 and $11,000 for the period from April 1, 2015 to May 18, 2015 and the three months ended June 30, 2014, respectively, and $24,000 and $22,000 for the period from January 1, 2015 to May 18, 2015 and the six months ended June 30, 2014, respectively. The Company had accumulated interest and penalties of approximately $357,000 as of December 31, 2014, respectively, which are included in the reserve for uncertain tax positions on the combined balance sheet.

The Company is generally no longer subject to examination in primary tax jurisdictions for tax years through 2011. The Company is not currently subject to any audits or examinations.

Note 7. Employee Benefit Plans

The Company provides a defined contribution plan covering eligible employees, which includes a matching contribution. Matching Company contributions to this plan were approximately $18,000 and $108,000 for the period from April 1, 2015 to May 18, 2015 and the three months ended June 30, 2014, respectively. Matching Company contributions to the plan were $37,000 and $218,000 for the period of January 1, 2015 to May 18, 2015 and the six months ended June 30, 2014, respectively.

Note 8. Common Stock

The capital structure of the combined entities as of December 31, 2014, is as follows:

 

     Common shares, no par value      Additional
paid-in
capital
 
     Authorized      Issued     

Don’s

     5,000         1,200       $ 524,005   

Gary’s

     3,000         2,104         184,488   

Horsehead’s

     200         120         40,000   
        

 

 

 
         $ 748,493   
        

 

 

 

 

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Table of Contents

Standard

UNAUDITED CONDENSED COMBINED BALANCE SHEET

 

     December 31,
2014
 

ASSETS

  

CURRENT ASSETS

  

Cash and cash equivalents

   $ 1,354,155   

Accounts receivable, net of allowance

     930,903   

Inventories

     11,090,360   

Prepaid expenses and other current assets

     291,782   

Related party receivables

     255,698   
  

 

 

 

Total current assets

     13,922,898   

PROPERTY AND EQUIPMENT

  

Land and improvements

     1,316,143   

Buildings and improvements

     3,099,557   

Office equipment

     1,393,020   

Vehicles, trailers and yard equipment

     6,056,322   

Leasehold improvements

     1,164,617   

Accumulated depreciation and amortization

     (5,340,370 )
  

 

 

 

Property and equipment, net

     7,689,289   

OTHER NON-CURRENT ASSETS

  

Goodwill

     363,373   

Deferred income taxes

     256,287   

Other non-current assets

     33,394   
  

 

 

 

Total non-current assets

     653,054   
  

 

 

 

TOTAL ASSETS

   $ 22,265,241   
  

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

CURRENT LIABILITIES

  

Accounts payable

   $ 563,045   

Accrued expenses and other current liabilities

     1,187,723   

Deferred warranty revenue

     179,832   

Deferred income taxes

     918,004   

Related party payables

     2,409,277   
  

 

 

 

Total current liabilities

     5,257,881   

DEFERRED INCOME TAXES

     70,668   

DEFERRED WARRANTY REVENUE, NET OF CURRENT PORTION

     176,610   

RESERVE FOR UNCERTAIN TAX POSITIONS

     458,425   
  

 

 

 

Total liabilities

     5,963,584   

COMMITMENTS AND CONTINGENCIES

  

SHAREHOLDERS’ EQUITY

  

Common stock, no par value

     —    

Additional paid-in capital

     5,058,040   

Retained earnings

     10,641,250   

Accumulated other comprehensive income

     (75,129 )
  

 

 

 

Total Standard shareholders’ equity

     15,624,161   

Noncontrolling interest

     677,496   
  

 

 

 

Total shareholders’ equity

     16,301,657   
  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 22,265,241   
  

 

 

 

The accompanying notes to the unaudited condensed combined financial statements are an integral part of these statements.

 

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Standard

UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

     Period from
April 1, 2015 to
May 18, 2015
    Three Months
Ended
June 30, 2014
    Period from
January 1, 2015 to
May 18, 2015
    Six Months
Ended

June 30, 2014
 

Net revenues

   $ 3,317,526      $ 7,968,828      $ 8,914,348      $ 15,465,839   

Cost of goods sold

     2,474,564        4,731,025        5,995,959        10,197,052   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     842,962        3,237,803        2,918,389        5,268,787   

Operating expenses

     1,347,020        3,146,941        3,385,020        4,475,022   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (504,058     90,862        (466,631     793,765   

Other income

     56,675        709,467        301,533        160,355   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax expense

     (447,383     800,329        (165,098     954,120   

Income tax (benefit) expense

     (274     9,243        79,409        31,484   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (447,109     791,086        (244,507     922,636   

Net income (loss) attributable to noncontrolling interest

     10,983        (60     (15,104     19,148   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Standard

   $ (458,092   $ 791,146      $ (229,403   $ 903,488   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (447,109   $ 791,086      $ (244,507   $ 922,636   

Foreign currency translation adjustments

     562,388        380,147        (365,753     (91,787
  

 

 

   

 

 

   

 

 

   

 

 

 

Net comprehensive income (loss)

     115,279        1,171,233        (610,260     830,849   

Net comprehensive income (loss) attributable to noncontrolling interest

     11,952        (148     (17,027     19,060   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net comprehensive income (loss) attributable to Standard

   $ 103,327      $ 1,171,381      $ (593,233   $ 811,789   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to the unaudited condensed combined financial statements are an integral part of these statements.

 

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Standard

UNAUDITED CONDENSED COMBINED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

     Common stock      Additional
paid-in
capital
     Retained
earnings
    Accumulated
other
comprehensive
loss
    Noncontrolling
interest
    Total
shareholders’
equity
 
     Shares      Amount              

Balance at January 1, 2015

     10,500       $ —        $ 5,058,040       $ 10,641,250      $ (75,129   $ 677,496      $ 16,301,657   

Net loss

     —           —           —           (229,403     —          (15,104     (244,507

Foreign currency translation adjustments

     —           —           —           —          (365,753     (1,923     (367,676
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 18, 2015

     10,500       $ —         $ 5,058,040       $ 10,411,847      $ (440,882   $ 660,469      $ 15,689,474   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     Common stock      Additional
paid-in
capital
     Retained
earnings
    Accumulated
other
comprehensive
income (loss)
    Noncontrolling
interest
    Total
shareholders’
equity
 
     Shares      Amount              

Balance at January 1, 2014

     10,500       $ —         $ 5,058,040       $ 8,950,774      $ 904,609      $ 572,901      $ 15,486,324   

Net income

     —           —           —           903,488        —          19,148        922,636   

Shareholder distribution

     —           —           —           (225,168     —          —          (225,168

Foreign currency translation adjustments

     —           —           —           —          (91,787     (88     (91,875
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

     10,500       $ —         $ 5,058,040       $ 9,629,094      $ 812,822      $ 591,961      $ 16,091,917   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to the unaudited condensed combined financial statements are an integral part of these statements.

 

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Standard

UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS

 

     Period from
January 1, 2015
to May 18, 2015
    Six Months ending
June 30, 2014
 

Cash flows from operating activities

    

Net (loss) income

   $ (244,507   $ 922,636   

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities

    

Depreciation and amortization expense

     302,325        353,443   

Deferred income tax benefit

     (193,890     (776,735

Provision for uncertain tax positions

     68,966        67,392   

Insurance proceeds

     150,307        1,095,701   

Gain on fire

     (51,364     (203,575

Loss on disposal of property and equipment

     15,139        51,594   

Change in assets and liabilities

    

Accounts receivable

     (216,359     (325,195

Inventories

     (11,578     (153,339

Prepaid expenses and other current assets

     (431,517     1,639,303   

Accounts payable

     (306,189     207,640   

Accrued expenses and other current liabilities

     342,584        (1,301,634
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (576,083     1,577,231   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures

     (119,425     (2,538,873 )

Insurance Proceeds

     108,959        794,286   

Other

     61,659        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     51,193        (1,744,587 )
  

 

 

   

 

 

 

Cash flows from financing activities

    

Shareholder distribution

     —          (225,168
  

 

 

   

 

 

 

Net cash used in financing activities

     —          (225,168
  

 

 

   

 

 

 

Effect of foreign exchange fluctuations on cash

     558,624        (12,695
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     33,734        (405,219

Cash and cash equivalents, beginning of period

     1,354,155        1,901,613   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,387,889      $ 1,496,394   
  

 

 

   

 

 

 

Supplemental cash flow disclosure

    

Cash paid for income taxes

   $ 9,098      $ 404,494   
  

 

 

   

 

 

 

The accompanying notes to the unaudited condensed combined financial statements are an integral part of these statements.

 

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Standard

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1. Nature of Operations

Standard (the “Company”) includes four commonly-controlled companies: Standard Auto Wreckers, Inc. (“Standard Auto”), End of Life Vehicles Inc. (“End of Life Vehicles”), Goldy Metals (Ottawa) Incorporated (“Goldy Metals Ottawa”) and Goldy Metals Incorporated (“Goldy Metals Toronto”). The Company’s primary business is auto recycling, which is the recovery and resale of original equipment manufacturer (“OEM”) and aftermarket parts, components and systems, such as engines, transmissions, radiators, trunks, lights and seats (referred to as “products”) reclaimed from damaged, totaled or low value vehicles. The Company purchases its vehicles primarily at auto salvage auctions. Upon receipt of vehicles, the Company inventories and then a) dismantles the vehicles and sells the recycled components at its full-service facilities or b) allows retail customers to directly dismantle, recover and purchase recycled parts at its self-service facilities. In addition, the Company purchases recycled OEM parts and related products from third parties for resale and distribution to its customers. The Company’s customers include collision repair shops (body shops), mechanical repair shops, auto dealerships and individual retail customers. The Company also generates a portion of revenue from the sale as scrap of the unusable parts and materials and from the sale of extended warranty contracts.

Standard Auto is incorporated in New York, End of Life Vehicles, Goldy Metals Ottawa and Goldy Metals Toronto all operate in Canada and are incorporated in the Province of Ontario. Collectively, the Company has three full-service dismantling and distribution facilities located in Niagara Falls, New York; Scarborough, Ontario; and Ottawa, Ontario. The Ottawa facility runs a self-service operation adjacent to its full-service operations and Goldy Metals Toronto has a second self-service operation in Scarborough, Ontario. End of Life Vehicles is a website based solution for individuals to arrange for an environmentally responsible disposal of their vehicle.

On May 19, 2015, all four commonly-controlled companies were purchased by Fenix Parts Inc. (“Fenix”) for an approximate purchase price of $46.6 million, subject to working capital and other adjustments. The acquisition did not include the capital stock of Dalana Realty, Inc. (“Dalana Realty”), Standard Auto Wreckers (Port Hope), Inc. (“Port Hope”), or Standard Auto Wreckers (Cornwall) Inc. (“Cornwall”), which was formed by one of the Company shareholders in 2013 to acquire property in Cornwall, Ontario to allow for future expansion. The owners of these entities, who also owned Standard prior to the acquisition by Fenix, entered into lease agreements with Fenix for certain properties on which Fenix conducts its automotive recycling business.

Note 2. Summary of Significant Accounting Policies

Basis of Preparation

These unaudited condensed combined financial statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures typically included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed combined financial statements should be read in conjunction with the audited combined financial statements of Standard and the notes thereto as of and for the year ended December 31, 2014 included in Fenix Parts, Inc.’s prospectus dated May 14, 2015. The Company continues to follow the accounting policies set forth in those combined financial statements. Management believes that these combined interim financial statements include all adjustments, normal and recurring in nature, that are necessary to present fairly the results of its operations and cash flows for period from April 1, 2015 to May 18, 2015, the three months ended June 30, 2014, the period from January 1, 2015 to May 18, 2015, and the six months ended June 30, 2014. Interim results are not necessarily indicative of annual results. All significant intercompany balances and transactions have been eliminated.

The combined financial statements include the accounts of Dalana Realty, the lessor of the premises from which Standard Auto operates. Dalana Realty and Standard Auto share common ownership. In April 2014, Port Hope, an Ontario corporation, was formed by one of the Company’s shareholders to hold new property to be used as a full-service dismantling and distribution facility in Port Hope, Ontario, to replace the Goldy Metals Toronto’s full-service operations in Scarborough which were not restarted after a fire at the facility in March 2014. The combined financial statements also include the accounts of Port Hope.

The Company has determined Dalana Realty and Port Hope are variable interest entities (“VIEs”) because the holders of the equity investment at risk do not have the obligation to absorb its expected losses or receive its residual returns. Furthermore, the Company has determined it is the primary beneficiary of the VIEs because the Company has the power to direct the activities that most significantly impact Dalana Realty’s and Port Hope’s economic performance. The Company consolidates Dalana Realty and Port Hope. All intercompany transactions are eliminated in consolidation, and the VIE’s operating results are attributable to the noncontrolling interest in the Company’s combined statements of operations and all of its shareholder’s equity is reported separately from the Company’s shareholders’ equity in the Company’s combined balance sheets and statements of shareholders’ equity.

 

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Foreign Currency

The assets and liabilities of End of Life Vehicles, Goldy Metals Ottawa, Goldy Metals Toronto and Port Hope, whose functional currency is the Canadian dollar, are translated into US dollars at period-end exchange rates prior to combination. Income and expense items are translated at the average rates of exchange prevailing during the period. The adjustments resulting from translating the Company’s financial statements are reflected as a component of accumulated other comprehensive income within shareholders’ equity. Foreign currency transaction gains and losses are recognized in net earnings based on differences between foreign exchange rates on the transaction date and the settlement date. Transaction gains were $ 5,100 and $4,300 for the period from April 1, 2015 to May 18, 2015 and the three months ended June 30, 2014, respectively, and $5,600 and $4,300 for the period from January 1, 2015 to May 18, 2015 and the six months ended June 30, 2014, and are included in operating expenses on the consolidated statements of operations.

Use of Estimates

The preparation of the Company’s combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the combined financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue from the sale of vehicle replacement products and scrap when they are shipped or picked up by the customers and ownership has transferred, subject to an allowance for estimated returns and discounts that management estimates based upon historical information. Management analyzes historical returns (often pursuant to standard warranties on the sold products) and allowances activity by comparing the items to the original invoice amounts and dates. The Company uses this information to project future returns and allowances on products sold. If actual returns and allowances deviate significantly from the Company’s historical experience, there could be an impact on its operating results in the period of occurrence. The Company has recorded a reserve for estimated returns and discounts of approximately $85,000 at December 31, 2014, within accrued expenses and other current liabilities.

The Company presents taxes assessed by governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenue on the combined statements of operations and are shown as current liabilities on the combined balance sheets until remitted. Revenue also includes amounts billed to customers for shipping and handling.

Revenue from the sale of separately priced extended warranty contracts is reported as deferred revenue and recognized ratably over the term of the contracts or over five years for life-time warranties. Revenue from such extended warranty contracts was approximately $48,000 and $99,000 for the period from April 1, 2015 to May 18, 2015 and the three months ended June 30 2014, respectively, and $98,000 and $202,000 for the period from January 1, 2015 to May 18, 2015 and the six months ended June 30, 2014, respectively.

Net revenues of approximately $2,575,000 and $7,014,000 were reported by the Company’s Canadian entities for the period from April 1, 2015 to May 18, 2015 and the three months ended June 30 2014, respectively. Net revenues of approximately $7,336,000 and $13,518,000 were reported by the Company’s Canadian entities for the period from January 1, 2015 to May 18, 2015 and the six months ended June 30 2014, respectively.

Cost of Goods Sold

Cost of goods sold primarily includes a) amounts paid for the purchase of vehicles and parts for resale, b) related auction, storage and towing fees, and c) other costs of procurement and dismantling, primarily labor and overhead allocable to dismantling operations.

Operating Expenses

Operating expenses are primarily comprised of a) salaries and benefits of employees that are not related to the procurement and dismantling of vehicles, b) facility costs such as rent, utilities, insurance, repairs and taxes not allocated to dismantling operations, c) selling and marketing costs, d) costs to distribute products and scrap and e) other general and administrative costs.

Concentrations

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The majority of cash and cash equivalents are maintained with several major financial institutions. The Company maintains its cash in bank deposit accounts which, at times, may exceed the insurance limits of the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts. Concentrations of credit risk with respect to accounts receivable are limited because a large number of customers make up the Company’s customer base. The Company controls credit risk through tough credit approvals, credit limits and monitoring procedures.

 

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The Company obtains its recycled OEM and related products from damaged, totaled or low value vehicles purchased at salvage auto auctions. For 2015 and 2014, substantially all of the vehicles purchased by the Company for dismantling were acquired at auctions run by two salvage auto auction companies.

Accounts Receivable and Allowance for Doubtful Accounts

In the normal course of business, the Company extends credit to customers after a review of each customer’s credit history. The Company recorded a reserve for uncollectible accounts of approximately $113,000 at December 31, 2014. The reserve is based upon management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable and historical experience. Receivables are written off once collection efforts have been exhausted. Recoveries of accounts receivable previously written off are recorded when received.

Inventories

Inventories consist entirely of recycled OEM and aftermarket products, including car hulls and other materials that will be sold as scrap. Inventory costs are established based upon the price the Company pays for a vehicle, including auction, storage and towing fees, as well as expenditures for buying and dismantling vehicles. After dismantling, the cost assigned to the salvage parts and scrap is determined using the average cost to sales percentage at the Company and applying that percentage to the Company’s inventory at expected selling prices. The average cost to sales percentage is derived from the Company’s historical vehicle profitability for salvage vehicles purchased at auction or procured from other sources.

For all inventories, carrying value is recorded at the lower of cost or market and is reduced to reflect the age of the product and current anticipated demand. If actual demand differs from the Company’s estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged against operations. Renewals and betterments that materially extend the useful life of an asset are capitalized. As property and equipment are sold or retired, the applicable cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss thereon is recognized. Depreciation and amortization expense is calculated using the straight-line method over the estimated useful lives. Depreciation and amortization expense totaled approximately $102,000 and $184,000 for the period from April 1, 2015 to May 18, 2015 and the three months ended June 30, 2014, respectively. Depreciation and amortization expense totaled approximately $302,000 and $353,000 for the period from January 1, 2015 to May 18, 2015 and the six months ended June 30, 2014, respectively. Approximately $2,370,000 of property and equipment, net of accumulated depreciation and amortization, was held by Dalana Realty and Port Hope as of December 31, 2014. Approximately $6,878,000 of property and equipment, net of accumulated depreciation and amortization, was held by the Company’s Canadian entities as of December 31, 2014.

Estimated useful lives are as follows:

 

Buildings

   39 years

Building and Land improvements

   15 years

Office equipment

   3 - 10 years

Vehicles, trailers and yard equipment

   5 - 10 years

Leasehold improvements

   10-15 years or life of lease, if shorter

The Company evaluates the recoverability of the carrying amount of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable based on an analysis of undiscounted cash flows. There were no events or changes in the periods presented.

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company is required to perform an annual impairment review, and more frequently under certain circumstances. Under the qualitative goodwill impairment assessment standard, management evaluates whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If it is determined that it is more likely than not, the Company proceeds with the next step of the impairment test, which compares the fair value of the reporting unit to its carrying value. If the

 

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Company determines through the impairment process that goodwill has been impaired, the Company will record the impairment charge in its results of operations. The Company has elected to perform its annual evaluation of impairment as of December 31. There were no impairment charges related to goodwill during the periods presented.

Income taxes

Income taxes are accounted for under the asset and liability method where deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis and for tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include historical cumulative losses, the forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

The Company recognizes the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions that are more likely than not to be realized. The Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. The Company policy is to include interest and penalties associated with income tax obligations in income tax expense.

Fair Value Measurements

Fair value of financial assets and liabilities are defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date (exit price). The Company is required to classify fair value measurements in one of the following categories:

 

    Level 1 - inputs which are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

    Level 2 - inputs which are defined as inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.

 

    Level 3 - inputs are defined as unobservable inputs for the assets or liabilities. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

Certain assets and liabilities are required to be recorded at fair value on either a recurring or non-recurring basis; however, the Company has no assets or liabilities that require recurring fair value measurements. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants.

The Company’s combined financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The Company’s debt and related party receivables are carried at cost which approximates fair value due to their variable or fixed interest rates, which are consistent with the interest rates in the market.

The Company may be required, on a non-recurring basis, to adjust the carrying value of its property and equipment or goodwill. When necessary, these valuations may be determined by the Company using Level 3 inputs. These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence that impairment may exist. There have been no indicators of impairment during the period from April 1, 2015 to May 18, 2015 and the three months ended June 30, 2014, or the period from January 1, 2015 to May 18, 2015 and the six months ended June 30, 2014.

 

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Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11, Simplifying the Measurement of Inventory, which requires entities to measure inventory at the lower of cost or net realizable value. This guidance for public entities is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting the new standard.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which modifies the evaluation of VIEs, and affects the consolidation analysis of reporting entities involved with VIEs. This guidance for public entities is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact of adopting the new standard.

In August 2014, the FASB issued ASU No. 2014-15 which amends Accounting Standards Codification (“ASC”) Topic 205, Presentation of Financial Statements, to describe management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This guidance will be effective for the Company’s fiscal year ended December 31, 2016. The Company does not expect adoption of this ASU to have a material impact on its combined financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The guidance in this update supersedes nearly all existing revenue recognition guidance under U.S. GAAP and creates a single, principle-based revenue recognition framework that is codified in a new FASB ASC Topic 606. The core principle of this guidance is for the recognition of revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new revenue standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is not permitted other than as of annual reporting periods beginning after December 15, 2016. The new standard allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the transition method that will be elected and the potential effects of the adoption of the new standard on its combined financial statements.

In April 2014, FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends FASB ASC Topic 205, Presentation of Financial Statements, and FASB ASC Topic 360, Property, Plant, and Equipment. This standard amends the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This guidance is effective on a prospective basis for annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued or available for issuance. The Company adopted this standard effective January 1, 2015. Adoption did not have a material impact on the Company’s combined financial statements.

Note 3. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

     December 31,
2014
 

Accrued salaries and employee costs

   $ 140,860   

Reserve for returns and discounts

     84,615   

Income taxes payable

     443,377   

Other liabilities

     518,871   
  

 

 

 
   $ 1,187,723   
  

 

 

 

Note 4. Commitments and Contingencies

Leases

Goldy Metals Toronto pays rent to one of the shareholders under a month to month lease agreement. Lease expense under this operating lease was approximately $9,800 and $16,500 for the period from April 1, 2015 to May 18, 2015 and the three months ended June 30, 2014, respectively. Lease expense under this operating lease was approximately $24,000 and $33,000 for the period from January 1, 2015 to May 18, 2015 and the six months ended June 30, 2014, respectively.

 

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Litigation and Related Contingencies

The Company is subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. The Company currently expects that the resolution of any other contingencies arising from compliance with these laws and regulations will not materially affect its combined financial position, results of operations or cash flows.

The Province of Ontario has filed a civil lawsuit against Goldy Metals Toronto and the owner of the land on which the facility is located claiming damages of CAD $10.5 million plus pre- and post-judgment interest and court costs, for alleged historical and spill-related contamination and property encroachment damage. The lawsuit is currently in the pre-discovery stage and no accrual has been recorded.

Note 5. Income Taxes

For the period from April 1, 2015 to May 18, 2015 and the three months ended June 30, 2014, the effective tax rate was (0.06%) and 1.15%, respectively. For the period from January 1, 2015 to May 18, 2015 and the six months ended June 30, 2014, the effective tax rate was (48.10)% and 3.30%, respectively. The effective tax rates differ from the statutory rate due to the impact of foreign tax rates and changes in uncertain tax positions.

The Company’s gross reserve for uncertain tax positions related to foreign and domestic matters, including penalties and interest, as of December 31, 2014, was approximately $452,000. The Company believes that it has adequately provided for all uncertain tax positions. The Company is generally no longer subject to examination in the Company’s primary tax jurisdiction for tax years through 2011. The Company is not currently subject to any audits or examinations. It is reasonably possible that new issues may be raised by tax authorities and that these issues may require increases in the balance of the reserve for uncertain tax positions.

Note 6. Related-Party Transactions

The Company had related party payables of approximately $2,409,000 at December 31, 2014. These amounts are due to Goldy Metals Holdings, Inc., the majority owner of Dalana Realty, for funds advanced to Dalana Realty and Port Hope for working capital needs, are payable on demand and bear no interest.

The Company had related-party receivables of approximately $256,000 at December 31, 2014. This amount consists of a loan receivable from Goldy Metals Holdings, Inc. of approximately $109,000, a loan receivable of approximately $104,000 from 1321 Erie Rd., a related party through common ownership, and certain advances to shareholders and other related entities of approximately $43,000. These receivables represent advances from the Company to pay various operating expenses of the related parties and are due on demand. None of the receivables bears interest, with the exception of the 1321 Erie Road note which has a fixed rate of 2.5% per annum.

The Company leases one of its Goldy Metals Toronto facilities from a shareholder on a month-to-month basis. Rent is paid at the rate of approximately $6,000 per month and no amounts were payable at December 31, 2014.

Note 7. Fire at Toronto Facility

On March 3, 2014, a fire occurred at the Goldy Metals Toronto facility located in Scarborough, Ontario. The fire destroyed the dismantling facility and a substantial portion of the location’s inventory. The Company received approximately $2,597,000 in insurance proceeds in and recognized a $758,000 gain within other income in the year ended December 31, 2014 as a result of the settlement of lost inventory, damaged buildings and other miscellaneous items from the fire.

For the three months ended June 30, 2014, the Company received insurance proceeds of $1,900,000 which were first applied against the outstanding insurance receivable of $1,122,000. The excess proceeds of $778,000 were offset against additional expenses incurred in the period of $72,000 for a net gain of $706,000. For the six months ended June 30, 2014, the Company received insurance proceeds of $2,036,000, which were offset against impairment and other charges of $1,822,000 for a net gain of $204,000.

For the periods from April 1, 2015 to May 18, 2015, and January 1, 2015 to May 18, 2015, the Company did not incur any additional charges but received insurance recoveries of approximately $52,000 and $259,000, respectively, which was recognized as income when received. As of September 4, 2015, the Company is in process of completing the insurance claim. At this time, the Company is uncertain if it will receive any additional recoveries from the insurance company and expects the amount of any such recoveries to be insignificant.

 

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Note 8. Common Stock

The capital structure of the combined entities as of December 31, 2014, was as follows:

 

     Common stock, no par value      Additional
Paid-
in Capital
 
     Authorized      Issued     

Standard Auto

     1,000         200       $ 1,427,429   

End of Life Vehicles

     unlimited         200         20   

Goldy Metals Ottawa

     unlimited         100         248,873   

Goldy Metals Toronto

     unlimited         10,000         3,381,718   
        

 

 

 
         $ 5,058,040   
        

 

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements

In this section, the words “we,” “ours,” and “us” refer to Fenix Parts, Inc., both before and after the IPO and Combinations unless the context suggests otherwise. From time to time, information provided by the Company or statements made by our employees may contain forward-looking information that involves risks and uncertainties. In particular, statements made in this report on Form 10-Q that are not historical facts (including but not limited to our expectations regarding revenue, business strategy, anticipated operating results and anticipated cash requirements) may be forward-looking statements. Our actual results could differ materially from those set forth in any forward-looking statements. Certain factors that might cause such a difference include those discussed in the section entitled “Risk Factors” contained in our registration statement on Form S-1 that became effective on May 13, 2015. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, it is not possible to foresee or identify all factors that could cause actual results to differ from expected or historical results. As a result, investors should not consider the foregoing factors as an exhaustive statement of all risks, uncertainties, or factors that could potentially cause actual results to differ. In light of these risks, uncertainties and assumptions, the forward-looking items discussed in this report might not occur.

Overview

Fenix was founded in January 2014 to create a leading recycler and reseller of OEM automotive products in the United States and Canada. We completed an initial public offering (“IPO”) of our common stock and acquired the Founding Companies, described below, on May 19, 2015. Our primary business is auto recycling, which is the recovery and resale of insurance quality OEM parts, components and systems reclaimed from damaged, totaled or low value vehicles. We sell recycled OEM products to collision repair shops, also known as body shops, and mechanical repair shops, auto dealerships and individual retail customers through centralized distribution facilities. Our recycled OEM products include mechanical parts used to repair worn or damaged components, such as engines and transmissions, and collision repair parts used to repair vehicles typically involved in a collision, such as door assemblies, trunk lids, lights, fenders and other products. We also sell aftermarket parts. We have nine full-service recycling facilities, concentrated in the Northeastern United States and Southeastern Canada. These locations include Binghamton, NY, Niagara Falls, NY, Pennsburg, PA, Rahway, NJ, Ottawa, Ontario, Port Hope, Ontario, Queensbury, NY, Watertown, NY and Jacksonville, FL. We have four self-service locations, two of which are co-located with full-service facilities. Our self-service locations are in Binghamton, NY, Elmira, NY, Ottawa, Ontario and Scarborough, Ontario. At these self-service locations, we allow retail customers to directly dismantle, recover and purchase recycled OEM products. Once each of our vehicles has been dismantled, we sell as scrap the remaining materials.

We completed our IPO on May 19, 2015 and our 2,000-for-1 common stock split immediately before the closing of the IPO. As a result, all share and per share information presented in our consolidated financial statements has been adjusted to retroactively reflect the common stock split. We raised approximately $110.4 million in gross proceeds from the IPO by selling 13.8 million shares at $8.00 per share and netted $101.3 million in the IPO after paying the underwriter’s discount and other offering costs. The number of shares sold includes 1.8 million sold pursuant to an overallotment agreement with the underwriters.

Concurrently with the closing of our initial public offering, we acquired in the Combinations eleven corporate entities that conduct eight businesses: (i) Don’s Automotive Mall, Inc. (“Don’s”), (ii) Eiss Brothers, Inc. (“Eiss Brothers”), (iii) Gary’s U-Pull It, Inc. (“Gary’s”), (iv) Green Oak Investments LLC dba GO Auto Recycling (“GO Auto”), (v) Horseheads Automotive Recycling, Inc. (“Horseheads”), (vi) Jerry Brown, Ltd. (“Jerry Brown”), (vii) Leesville Auto Wreckers, Inc. (“Leesville”) and (viii) Standard Auto Wreckers, Inc. and its three Canadian affiliates (collectively, “Standard”). All of these companies are collectively referred to as the “Founding Companies.” Don’s, Gary’s and Horseheads are under common control and are referred to collectively as “Beagell Group.” Beagell Group and Standard are referred to collectively as the “co-predecessors.” The Founding Companies were acquired for a combination of cash and shares of our common stock or shares of our subsidiary. A portion of the net proceeds from the IPO, supplemented by new borrowing, was used to pay the $88.1 million cash portion of the consideration at closing in the Combinations.

The accompanying financial statements of Fenix Parts, Inc. as of December 31, 2014 and through May 18, 2015 reflect activities to effect the IPO and the Combinations. These financial statements include the results of the Founding Companies from May 19, 2015 to June 30, 2015. The accompanying financial statements of Beagell Group and Standard, the co-predecessors of Fenix Parts Inc. as of December 31, 2014 and for the period from April 1, 2015 to May 18, 2015, the period from January 1, 2015 to May 18, 2015, and the three and six month periods ended June 30, 2014, reflect the financial position and results of operations of their respective automobile recycling businesses prior to the Combinations.

Sources of Revenue

The historical automobile recycling revenues of the co-predecessors and other Founding Companies and our consolidated revenues after the Combinations consists of: (i) recycled OEM and related products, and (ii) other sources. We sell recycled OEM and related

 

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products to collision repair shops and mechanical repair shops, parts suppliers and individual retail customers through centralized distribution facilities. Our recycled OEM and related products include mechanical parts used to repair worn or damaged components, such as engines, transmissions, transfer cases, air conditioning compressors and knee assemblies, and collision repair parts used to repair vehicles typically involved in a collision, such as doors, lids, gates, front and rear bumpers, and headlights. In addition, we purchase recycled OEM and related products from third parties for resale and distribution to our customers.

Other revenues primarily include the disposal of end of life vehicles and related scrap sales. We obtain scrap metal from several sources, including vehicles that have been used in both our full-service and self-service recycling operations. Other revenues will vary based on fluctuations in commodity prices and the volume of materials sold. We sell extended warranty contracts for certain mechanical products. Revenue from these contracts is deferred and recognized ratably over the term of the contracts, or five years in the case of lifetime warranties.

The demand for our products and services is influenced by several factors, including the number of vehicles on the road, the number of miles being driven, the number and age of drivers, the frequency and severity of vehicle accidents, the age profile of vehicles in accidents, availability and pricing of new OEM parts and local weather conditions.

There is no standard price for many of our products, but rather a pricing structure that varies based upon such factors as product availability, quality, demand, new OEM product prices, the age and mileage of the vehicle from which the part was obtained and competitor pricing.

Cost of Goods Sold

Our cost of goods sold for recycled OEM and related products includes the price we pay for the vehicles we purchase and, where applicable, auction, storage and towing fees. We acquire vehicles for dismantling from several sources, including auto salvage auctions and from the public. Prices for vehicles may be impacted by a variety of factors, including the demand and pricing trends for used vehicles, the number of vehicles designated as “total losses” by insurance companies, the production level of new vehicles, and the status of laws regulating the titling of “total loss” vehicles and the bidders of vehicles at auction. Our cost of goods sold also includes the price we pay to third parties for recycled OEM and related products purchased for resale and labor and other costs we incur to acquire and dismantle vehicles.

Some of our mechanical products are sold with a warranty against defects which could result in product returns. We record the estimated returns reserves at the time of sale using historical returns information to project future returns and related expenses.

Expenses

Our facility expenses primarily consist of costs of operations and distribution. These costs include (1) wages for the operating management, facility and distribution personnel, related incentive compensation and employee benefits; (2) costs to occupy and operate the facility including rent, utilities, insurance and taxes; (3) repairs and maintenance costs related to our facilities and equipment; and (4) other facility expenses. Our distribution and operations expenses are integral to the operation of each facility and primarily include our costs to prepare and deliver our products to our customers. These costs include labor costs for drivers, fuel, third party freight costs, local delivery and transfer truck leases or rentals and related repairs and maintenance, insurance, and supplies. The costs included in facility expenses do not relate to vehicle purchasing and to the dismantling process and, therefore, are classified below the gross margin line on our statement of operations.

Our selling and marketing expenses primarily include salary, commission and other incentive compensation expenses for sales personnel, advertising, promotion and marketing costs, telephone and other communication expenses, credit card fees and bad debt expense. Most of our product sales personnel are paid on a commission basis. The size and quality of our sales force are critical to our ability to respond to our customers’ needs and increase our sales volume.

Our general and administrative expenses primarily include the costs of our corporate offices and field support services center that provide field management, treasury, accounting, legal, payroll, business development, human resources and information systems functions. These costs include wages and benefits for corporate, regional and administrative personnel, stock-based compensation and other incentive compensation, IT system support and maintenance expenses, accounting, legal and other professional fees, and supplies. Prior to the IPO, general and administrative expenses also included acquisition related costs and legal, accounting and other fees. After the IPO and Combinations, general and administrative expenses include expenses associated with our operation as a public company, including audit, legal, accounting, investor relations and rent.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon both the individual consolidated or combined financial statements of Fenix Parts, Inc. (prior to the IPO and Combinations) and the co-predecessors, as well as a discussion of the actual results of operations since the Combinations and certain pro forma results of operations for the Company as if

 

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the Combinations and IPO had taken place on January 1, 2014, all of which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an on going basis, we evaluate our estimates, assumptions and judgments including those related to revenue recognition, warranty costs, inventory valuation, allowance for doubtful accounts, goodwill impairments, self-insurance programs, contingencies, asset impairments and taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities and our recognition of revenue that is not readily apparent from other sources. Actual results may differ from these estimates.

Revenue Recognition

For our recycled OEM and related products, we recognize and report revenue from the sale of recycled OEM and related products when they are shipped or picked up by the customers and ownership has transferred, subject to an allowance for estimated returns (often pursuant to standard warranties on sold products), discounts and allowances that management estimates based upon historical information. We analyze historical returns and allowances activity by comparing the items to the original invoice amounts and dates. We use this information to project future returns and allowances on products sold. If actual returns and allowances are higher than our historical experience, there would be an adverse impact on our operating results in the period of occurrence. For an additional fee, we also sell extended warranty contracts for certain mechanical products. Revenue from these contracts is deferred and recognized ratably over the term of the contracts, or five years in the case of lifetime warranties.

For our other services revenue, we recognize revenue from the sale of scrap, cores and other metals when ownership has transferred, which typically occurs upon delivery to the customer.

Inventory Accounting

Our recycled OEM and related product inventory cost is established based upon the price we pay for a vehicle, including auction, storage and towing fees, as well as expenditures for buying and dismantling vehicles. After dismantling, the cost assigned to salvaged parts and scrap is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility’s inventory at expected selling prices. The average cost to sales percentage is derived from each facility’s historical vehicle profitability for salvage vehicles purchased at auction or from contracted rates for salvage vehicles acquired under certain direct procurement arrangements.

For all inventories, carrying value is recorded at the lower of cost or market and is reduced to reflect the age of the inventory and current anticipated demand. If actual demand differs from our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made. 

Business Combinations

We record our acquisitions, under the acquisition method of accounting, under which most of the assets acquired and liabilities assumed are initially recorded at their respective fair values and any excess purchase price is reflected as goodwill. We utilize management estimates and, in some instances, independent third-party valuation firms to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration, if any. Such estimates and valuations require us to make significant assumptions, including projections of future events and operating performance.

We make assumptions about the value of tangible assets purchased in the Combinations, particularly for inventory and property and equipment. Inventory in the Combinations was marked up to 90% of its estimated selling price representing the inventory’s cost and estimated related profit margin. Selling costs and related profit margin were estimated at all Founding Companies to be 10%. The acquired inventory is expected to be sold within six to nine months. Assumptions for property and equipment valuation, which are based on cost and market approaches, are primarily data from industry databases and dealers on current costs of new equipment and information about the useful lives and age of the equipment. The remaining useful life of property and equipment is determined based on historical experience using such assets and varies from 3-6 years depending on the Founding Company and nature of the assets. All property and equipment is depreciated using the straight-line method.

The fair value of customer relationships and trade names acquired in business combinations are based on a number of significant assumptions. Trade names are valued using a “relief from royalty” method, which models cash savings from owning intangible assets as compared to paying a third party for their use. Descriptions of the inputs into this method, and the estimates or ranges of these inputs used for all of the Combinations are as follows:

 

Compound annual revenue growth rate over term of use

     3% - 6.2

Percentage of revenue attributable to trade name in forecast year

     20% - 100

Royalty rate

     2 %

Discount rate

     11.5% - 14

Tax rate

     38.6% - 40.9

 

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The expected useful life of trade names, which we have established as five years, is based on our planned timeframe for using the existing trade names we purchased in the Combinations. We amortize such trade names using the straight-line method as no other method of amortization is more representative of our usage of these assets.

Customer relationships are valued using an income approach called the multi-period excess earnings method, a form of discounted cash flow that estimates revenues and cash flows derived from the use of the intangible asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as other intangible assets or property and equipment, that contributed to the generation of the cash flows to arrive at cash flows attributable solely to the intangible asset being valued. Descriptions of the inputs into this method, and the estimates or ranges of these inputs used for all of the Combinations are as follows:

 

Compound annual revenue growth rate in forecast period

     2.1% - 3.1

Annual customer attrition rate

     10

Gross Margin in forecast period

     29.9% - 48.1

Contributory asset charges as a percentage of revenue

     0.0% - 2.6

Discount rate

     12.5% - 16.0

Tax rate

     38.6% - 40.9

The expected useful life of customer relationships is established as 15 years, which is the period over which these assets are expected to reasonably contribute to future cash flows. We amortize such customer relationships using an accelerated method that reflects a greater relative contribution to future cash flows in the earlier years of the assets’ useful lives.

We also make assumptions to value off-market leases we entered into as part of the Combinations. Such leases are recorded as assets or liabilities when applying the acquisition method and we amortize these assets or liabilities over the 15 year life of the leases so that aggregate rent expense reflects market rates. Amounts relating to off-market leases that are recorded under the acquisition method are calculated based on a cost approach to value the land and buildings on a fee simple basis and then by applying a capitalization rate to that value to calculate a market rate. Cost estimates are obtained by analyzing recent sales transactions for similar properties.

The estimated fair values are subject to change during the measurement period, which is limited to one year subsequent to the acquisition date.

For certain acquisitions, we issued contingent consideration under which additional payments will be made to the former owners if specified future events occur or conditions are met, such as meeting profitability or earnings targets. Each contingent consideration obligation is measured at the acquisition date fair value of the consideration, which is determined using the discounted expected cash flows for those contingent payments that will be made in cash. For payments in stock, the fair value at the balance sheet date is based on the fair value of the stock and the probability of reaching a particular contingent milestone. At each subsequent reporting period, we measure the liability at fair value and record any changes to the fair value. The fair value measurement of the liability is performed by our corporate accounting department using current information about key assumptions, with the input from our sales and operating management. Each reporting period, we evaluate the performance of the business compared to our previous expectations, along with any changes to our future projections, and update the estimated cash flows accordingly. In addition, we consider changes to our cost of capital and changes to the probability of achieving the contingent payment targets when updating our estimates.

Goodwill Impairment

We are required to assess our goodwill for impairment at least annually for each reporting unit that carries goodwill. We may elect to first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit’s fair value is in excess of its carrying value. If not, or if we elect to not perform a qualitative assessment, we then perform a quantitative impairment test. The first step of the quantitative test includes us estimating the fair value of the reporting unit and comparing that estimated fair value to the reporting unit’s carrying value. If fair value exceeds carrying value, then no impairment is deemed to exist. Otherwise, we proceed to the second step and use that estimated fair value as a hypothetical purchase price for the reporting unit to determine the resulting “implied” goodwill (computed similarly to how goodwill is computed under acquisition accounting described above). An excess of a reporting unit’s recorded goodwill over its “implied” goodwill is reported as an impairment charge. We perform goodwill impairment tests annually in the fourth quarter and between annual tests whenever events or circumstances indicate that an impairment may exist. We are required to evaluate events and circumstances that may affect the performance of the reporting unit and the extent to which the events and circumstances may impact the future cash flows of the reporting unit.

Our reporting unit fair value estimates are established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach. We believe that using two methods to determine fair value limits the chances of an unrepresentative valuation. Nonetheless, these valuations are subject to significant subjectivity and assumptions, including estimates of future sales growth rates, gross margin patterns, changes in operating expenses, terminal values, discount rates and comparable companies. Changes in such assumptions or estimates may require us to record goodwill impairment charges.

 

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Impairment of Long-Lived Assets

We evaluate the carrying value of intangible assets, such as trade names and customer relationships, and other long lived assets for impairment whenever indicators of impairment exist. We test these assets for recoverability by comparing the net carrying value of the asset or asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset or asset group. If the assets are recoverable, an impairment loss does not exist and no loss is recorded. If the assets are not recoverable, an impairment loss is recognized for any deficiency of the asset or asset group’s fair value compared to their carrying value. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage our business, there is significant judgment in determining the cash flows attributable to these assets, including markets and market share, sales volumes and mix, capital spending and working capital changes.

Accounting for Income Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of our assets and liabilities and for certain tax credit carryforwards. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, we believe it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience, expectations of future taxable income, the ability to carryback losses and other relevant factors.

In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements.

The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes may be required. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained if challenged by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period may be materially affected. An unfavorable tax settlement would require cash payments and may result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.

Share-based compensation

We measure share-based compensation expense at the grant date based on the fair value of the award. We recognize the expense for service-based share awards over the appropriate service period on a straight-line basis, net of estimated forfeitures.

The fair value of service-based restricted stock units and restricted stock awards is measured at their underlying closing share price on the date of grant.

Recently Issued Accounting Pronouncements

See Note 2, “Recent Accounting Pronouncements” of the Notes to Unaudited Condensed Consolidated Financial Statements for Fenix Parts, Inc.

 

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Fenix Parts, Inc.

Overview

Fenix was founded on January 2, 2014 for the purpose of effecting the Combinations and IPO. Fenix had no automobile recycling operations before May 2015 during which time it had two employees. From inception to May 19, 2015, Fenix incurred various legal, accounting and administrative costs in preparation for its IPO, the Combinations and to reassure Fenix’s continued viability upon consummation of these transactions. After May 18, 2015, Fenix’s results include the operations of the acquired businesses. All discussions below relating to the six month period ended June 30, 2014 for Fenix Parts, Inc. refer to inception (January 2, 2014) to June 30, 2014.

Results of Operations

Net revenue for the three- and six-months ended June 30, 2015 was $11.5 million and this result reflects the automobile recycling operations of Fenix from May 19 to June 30, 2015. Prior to May 19, the operations of Fenix consisted of activities to affect the IPO and complete the Combinations with the Founding Companies. On a pro forma basis assuming the Combinations occurred on January 1, 2014, revenues for the three months ended June 30, 2015 and 2014 were $25.6 million and $27.3 million, respectively, representing a 6.2% decrease. On a pro forma basis for the six month period ending June 30, 2015 and 2014 revenues were and $50.3 million and $54.1 million, respectively, representing a 7.0% decrease. The decreases in revenues in the three and six month periods ended June 30, 2015 compared to the same periods in 2014 relate to lower prices for scrap sales and foreign currency effects on revenues at the Canadian operations. Pro forma net revenue for the three months ended June 30, 2015 was 3.7% higher than pro forma net revenue for the three month period ended March 31, 2015 due primarily to volume increases in scrap sales.

Net loss for the three and six months ended June 30, 2015 was $4.0 million and $6.6 million, respectively. On a pro forma basis assuming the Combinations occurred on January 1, 2014, the net loss for the three months ended June 30, 2015 and 2014 was $3.3 million and $0.7 million, respectively. The increase in the net loss is primarily attributed to costs incurred in 2015 for accounting, auditing and other corporate functions that were not incurred in the first half of 2014. On a pro forma basis, the net loss for the six months ended June 30, 2015 and 2014 was $6.5 million and $0.4 million, respectively, and the increase in this net loss is also primarily attributable to accounting, auditing and other corporate expenses in 2015 that were not incurred in 2014. Both the three and six month periods ended June 30, 2015 were also affected by lower margins in the period from May 19 to June 30, 2015 as cost of goods sold include the adjustment and subsequent amortization of higher inventory values from applying the purchase method of accounting to the acquired inventories of the Founding Companies. The 2014 margins do not include this effect.

Fenix is subject to risks and uncertainties relating to foreign currency exchange rates. Because the Company has operations in Canada, the continuation of the current strengthening in the U.S. Dollar relative to the Canadian Dollar could adversely affect our results of operations.

Fenix is also subject to risks and uncertainties relating to the price of scrap metal. While sales of scrap metal represents a small portion of our overall sales, continued weakness in metals prices could adversely affect our revenues and profits. This trend should be viewed in light of the offsetting effect of lower metals prices on our cost of vehicles.

Liquidity and Capital Resources

Fenix’s source of funding was capital raises of $2.1 million of cash through May 19, 2015 from a small group of investors, at which time the Company completed the IPO, raising approximately $102.7 million after deducting underwriting discounts.

Net cash used in operating activities totaled $6.7 million and $0.3 million for the six months ended June 30, 2015 and 2014, respectively. The later period includes cash flows from the Founding Companies from May 19 to June 30, 2015.

Net cash used in investing activities totaled $85.8 million and $0 for the six months ended June 30, 2015 and 2014, respectively. Investing activities in the six months ended June 30, 2015 consist of the cash used to purchase the Founding Companies and the capital expenditures associated with the automobile recycling operations after the Combinations. There were no capital expenditures in the six months ended June 30, 2014 prior to the IPO and Combinations.

Net cash provided by financing activities totaled $111.2 million and $2 million for the six months ended June 30, 2015 and 2014, respectively. The company raised $102.7 million, net of underwriting discounts, with the IPO and borrowed $10 million on its credit facility to fund the acquisition of the funding companies.

Fenix’s primary sources of ongoing liquidity are cash flows from our operations. In addition, we have entered into a $35.0 million senior secured credit facility with BMO Harris Bank N.A. under which we have borrowed $10.0 million and utilized $5.9 million of letters of credit on the closing date of the Combinations. The Company does not expect to utilize the credit facility as a primary source of funding for working capital needs and expects cash flows from operations to be sufficient for that purpose.

The procurement of inventory is the Company’s largest operating use of funds. Fenix normally pays for vehicles acquired at salvage auctions and under some direct procurement arrangements at the time that possession is taken of the vehicles.

As part of the consideration for certain of the Combinations, Fenix entered into contingent consideration agreements with certain of the selling shareholders. Under the terms of the contingent consideration agreements, additional payments will be made to the former owners if specified future events occur or conditions are met, such as meeting profitability or earnings targets. For the Combination with Jerry Brown, Fenix is required to pay (a) up to an additional $1.75 million if the business achieves certain revenue targets during the twelve-month period beginning with the month following the month of closing of this offering and (b) an additional, uncapped amount if the business achieves certain EBITDA targets during 2016. Based on an evaluation of the likelihood of meeting these performance targets, the Company recorded a liability for the Combination date fair value of the contingent consideration of $2.2 million. Fenix expects to fund these payments through either cash generated from operations or through draws on the revolving credit facility.

The Combination Agreements for Eiss Brothers and the Canadian Founding Companies provide for a holdback of Combination Consideration which will be payable only if certain performance hurdles are achieved. The maximum amount of consideration that is subject to holdback for Eiss Brothers is $245,000 in cash plus 11,667 shares of our common stock, of which none, some or all will be released to Eiss Brothers depending upon its EBITDA during the twelve-month period beginning with the month following the month of the closing of this offering. The maximum amount of consideration that is subject to holdback for the Canadian Founding Companies is $5.9 million in cash (or, at the Company’s option, in the form of a letter of credit under our credit facility) plus 280,000 Exchangeable Preferred Shares, of which, none, some or all will be released to the Canadian Founding Companies depending on their combined revenues from specific types of sales for the twelve-month period beginning with the month following the month of the closing of this offering. Based on our evaluation of the likelihood of meeting these performance targets, a liability was recorded for the Combination date fair value of the contingent consideration of $8.0 million, of which the present value of the cash portion is $5.9 million. Fenix expects to fund the related cash payments through either cash generated from operations or through draws on our credit facility.

 

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Fenix intends to continue to evaluate markets for potential growth through selected business acquisitions and the internal development of distribution and dismantling facilities. Future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of our future business acquisitions and our internal development efforts. The Company expects our credit facility to provide additional sources of liquidity to fund acquisitions.

Fenix believes that cash and equivalents, cash provided by operating activities and funds available from bank borrowings will be sufficient to meet our current operating and capital requirements, although such sources may not be sufficient for future acquisitions depending on their size. From time to time, the Company may need to raise additional funds through public or private financing, or other arrangements. There can be no assurance that additional funding, or refinancing of our credit facility, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Failure to raise capital if and when needed could have a material adverse impact on our business, operating results, and financial condition.

Contractual Obligations and Commercial Commitments

Operating leases with the former owners of the Founding Companies, have terms of 15 years with options for additional renewals. The sub lease for office space has a term of May 1, 2015 to September 30, 2018. Cash payments for rent under this lease, future payments on debt obligations, and future contingent consideration payments described above by year are:

 

     Rest of 2015      2016      2017      2018      2019      Thereafter
through 2030
 

Operating leases

   $ 1,133,315       $ 1,916,502       $ 1,955,633       $ 2,093,404       $ 2,127,720       $ 26,548,122   

Debt obligations

     250,000         975,000         1,100,000         1,000,000         1,000,000         5,750,000   

Consulting obligations

     229,000         430,000         405,000         241,000         80,000         840,000   

Contingent consideration liabilities

     —           11,033,000            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,612,315       $ 14,354,502       $ 3,460,633       $ 3,334,404       $ 3,207,720       $ 33,138,122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Approximately $8.6 million of contingent consideration is payable in cash.

Beagell Group

Overview

The Beagell Group, a co-predecessor, includes three commonly-controlled companies: Don’s, Gary’s and Horseheads. Don’s and Gary’s were founded in 1979 in Binghamton, New York, and Horseheads was founded in 1990 in Elmira, New York. Don’s sells recycled OEM products through its two full-service dismantling and distribution facilities located in Binghamton, New York and Pennsburg, Pennsylvania. As of May 18, 2015, Don’s operated a total of six dismantling bays and had approximately 81 full-time employees. Gary’s and Horseheads sell recycled OEM products through their self-service facilities in Binghamton and Elmira, New York. As of May 18, 2015, Gary’s and Horseheads together had approximately 39 additional employees.

Results of Operations for the period from April 1, 2015 to May 18, 2015 and the Three Months Ended June 30, 2014

Revenue

Revenue decreased by $3.7 million, or 48.0%, to $4.1 million for the period from April 1, 2015 to May 18, 2015 from $7.8 million for the three months ended June 30, 2014. The decrease in revenue was due to the shortened period and lower revenue at the self-service operations primarily from lower scrap sales.

Cost of Goods Sold

Cost of goods sold decreased by $2.7 million, or 51.7%, to $2.5 million for the period from April 1, 2015 to May 18, 2015 from $5.2 million for the three months ended June 30, 2014. The decrease in cost of goods sold resulted primarily from there being less days in the 2015 period compared to 2014. As a percentage of revenue, cost of goods sold decreased to 62.5% of revenue for the period from April 1, 2015 to May 18, 2015 compared to 67.4% of revenue for the three months ended June 30, 2014.

Operating Expenses

Operating expenses decreased by $489,000, or 25.7%, to $1.4 million for the period from April 1, 2015 to May 18, 2015 from $1.9 million for the three months ended June 30, 2014. The decreased operating expenses resulted primarily from there being less days in the 2015 period compared to 2014, partially offset by higher overall payroll and medical costs.

Net Income

Net income decreased by $390,000, or 72.8%, to $146,000 for the period from April 1, 2015 to May 18, 2015 from $536,000 for the three months ended June 30, 2014. This decrease was primarily due to the reductions in revenue and gross profit described above and higher operating expenses, as well as there being less days in the 2015 period compared to 2014. As a percentage of revenue, net income decreased to 3.6% of revenue in the period from April 1, 2015 to May 18, 2015 compared to 6.9% of revenue in the three months ended June 30, 2014.

 

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Results of Operations for the period from January 1, 2015 to May 18, 2015 and the Six Months Ended June 30, 2014

Revenue

Revenue decreased by $4.1 million, or 27.0%, to $11.1 million for the period from January 1, 2015 to May 18, 2015 from $15.2 million for the six months ended June 30, 2014. The decrease in revenue was due to an increase of recycled parts sales at the full-service location that was more than offset by lower revenue at the self-service operations primarily due to lower scrap sales, as well as there being less days in the 2015 period compared to 2014.

Cost of Goods Sold

Cost of goods sold decreased by $2.9 million, or 28.0%, to $7.4 million for the period from January 1, 2015 to May 18, 2015 from $10.3 million for the six months ended June 30, 2014. The decrease in cost of goods sold resulted primarily from of the cost impact of lower scrap sales, as well as there being less days in the 2015 period compared to 2014. As a percentage of revenue, cost of goods sold decreased to 66.6% of revenue for the period from January 1, 2015 to May 18, 2015 compared to 67.5% of revenue for the six months ended June 30, 2014.

Operating Expenses

Operating expenses decreased by $277,000, or 8.0%, to $3.2 million for the period from January 1, 2015 to May 18, 2015 from $3.5 million for the six months ended June 30, 2014. The increased operating expenses resulted primarily from higher overall payroll costs and medical costs, partially offset by there being less days in the 2015 period compared to 2014.

Net Income

Net income decreased by $855,000, or 62.4%, to $516,000 for the period from January 1, 2015 to May 18, 2015 from $1.4 million for the six months ended June 30, 2014. This decrease was primarily due to the reductions in revenue and gross profit described above and higher operating expenses, as well as there being less days in the 2015 period compared to 2014. As a percentage of revenue, net income decreased to 4.6% of revenue in the period from January 1, 2015 to May 18, 2015 compared to 9.0% of revenue in the six months ended June 30, 2014.

Liquidity and Capital Resources

Sources of ongoing liquidity are cash flows from operations. Net cash provided by operating activities totaled $477,000 for the period from January 1, 2015 to May 18, 2015, compared to $2.0 million for the six months ended June 30, 2014. The lower cash from operating activities resulted mostly from a decrease in net income. Inventory is the largest operating use of cash.

Net cash provided by investing activities was approximately $803,000 for the period from January 1, 2015 to May 18, 2015, compared to $146,000 used for the six months ended June 30, 2014.

Net cash used in financing activities was $1.9 million for the period from January 1, 2015 to May 18, 2015, compared to $912,000 for the six months ended June 30, 2014. The change in cash used in financing activities primarily resulted from more shareholder distributions in the period from January 1, 2015 to May 18, 2015.

Standard

Overview

Standard Auto Wreckers, Inc., was founded in 2005, in Niagara Falls, New York; End of Life Vehicles Inc. was founded in 2007 in Toronto, Ontario; Goldy Metals Incorporated was founded in 1979 in Toronto, Ontario; and Goldy Metals (Ottawa) Incorporated was founded in 2013 in Ottawa, Ontario. We collectively refer to Standard Auto Wreckers, Inc. and its three Canadian affiliates as “Standard” and consider it a co-predecessor company.

Standard sells recycled OEM products through three full-service dismantling and distribution facilities located in Niagara Falls, New York; Port Hope, Ontario; and Ottawa, Ontario. As of May 18, 2015, Standard operated a total of 22 dismantling bays and had 191 full-time employees. Ottawa facilities run self-service operations adjacent to the full-service operation. An additional full-service dismantling and distribution facility with 12 dismantling bays was added in Port Hope, Ontario in 2014 to replace the Scarborough full-service operation and allow for the expansion of the self-service operation.

 

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Results of Operations for the period from April 1, 2015 to May 18, 2015 Compared to the Three Months Ended June 30, 2014

Revenue

Revenue decreased by $4.6 million, or 58.4%, to $3.3 million for the period from April 1, 2015 to May 18, 2015 from $8.0 million for the three months ended June 30, 2014. The decrease in revenue during the 2015 period was primarily due to lower scrap prices, which negatively impacted self-service operations, and standard’s decision to accumulate scrap with a view to selling it when scrap prices stabilize, as well as there being less days in the 2015 period compared to 2014.

Cost of Goods Sold

Cost of goods sold decreased by $2.2 million, or 47.7%, to $2.5 million for the period from April 1, 2015 to May 18, 2015 from $4.7 million for the three months ended June 30, 2014. The lower cost of goods sold resulted primarily from the decrease in revenue as a result of there being less days in the 2015 period compared to 2014. As a percentage of revenue, cost of goods sold increased to 74.6% of revenue for the period from April 1, 2015 to May 18, 2015 compared to 59.4% of revenue for the three months ended June 30, 2014.

Operating Expenses

Operating expenses decreased by $1.8 million, or 57.2%, to $1.3 million for the period from April 1, 2015 to May 18, 2015 from $3.1 million for the three months ended June 30, 2014. The lower operating expenses resulted primarily from there being less days in the 2015 period compared to 2014.

Net Income

Net income decreased by $1.3 million to a net loss of $0.5 million for the period from April 1, 2015 to May 18, 2015 from net income of $0.8 million for the three months ended June 30, 2014. In the three months ended June 30, 2014 the Company recorded approximately $0.7 million in gains related to the Toronto fire, net of related expense. In the three months period from April 1, 2015 to May 18, 2015, the Company recorded recoveries of $0.1 million related to the Toronto fire.

Results of Operations for the period from January 1, 2015 to May 18, 2015 Compared to the Six Months Ended June 30, 2014

Revenue

Revenue decreased by $6.6 million, or 42.4%, to $8.9 million for the period from January 1, 2015 to May 18, 2015 from $15.5 million for the six months ended June 30, 2014. The decrease in revenue was primarily due to there being less days in the 2015 period compared to 2014.

Cost of Goods Sold

Cost of goods sold decreased by $4.2 million, or 42.4%, to $6.0 million for the period from January 1, 2015 to May 18, 2015 from $10.2 million for the six months ended June 30, 2014. The lower cost of goods sold resulted primarily from the decrease in revenue as a result of there being less days in the 2015 period compared to 2014. As a percentage of revenue, cost of goods sold increased to 67.3% of revenue for the period from January 1, 2015 to May 18, 2015 compared to 65.9% of revenue for the six months ended June 30, 2014.

Operating Expenses

Operating expenses decreased by $1.1 million, or 24.4%, to $3.4 million for the period from January 1, 2015 to May 18, 2015 from $4.5 million for the six months ended June 30, 2014. The lower operating expenses resulted primarily from there being less days in 2015 period compared to 2014, partially offset by expenses incurred related to organic growth.

Net Income

Net income decreased by $1.2 million to a net loss of $0.3 million for the period from January 1, 2015 to May 18, 2015 from net income of $0.9 million for the six months ended June 30, 2014. This decrease was primarily due to a fire-related gain recorded in 2014 in other income. In the six months ended June 30, 2014 the Company recorded approximately $0.2 million in gains related to the Toronto fire, net of insurance recoveries. In the period from January 1, 2015 to May 18, 2015, the Company recorded recoveries of $0.3 million related to the Toronto fire.

Liquidity and Capital Resources

Sources of ongoing liquidity are cash flows from operations. Net cash used in operating activities totaled $0.6 million for the period from January 1, 2015 to May 18, 2015, compared to net cash provided by operating activities of $1.6 million for the six months

 

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ended June 30, 2014. The lower cash provided by operating activities for the six months ending June 30, 2014 was primarily due to a reduction in net income and insurance proceeds. Inventory is the largest operating use of cash and, as of December 31, 2014, $11.1 million of inventory was on hand.

Net cash provided by investing activities was $0.1 million for the period from January 1, 2015 to May 18, 2015, compared to a use of $1.7 million for the six months ended June 30, 2014. The reduction in cash used in investing activities is due primarily to lower capital spending.

Net cash used in financing activities was $0 for the period from January 1, 2015 to May 18, 2015, compared to a use of $0.2 million for the six months ended June 30, 2014. The change in cash used in financing activities primarily resulted from payment of dividends in 2014.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our results of operations are exposed to market risk related to price fluctuations in scrap metal and other metals. Market prices of these metals affect the amount that we pay for our inventory as well as the revenue that we generate from sales of these metals. As both our revenue and costs are affected by the price fluctuations, we have a natural hedge against the changes. However, there is typically a lag between the effect on our revenue from metal price fluctuations and inventory cost changes. Therefore, we can experience positive or negative gross margin effects in periods of rising or falling metal prices, particularly when such prices move rapidly. If market prices were to fall at a greater rate than our vehicle acquisition costs, we could experience a decline in our gross margins.

Our earnings are affected by changes in interest rates due to the fact that interest on our credit facility is calculated based upon a base rate plus an applicable margin. For our U.S. borrowings, the base rate is the highest of (i) the rate BMO Harris Bank N.A. announces as its “prime rate,” (ii) 0.50% above the rate on overnight federal funds transactions or (iii) the London Interbank Offered Rate (LIBOR) for an interest period of one month plus 1.00%.is either the lender’s “prime rate” LIBOR or Prime Rate plus an applicable margin as of June 30, 2015. The applicable margin is based on our total leverage ratio. The initial margin for interest rates on U.S. borrowings under the credit facility is 2.00% on LIBOR loans and 1.00% on base rate loans.

The Canadian borrowings under the credit facility bear interest at fluctuating rates determined quarterly, at the Company’s election in advance for any applicable interest period, by reference to the “Canadian base rate” plus the applicable margin within the relevant range of margins provided in the term sheet. The Canadian base rate is the higher of (i) the rate the Bank of Montreal announces as its “reference rate,” or (ii) the Canadian Dollar Offered Rate (CDOR) for an interest period equal to the term of any applicable borrowing plus 0.50%. The applicable margin is based on our total leverage ratio. The initial margin for interest rates on Canadian borrowings under the credit facility is 1.00% on base rate loans.

Our operations in Canada are also exposed to changes in the relationship between the U.S. dollar and the Canadian dollar. As both our revenue and costs are affected by the price fluctuations, we have a natural hedge against the changes.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management establishes and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. This information is intended to be accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2015, the end of the period covered by this report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting. These material weaknesses were attributable to the Company’s and the Founding Companies’ lack of accounting personnel with an appropriate level of accounting knowledge, experience and training commensurate with our financial reporting requirements, as previously disclosed in our final prospectus dated May 14, 2015 (the “Final Prospectus”) included in our Registration Statement on Form S-1 filed on April 8, 2015 and declared effective on May 13, 2015 (Registration No. 333-203296) (the “Registration Statement”) and in our previously filed Form 10-Q for the period ended March 31, 2015.

We acquired the Founding Companies on May 19, 2015 concurrently with the closing of the initial public offering of our common stock. Since that time, we have initiated and are continuing to make various efforts to remediate these weaknesses in our internal control, as further disclosed in the Final Prospectus.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition and results of operations, and the trading price of our common stock. Please refer to our Final Prospectus, filed with the SEC on May 15, 2015, for information concerning the risks and uncertainties that could negatively impact us. The following represents changes and/or additions to the risks and uncertainties previously disclosed.

We operate in foreign jurisdictions, which exposes us to foreign exchange and other risks.

We have operations in Canada. Our Canadian operations expose us to additional risks associated with international business, which could have an adverse effect on our business, results of operations and/or financial condition. We also incur costs at our Canadian operations in Canadian Dollars. We are thus subject to foreign exchange exposure, as well as exposure to foreign tax and other foreign and domestic laws.

 

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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

The Company was formed and initially capitalized in January 2014 when an aggregate of 1,800,000 shares of our common stock were issued and sold to five investors for the nominal cash consideration of $0.001 per share.

In March and April 2014, the Company issued and sold an aggregate of 402,000 shares of common stock to 13 investors for a purchase price of $5.00 per share.

During the period of September 2014 through May 14, 2015, the Company issued and sold an aggregate of 562,923 shares of common stock to 37 investors for an ultimate purchase price of $6.50 per share.

All share and price per share numbers above have been adjusted to reflect the 2,000-for-1 common stock split that occurred immediately prior to the closing of our initial public offering.

No underwriters were involved in these sales of unregistered shares of common stock.

Use of Proceeds

On May 14, 2015, the Company priced the initial public offering of our common stock. Under the Registration Statement, the Company registered, issued and sold 13,800,000 shares of our common stock, including 1,800,000 shares issued pursuant to the exercise of the underwriters’ over-allotment option, at a price to the public of $8.00 per share for an aggregate offering price of $110.4 million. The offering closed on May 19, 2015, and the underwriters’ exercise of their overallotment option closed on May 22, 2015.

BMO Capital Markets and Stifel acted as joint book-running managers for the offering. BB&T Capital Markets and Barrington Research acted as co-managers.

The Company received net proceeds in the offering, including net proceeds from the exercise of the underwriters’ option, of approximately $102.0 million after deducting underwriting discounts and commissions of approximately $6.72 million and offering-related expenses of approximately $1.4 million. The offering-related expenses included approximately $350,000 in legal fees paid to our counsel, Johnson and Colmar, one of whose partners is our assistant secretary. With this exception, all of our offering-related expenses were direct or indirect payments to persons other than (i) directors, officers or any of their associates; (ii) persons owning 10% or more of our common stock; or (iii) affiliates. The foregoing expenses are a reasonable estimate of the expenses incurred by us in the offering and do not represent the exact amount of expenses incurred.

A portion of the net proceeds received in the offering was used to fund the approximately $88.1 million cash portion of the consideration paid in the combinations with founding companies, including $6.8 million in cash for adjustments required under the combination agreements with the founding companies. The balance of the net proceeds will be used for the acquisitions of additional automotive recycling businesses and for general corporate purposes.

There has been no material change in the use of proceeds from the initial public offering as described in the Registration Statement under “Use of Proceeds.”

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

Exhibit

Number

  

Description of Exhibit

  31.1    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32*    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PR    XBRL Taxonomy Extension Presentation Linkbase Document.

 

* This certification is deemed not “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

 

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SIGNATURES

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

 

    Fenix Parts, Inc.
Dated: September 14, 2015     By:  

/s/ Kent Robertson

      Kent Robertson
      President and Chief Executive Officer
      (Principal Executive Officer)
    By:  

/s/ Scott Pettit

      Scott Pettit
      Chief Financial Officer
      (Principal Financial Officer)

 

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