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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 September 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 November 16, 2015, the registrant had issued and outstanding an aggregate of 20,198,543 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”) and Fenix Parts Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2015, as filed with the SEC.



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FENIX PARTS, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I - FINANCIAL INFORMATION

 
ITEM 1.     FINANCIAL STATEMENTS
    
Fenix Parts, Inc.

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Fenix Parts, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
 
CURRENT ASSETS
 
 
 
 
Cash and cash equivalents
 
$
10,850,540

 
$
453,047

Accounts receivable, net of allowance
 
4,683,594

 

Inventories
 
35,157,934

 

Prepaid expenses and other current assets
 
1,480,289

 
50,000

Deferred stock offering costs
 

 
346,369

Total current assets
 
52,172,357

 
849,416

PROPERTY AND EQUIPMENT
 
 
 
 
Leasehold improvements
 
1,132,203

 

Vehicles
 
2,815,089

 

Machinery and equipment
 
7,108,296

 

Office furniture and fixtures
 
748,854

 

Accumulated depreciation and amortization
 
(902,109
)
 

Property and equipment, net
 
10,902,333

 

OTHER NON-CURRENT ASSETS
 
 
 
 
Goodwill
 
70,995,317

 

Intangible assets, net
 
33,210,066

 

Indemnification receivable
 
4,243,851

 

Other non-current assets
 
56,893

 

Investment in related party
 
29,793

 

Total non-current assets
 
108,535,920

 

TOTAL ASSETS
 
$
171,610,610

 
$
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
 
 
 
September 30, 2015
 
December 31, 2014
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Account payable
 
$
3,427,930

 
$
1,673,259

Accrued expenses and other current liabilities
 
2,888,005

 
303,731

Sales return reserve
 
715,060

 

Amounts due to related parties
 
3,669,696

 

Deferred warranty revenue – current
 
341,338

 

Deferred income tax liabilities
 
1,106,996

 

Deferred rent
 
323,933

 

Contingent consideration liabilities - current
 
7,854,839

 

Current portion of long-term debt
 
750,000

 

Current portion of related party long-term debt
 
100,000

 

Total current liabilities
 
21,177,797

 
1,976,990

NON-CURRENT LIABILITIES
 
 
 
 
Deferred warranty revenue, net of current portion
 
336,065

 

Long-term related party debt, net of current portion
 
100,000

 

Long-term debt, net of current portion
 
8,588,479

 

Deferred income tax liabilities
 
13,202,455

 

Amounts due to related parties, net of current portion
 
1,343,559

 

Reserve for uncertain tax positions
 
4,663,162

 

Contingent consideration liabilities
 
2,387,815

 

Total non-current liabilities
 
30,621,535

 

TOTAL LIABILITIES
 
51,799,332

 
1,976,990

COMMITMENTS AND CONTINGENCIES
 

 

SHAREHOLDERS’ EQUITY (DEFICIT)
 

 

Common stock, $0.001 par value; 30,000,000 shares authorized; 19,924,718 shares issued and outstanding at September 30, 2015; 2,429,333 shares issued and outstanding at December 31, 2014
 
19,925

 
2,429

Additional paid-in capital
 
132,250,602

 
3,616,571

Accumulated other comprehensive loss
 
(2,960,794
)
 

Accumulated deficit
 
(17,898,455
)
 
(4,746,574
)
Total Fenix Parts, Inc. shareholders’ equity before noncontrolling interest
 
111,411,278

 
(1,127,574
)
Noncontrolling interest
 
8,400,000

 

Total shareholders’ equity (deficit)
 
119,811,278

 
(1,127,574
)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
 
$
171,610,610

 
$
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
 
Nine Months Ended
September 30, 2015
 
Period from 
January 2, 2014 (Inception) to
September 30, 2014
 
 
September 30, 2015
 
September 30, 2014
 
Net revenues
 
$
27,274,575

 
$

 
$
38,745,471

 
$

Cost of goods sold
 
20,584,179

 

 
30,592,330

 

Gross profit
 
6,690,396

 

 
8,153,141

 

Operating expenses
 
18,209,178

 
2,168,879

 
29,853,217

 
2,796,856

Operating loss
 
(11,518,782
)
 
(2,168,879
)
 
(21,700,076
)
 
(2,796,856
)
Interest expense
 
(77,930
)
 

 
(99,800
)
 

Interest income
 
22,249

 
229

 
39,353

 
528

Other (expense) income, net
 
3,680

 

 
(1,717,762
)
 

Loss before income tax expense
 
(11,570,783
)
 
(2,168,650
)
 
(23,478,285
)
 
(2,796,328
)
Benefit for income taxes
 
5,022,287

 

 
10,326,404

 

Net loss
 
(6,548,496
)
 
(2,168,650
)
 
(13,151,881
)
 
(2,796,328
)
Foreign currency translation adjustment
 
(2,255,609
)
 

 
(2,960,794
)
 

Net comprehensive loss
 
$
(8,804,105
)
 
$
(2,168,650
)
 
$
(16,112,675
)
 
$
(2,796,328
)
Loss per share available to common shareholders
 
 
 
 
 
 
 
 
Basic & Diluted
 
$
(0.33
)
 
$
(1.01
)
 
$
(1.10
)
 
$
(1.39
)
Shares used in computing earnings per share
 
 
 
 
 
 
 
 
Basic & Diluted
 
19,475,046

 
2,156,400

 
11,206,390

 
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
 
2,934,680

 
2,935

 
23,584,103

 

 

 

 
23,587,038

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
 
271,111

 
271

 
831,736

 

 

 

 
832,007

Share based awards
 
150,000

 
150

 
659,565

 

 

 

 
659,715

Foreign currency translation adjustment
 

 

 

 
(2,960,794
)
 

 

 
(2,960,794
)
Net loss
 

 

 

 

 
(13,151,881
)
 

 
(13,151,881
)
Balance at September 30, 2015
 
19,924,718

 
19,925

 
$
132,250,602

 
$
(2,960,794
)
 
$
(17,898,455
)
 
$
8,400,000

 
$
119,811,278

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 2, 2014 (inception)
 

 
$

 
$

 
$

 
$

 
$

 
$

Shareholder contributions
 
2,086,000

 
2,086

 
2,892,914

 

 

 

 
2,895,000

Net loss
 

 

 

 

 
(2,796,328
)
 

 
(2,796,328
)
Balance at September 30, 2014
 
2,086,000

 
$
2,086

 
$
2,892,914

 
$

 
$
(2,796,328
)
 
$

 
$
98,672

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
 
 
 
Nine Months Ended 
 September 30, 2015
 
Period from
January 2, 2014
(Inception) to
September 30, 2014
Cash flows from operating activities
 
 
 
 
Net loss
 
$
(13,151,881
)
 
$
(2,796,328
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
 
Depreciation and amortization
 
2,155,692

 

Share-based compensation expense
 
1,496,295

 

Deferred income tax benefit
 
(10,422,752
)
 

Provision for uncertain tax positions
 
56,610

 

Amortization of inventory fair value adjustment
 
6,951,891

 

Change in fair value of contingent consideration
 
(193,346
)
 

Make whole provision for pre-IPO investors
 
1,827,085

 

Change in assets and liabilities, net of acquired businesses
 
 
 
 
Accounts receivable
 
(6,367,037
)
 

Inventories
 
270,277

 

Prepaid expenses and other assets
 
(26,329
)
 
(50,000
)
Accounts payable
 
(3,850,194
)
 
526,112

Accrued expenses and other liabilities
 
7,721,494

 
218,652

Deferred warranty revenue
 
665,277

 

Due to related parties
 
1,467,227

 

Net cash used in operating activities
 
(11,399,691
)
 
(2,101,564
)
Cash flows from investing activities
 
 
 
 
Capital expenditures
 
(113,656
)
 

Purchases of companies, net of cash acquired
 
(89,102,636
)
 

Net cash used in investing activities
 
(89,216,292
)
 

Cash flows from financing activities
 
 
 
 
Proceeds from initial public offering
 
102,672,000

 

Proceeds from other issuances of common stock
 
250,276

 
2,895,000

Stock offering costs
 
(1,393,394
)
 

Borrowings on term loan
 
10,000,000

 

Payments on debt
 
(250,000
)
 

Debt issuance cost
 
(438,000
)
 

Proceeds from other debt financing
 
213,306

 

Net cash provided by financing activities
 
111,054,188

 
2,895,000

Effect of foreign exchange fluctuations on cash and cash equivalents
 
(40,712
)
 

Increase in cash and cash equivalents
 
10,397,493

 
793,436

Cash and cash equivalents, beginning of period
 
453,047

 

Cash and cash equivalents, end of period
 
$
10,850,540

 
$
793,436

Supplemental cash flow disclosures:
 
 
 
 
Cash paid for interest
 
$
64,000

 
$

Noncash transactions:
 
 
 
 
Equity issued for purchases of Founding Companies and Ocean County
 
$
34,320,000

 
$

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 September 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 September 30, 2015 and the results of its operations and cash flows for the periods ended September 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 nine months ended September 30, 2014 refer to inception (January 2, 2014) through September 30, 2014.

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

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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 $715,000 at September 30, 2015.
The Company presents taxes assessed by governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenue on the consolidated statements of operations and are shown as current liabilities on the consolidated 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 $235,000 and $358,000 for the three and nine month periods ended September 30, 2015, respectively.
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 maintained a reserve for uncollectible accounts of approximately $329,000 at September 30, 2015. 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 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

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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 is less than 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. Depreciation expense is calculated using the straight-line method over the estimated useful lives. Leasehold improvements are amortized over the shorter of the useful life of the related assets or the lease term. 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 are removed from the accounts and any resulting gain or loss thereon is recognized. Depreciation expense totaled approximately $610,000 and $914,000 for the three and nine month periods ended September 30, 2015, respectively.
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
Office furnitures and fixtures
7 years
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
Office furnitures and fixtures
2-3 years
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 nine month periods ended September 30, 2015.
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 October 1. There were no impairment charges related to goodwill during the post-Combination period ended September 30, 2015.






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The following table summarizes the provisional adjustments to the initially reported goodwill balance at the Founding Company acquisition date in addition to the goodwill resulting from the Ocean County acquisition as outlined in Note 3 (in thousands):
 
 
Amount
Balance at May 18, 2015
 
$
70,810

Ocean County goodwill
 
1,642

Provisional adjustments:
 
 
     Change in fair value of Go Pull-It Investment
 
367

     Reimbursement of pre-acquisition charges paid by former owners to be covered by Fenix
 
524

     Foreign currency translation adjustment
 
(2,682
)
     Revisions of working capital
 
334

Balance at September 30, 2015
 
70,995

Intangible Assets
Intangible assets subject to amortization consist of tradenames, customer relationships, non-compete agreements and incremental off market lease payments. 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 $931,000 and $1,216,000, respectively, for the three and nine months periods ended September 30, 2015.
Indemnification Receivable
In conjunction with the Combinations, the Company recorded an indemnification receivable, 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. The indemnification receivable balance was $4,243,851 at the date of the Combinations and at September 30, 2015.
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

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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 September 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.
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.
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. U.S. federal income taxes are not provided on undistributed earnings of Canadian subsidiaries as it is management's intent that such earnings will remain invested in these subsidiaries.
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 September 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

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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.
For the three and nine months ended September 30, 2015 and 2014, basic earnings per share is equal to diluted earnings per share because all outstanding stock awards are considered anti-dilutive during periods of net loss.
The following outstanding equity instruments as of September 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 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Stock options
 
966,297

 

 
1,566,297

 

Restricted stock awards
 
150,000

 

 
150,000

 

Leesville bonus shares
 
271,112

 

 
271,112

 



The calculations of loss per share for the three and nine month periods ended September 30, 2015 and 2014, are as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Basic Loss per Common Share:
 
 
 
 
 
 
 
 
Net loss
 
$
(6,548,496
)
 
$
(2,168,650
)
 
$
(13,151,881
)
 
$
(2,796,328
)
Net loss allocable to Fenix Canada preferred shares
 
(167,715
)
 

 
(861,816
)
 

Net loss available to common shares
 
$
(6,380,781
)
 
$
(2,168,650
)
 
$
(12,290,065
)
 
$
(2,796,328
)
Weighted-average common shares outstanding
 
19,475,046

 
2,156,400

 
11,206,390

 
2,007,028

Basic and diluted loss per Common Share
 
$
(0.33
)
 
$
(1.01
)
 
$
(1.10
)
 
$
(1.39
)
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.
Recent Accounting Pronouncements
In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASC") No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which simplifies the accounting for adjustments made to provisional amounts recognized in business combinations. The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments also require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to provisional amounts, calculated as if the accounting had been completed at the acquisition date. The ASU also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company is currently evaluating the impact of adopting the new standard.

Note 3. Business Combinations
Founding Companies

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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 End of Lif Vehicles Inc., Goldy Metals Incorporated, Goldy Metals (Ottawa) Incorporated (collectively, "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.

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.

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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)
 

 
7,445

 
310

 

 
2,468

 

 
10,223

Total Combination Consideration
 
 
 
$
34,516

 
$
46,327

 
$
8,895

 
$
6,896

 
$
16,577

 
$
17,064


$
130,275

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 30, 2015 as additional information is obtained.
(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 30, 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.




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Table of Contents

(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 September 30, 2015 of $1,465 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 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 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 $1,001 and $193 decrease to operating expenses in the statement of operations for the three and nine months post-Combinations period ended September 30, 2015, respectively.

The following table summarizes the approximate fair values of the assets acquired and liabilities assumed at the date of acquisition and incorporates any provisional adjustments in measurement since they were originally reported.  

 
 
Beagell Group
 
Standard
 
Eiss Brothers
 
Go Auto
 
Jerry Brown
 
Leesville
 
Total
Cash and other current assets
(i)
$
10,358

 
$
15,265

 
$
6,637

 
$
1,859

 
$
6,301

 
$
5,643

 
$
46,063

Property and equipment
(ii)
4,476

 
4,408

 
364

 
203

 
1,663

 
641

 
11,755

Other non current assets
 
1,983

 
1,445

 

 
30

 
1,746

 

 
5,204

Intangible assets
(iii)
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
)
 
(8,809
)
Reserve for uncertain tax positions
(iv)
(2,017
)
 
(527
)
 

 

 
(1,829
)
 
(203
)
 
(4,576
)
Deferred income taxes, net
(vi)
(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

 
6,828

 
4,928

 
2,692

 
7,600

 
59,633

Goodwill
 
20,264

 
24,496

 
2,766

 
2,115

 
11,526

 
9,643

 
70,810

Total net assets acquired
 
$
32,535

 
$
49,810

 
$
9,594

 
$
7,043

 
$
14,218

 
$
17,243

 
$
130,443

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. All property and equipment is being depreciated using the straight-line method.
(iii)
The table below summarizes the aggregate intangible assets acquired:






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Amount
Trade names
 
$
5,670

Customer relationships
 
25,970

Covenants not to compete
 
1,710

Off market lease payments
 
1,470

Total
 
34,820

 
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.

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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.

Pro Forma Results

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 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues
 
$
27,275

 
$
28,151

 
$
82,375

 
$
82,946

Net loss
 
$
(7,155
)
 
$
(2,604
)
 
$
(14,784
)
 
$
(3,528
)
Pro forma revenues consisted of (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Recycled OEM parts
 
$
22,839

 
$
22,330

 
$
66,359

 
$
65,917

Scrap, warranty and other
 
4,436

 
5,821

 
16,016

 
17,029

Total
 
$
27,275

 
$
28,151

 
$
82,375

 
$
82,946


Significant adjustments to the historical revenues of the Founding Companies include the elimination of sales 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 post-Combination periods.

The cost of goods sold impact of the subsequent sale of acquired inventories written-up from historic cost basis to fair value is reflected for pro forma reporting purposes in the same manner as reported in the accompanying condensed consolidated financial statements, and is not adjusted back to January 1, 2014 as it does not have a continuing impact on the Company. As a result, pro forma gross profit and net income in the periods immediately following the acquisitions are substantially lower than the pre-acquisition periods.
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.
Ocean County Auto Wreckers, Inc.
On August 14, 2015, the Company completed its acquisition of 100% of the capital stock of Ocean County Auto Wreckers, Inc. ("Ocean County") in Bayville, New Jersey for a total aggregate purchase price of $3,220,000. The purchase consideration was comprised of approximately $2,624,000 in cash and 59,709 shares of Fenix common stock. 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. The acquisition of Ocean County complements the Company's other auto recycling operations in the Northeast United States.

The Ocean County acquisition is being accounted for using the acquisition method of accounting whereby the total purchase price is allocated to tangible and intangible assets and liabilities based on their estimated fair market values on the date of acquisition. These fair value estimates of the assets acquired and liabilities assumed will be based on a third party valuation that has not yet been completed, but it is anticipated that such estimates will be made following similar methodology as that used for the Founding Companies as described above.

The following table summarizes the approximate fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands). The approximate fair value of the assets and liabilities assumed, and the related tax balances, are based on preliminary

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estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as the Company receives valuation reports and finalize the valuations of these assets and liabilities. Such changes could result in variances between the Company's future financial results and the amounts presented in the unaudited pro forma information, including variances in estimated purchase price, fair values recorded, and expenses associated with these items.
Cash and other current assets
 
$
2,790

Property and equipment
 
279

Other non current assets
 
1

Intangible assets
 
870

Current liabilities
 
(553
)
Reserve for uncertain tax positions
 

Deferred income taxes, net
 
(1,808
)
Non-current liabilities
 
(2
)
Total net identifiable assets acquired
 
1,577

Goodwill
 
1,642

Total net assets acquired
 
$
3,219


Pro forma financial information including Ocean County for pre-acquisition periods is not provided as the results are not significant to the consolidated results of the Company.

Note 4. Long-Term Obligations
Credit Facility and Term Note
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.
As of September 30, 2015, there was a $5.9 million letter of credit outstanding related to the Combinations and the balance due under the term loan was $9.8 million.
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, which 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.

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

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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 net worth of $102.6 million plus fifty percent of net income for each fiscal quarter. Net worth is defined as the total stockholder's equity, including capital stock, additional paid in capital, and retained earnings after deducting treasury stock. As of September 30, 2015, the Company was in compliance with all financial covenants specified by the credit agreement.

Go Pull-It Note

Also as described in Note 3, the Company entered into an agreement to purchase a 5% equity interest in Go Pull-It LLC for a total purchase price of $450,000. At the combination closing, the Company made a cash payment of $250,000 and entered into a $200,000 promissory note with the former owners, which provides for two payments of principal on the first and second anniversaries of the execution of the purchase and option agreement.

The following is a summary of the components of the Company's long term obligations and amounts outstanding at September 30, 2015 (in thousands):
Obligations:
 
Term loan
$
9,338

Go Pull-It note
200

 
9,538

Less current maturities
750

 
$
8,788

Debt Issuance Costs
In connection with the execution of the credit facility and term note agreements, the Company recorded $438,000 in debt issuance costs in May 2015, which are netted against the term loan balance and are being amortized over the five year term. The amortized debt issuance costs are recognized as interest expense in the statement of operations and was $16,000 and $26,000 for the three and nine month periods ended September 30, 2015, respectively. The term note balance above includes a reduction for the unamortized debt issuance costs of $412,000 as of September 30, 2015.

Note 5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of following:
 
 
September 30,
2015
 
December 31,
2014
Accounting, consulting and legal fees
 
$

 
$
48,431

Accrued salaries and employee benefits
 
1,097,834

 
175,000

Other liabilities
 
1,790,171

 
80,300

Total accrued expenses and other current liabilities
 
$
2,888,005

 
$
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 (44.7)% and (40.0)% for the three and nine months periods ended September 30, 2015, respectively. This effective rate differs from the U.S. federal statutory rate due to the effects of the state and Canadian income taxes and the reversal of the valuation allowance.
The Company’s uncertain tax position reserves, including related interest and penalties of $1 million, were approximately $4.7 million as of September 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 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, as discussed more fully under "Income Taxes" in Note 2 above, changes in these reserves can 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.
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 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

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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 as of the IPO date. The later investors were also granted registration rights.

Note 8. Stock-Based Compensation
The Company’s 2014 Incentive Stock Plan (“Plan”) was adopted by the Board of Directors in November 2014 and approved by the Company's shareholders in January 2015. The Plan was amended by the Board of Directors in July 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, which is administered by the Compensation Committee of the Company's Board of Directors. The number of shares originally reserved for share-based awards under the Plan equaled 2,750,000 shares. As of September 30, 2015, the Company had 1,014,000 shares available for share-based awards under the Plan.
Stock-based compensation is included in operating expenses in the consolidated statements of operations. The components of stock-based compensation for the three and nine month periods ended September 30, 2015 were as follows:
 
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
Stock options
 
$
519,899

 
$
582,082

Restricted stock grants
 
77,859

 
77,859

Leesville bonus shares
 
546,679

 
831,679

Other awards
 

 
216,800

Total stock-based compensation
 
$
1,144,437

 
$
1,708,420

Stock Options
Stock options granted to employees under the Plan typically have a 10-year life and vest in equal installments on each of the first four anniversary dates of the grant, although certain awards have been made with a shorter vesting period. 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 service period of the award. Stock options granted to non-executive board members vest on the first anniversary of the award date. Stock compensation expense for these awards to non-executive directors 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 fair value of the stock options granted during the nine months ended September 30, 2015 was $2.47 - $3.33 per share using the following assumptions:
 
 
 
Expected dividend yield
 
%
Risk-free interest rate
 
1.57 - 1.85%

Expected volatility
 
30.0
%
Expected life of option
 
5.3 - 6.3 years



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Stock option activity for the nine months ended September 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
 
1,556,297

 
9.10

 
 
 
 
Exercised
 

 

 
 
 
 
Expired or forfeited
 

 

 
 
 
 
Outstanding on September 30, 2015
 
1,556,297

 
$
9.10

 
8.7
 
$

Exercisable on September 30, 2015
 

 
$

 

 
$

At September 30, 2015, there is $3,650,000 of unrecognized compensation costs related to stock option awards to be recognized over a weighted average period of 3.3 years.

Restricted Stock Awards

Restricted stock awards (RSAs) granted to employees vest over time based on continued service (typically vesting over a four or five year period in equal annual installments). Such time-vested RSAs are valued at fair value based on the closing price of Fenix common stock on the date of grant. Compensation cost, adjusted for estimated forfeitures, is amortized on a straight-line basis over the requisite service period.

A summary of restricted stock award activity for the nine months ended September 30, 2015 is as follows:

 
 
Number of Awards
 
Weighted-
Average
Grant Date Fair Value Per Share
Unvested restricted stock awards at January 1, 2015
 

 
$

Granted
 
150,000

 
9.66

Forfeited
 

 

Vested
 

 

Unvested restricted stock awards at September 30, 2015
 
150,000

 
$
9.66


At September 30, 2015, there is $1,189,000 of unrecognized compensation costs related to restricted stock awards to be recognized over a weighted average period of 4.4 years.

Leesville Bonus Shares
The Company issued 271,112 restricted shares of common stock at the closing of the Leesville acquisition. The shares vest twelve months after the grant date. Compensation expense of approximately $546,000 and $832,000 was recorded in the three and nine months ended September 30, 2015, respectively.
Other Awards
During June 2015, the Company issued a total of 20,000 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 $217,000 has been recorded in the nine months ended September 30, 2015 for these awards based on the share price on the date of grant.

Note 9. Commitments and Contingencies
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
Operating Leases
As described in Note 3, the Company has operating leases with legal entities that are controlled by former owners of the Founding Companies and Ocean County, 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 17 distinct properties as of September 30, 2015, 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 for the Founding Companies and on August 14, 2015 for Ocean County. The scheduled payments under these leases over their original terms total approximately $35.8 million. The Company records rent expense in the statements of operations based on market rental rates, which totaled approximately $1,032,000 and $1,231,000 for the three and nine months ended September 30, 2015, respectively.
Because these leases were entered into upon the closing of the acquisitions, 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.
Investment in GO Pull-It LLC
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”) 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 have been valued at $30,000 in the consolidated balance sheet as part of the purchase price allocation as described in Note 3 above.
Other
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 September 30, 2015. The Company also sells inventory to related parties. Net revenues for these sales were approximately $26,000 in the post-Combination period ended September 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 made contributions to the plans of approximately $219,200 and $281,000 during the three and nine month periods ended September 30, 2015, respectively.


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Note 12. Subsequent Events
In October 2015, the Company completed its acquisitions of the stock of Butler Auto Sales and Parts, Inc. ("Butler") based in Forest City, North Carolina, and substantially all of the assets of Tri-City Auto Salvage ("Tri-City") based in Greensboro, North Carolina. The aggregated purchase price consisted of $14,900,000 in cash and 149,281 shares of Fenix common stock. The cash portion of the purchase price was financed through a combination of cash on hand and utilization of $8,700,000 of the Company's credit facility. In both acquisitions, the purchase price is subject to working capital adjustments, and the Company entered into a long-term lease with the former owners for use of the premises on which the Company will conduct its automotive recycling business. Butler is a full-service auto recycling facility servicing Charlotte and the surrounding markets, and Tri-City is a full-service recycling facility servicing Greensboro and the surrounding markets. These acquisitions represent the Company's initial locations in North Carolina, complementing the Company's other auto recycling operations in the Eastern United States. For the twelve months ended June 30, 2015, Butler and Tri-City had combined revenues of approximately $17,000,000. 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 liabilities assumed.

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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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Beagell Group
UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS
 
 
 
Three Months
Ended
September 30,
2014
 
Period from
January 1, 2015 to
May 18, 2015
 
Nine Months
Ended
September 30,
2014
Net revenues
 
$
8,001,559

 
$
11,107,071

 
$
23,211,102

Cost of goods sold
 
5,101,348

 
7,395,359

 
15,371,134

Gross profit
 
2,900,211

 
3,711,712

 
7,839,968

Operating expenses
 
2,450,696

 
3,183,803

 
5,911,121

Income from operations
 
449,515

 
527,909

 
1,928,847

Other income
 
27,629

 
63,695

 
75,300

Income before income tax expense
 
477,144

 
591,604

 
2,004,147

Income tax expense
 
134,395

 
75,402

 
290,242

Net income
 
342,749

 
516,202

 
1,713,905

Net income attributable to noncontrolling interest
 
147,112

 
279,481

 
420,048

NET INCOME ATTRIBUTABLE TO BEAGELL GROUP
 
$
195,637

 
$
236,721

 
$
1,293,857

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 SHAREHOLDERS’ EQUITY
 
 
 
Common stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Non controlling
 
Total
shareholders’
equity
 
 
Shares
 
Amount
 
 
 
 
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
capital
 
Retained
earnings
 
Non controlling
 
Total
shareholders’
equity
 
 
Shares
 
Amount
 
 
 
 
Balance at January 1, 2014
 
3,412

 
$

 
$
727,973

 
$
8,578,003

 
$
2,340,578

 
$
11,646,554

Net income
 

 

 

 
1,293,857

 
420,048

 
1,713,905

Shareholder distributions
 

 

 

 
(958,002
)
 
(325,125
)
 
(1,283,127
)
Balance at September 30, 2014
 
3,412

 
$

 
$
727,973

 
$
8,913,858

 
$
2,435,501

 
$
12,077,332

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
 
Nine Months
Ended
September 30,
2014
Cash flows from operating activities
 
 
 
 
Net income
 
$
516,202

 
$
1,713,905

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Depreciation and amortization expense
 
277,183

 
662,134

Provision for uncertain tax positions
 
86,000

 
290,242

Gain on disposal of property and equipment
 
(61,658
)
 
(17,589
)
Change in assets and liabilities
 
 
 
 
Accounts receivable
 
(134,875
)
 
79,884

Inventories
 
114,002

 
(285,134
)
Prepaid expenses and other current assets
 
(103,812
)
 
(43,839
)
Account payable
 
233,192

 
214,407

Accrued expenses and other liabilities
 
(306,112
)
 
326,992

Deferred warranty revenue
 
(142,884
)
 
58,026

Net cash provided by operating activities
 
477,238

 
2,999,028

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

 
(50,371
)
Payments received (made) on related party receivables
 
333,270

 

Capital expenditures
 
(284,690
)
 
(144,517
)
Net cash provided by (used in) investing activities
 
802,894

 
(161,513
)
Cash flows from financing activities
 
 
 
 
Payments of debt
 
(26,032
)
 
(188,275
)
Proceeds from debt
 

 
60,000

Shareholder distributions
 
(1,858,900
)
 
(1,283,127
)
Net cash used in financing activities
 
(1,884,932
)
 
(1,411,402
)
(Decrease) increase in cash and cash equivalents
 
(604,800
)
 
1,426,113

Cash and cash equivalents, beginning of period
 
2,769,876

 
1,719,740

Cash and cash equivalents, end of period
 
$
2,165,076

 
$
3,145,853

Supplemental cash flow disclosures
 
 
 
 
Cash paid for income taxes
 
$
4,773

 
$

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

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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 the three months ended September 30, 2014, the period from January 1, 2015 to May 18, 2015, and the nine months ended September 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.

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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 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 $112,000 for the three months ended September 30, 2014, $189,000 for the period from January 1, 2015 to May 18, 2015 and $232,000 for the nine months ended September 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

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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.

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 $227,000 for the three months ended September 30, 2014, respectively. Depreciation and amortization expense totaled approximately $277,000 and $662,000 for the period from January 1, 2015 to May 18, 2015 and the nine months ended September 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

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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.
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 September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASC") No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which simplifies the accounting for adjustments made to provisional amounts recognized in business combinations. The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts

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are determined. The amendments also require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to provisional amounts, calculated as if the accounting had been completed at the acquisition date. The ASU also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company is currently evaluating the impact of adopting the new standard.

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. There was no rental expense for the three months ended September 30, 2014 and $72,000 for the nine months ended September 30, 2014.
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 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.

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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 $1,000 for the three months ended September 30, 2014, and $24,000 and $23,000 for the period from January 1, 2015 to May 18, 2015 and the nine months ended September 30, 2014, respectively. The Company had accumulated interest and penalties of approximately $377,000 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 $159,000 for the period from April 1, 2015 to May 18, 2015 and the three months ended September 30, 2014, respectively. Matching Company contributions to the plan were $37,000 and $377,000 for the period of January 1, 2015 to May 18, 2015 and the nine months ended September 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