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EX-32 - EXHIBIT 32 - Fenix Parts, Inc.fenx-20161231xex32.htm
EX-31.2 - EXHIBIT 31.2 - Fenix Parts, Inc.fenx-20161231xex312.htm
EX-31.1 - EXHIBIT 31.1 - Fenix Parts, Inc.fenx-20161231xex311.htm
EX-23.2 - EXHIBIT 23.2 - Fenix Parts, Inc.fenx-20161231xex232.htm
EX-23.1 - EXHIBIT 23.1 - Fenix Parts, Inc.fenx-20161231xex231.htm
EX-21 - EXHIBIT 21 - Fenix Parts, Inc.fenx-20161231xex21.htm
EX-10.67# - EXHIBIT 10.67# - Fenix Parts, Inc.fenx-20161231xex1067.htm
EX-10.66# - EXHIBIT 10.66# - Fenix Parts, Inc.fenx-20161231xex1066.htm
EX-10.65 - EXHIBIT 10.65 - Fenix Parts, Inc.fenx-20161231xex1065.htm
EX-10.9 - EXHIBIT 10.9 - Fenix Parts, Inc.fenx-20161231xex109.htm
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-K
 _______________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016
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. ID)
 
 
 
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
_______________________________________
Title of Each Class
 
Name of each exchange on which registered
Common Stock, par value $.001 per share
 
NASDAQ Global Market*
Securities registered pursuant to Section 12(g) of the Act: None
________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ¨     No   x
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 that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of June 30, 2016, the aggregate market value of common stock outstanding held by stockholders who were not affiliates of the registrant was approximately $64 million (based on the closing sale price on the NASDAQ Global Market on such date).
The number of outstanding shares of the registrant's common stock as of July 20, 2017 was 20,327,685.
* Suspended from trading on June 29, 2017

Documents Incorporated by Reference
None.
 



TABLE OF CONTENTS

 
 
Page No.
 
 
 


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PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 expected or projected 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. Some of these risks, uncertainties, and other factors are set forth elsewhere in this Annual Report on Form 10-K and in other documents we have filed with the SEC and include, among other things:

Lack of liquidity materially adversely affecting our ability to continue as a going concern if we are unable to execute on the development of a strategic alternative to improve liquidity;
Our relatively short operating history and our ability to successfully integrate our operating subsidiaries ("Subsidiaries"), and those subsidiaries we may acquire;
Reduced liquidity and market price of our stock due to trading on Pink Sheets, instead of being listed on a national securities exchange;
Our ability to satisfy our debt obligations and to operate in compliance with our financing agreements;
Our ability to successfully locate and acquire businesses that provide recycled OEM automotive products and our ability to successfully integrate acquired companies with our business;
Our ability to acquire additional businesses that may require financing that we are unable to obtain on acceptable terms or at all;
Our success in managing internal growth;
Variations in the number of vehicles sold, vehicle accident rates, miles driven and the age of vehicles in accidents;
Competition from vehicle replacement part companies, including but not limited to those that provide recycled parts;
Our ability to maintain our relationships with auto body shops, insurers, other customers and with auction companies from which we purchase our salvage vehicles;
Our compliance and our Subsidiaries' past compliance with environmental laws and regulations and federal, state and local operating and permitting requirements;
Known environmental liabilities at the facility we have been leasing in Toronto, Ontario since May 2015, associated with groundwater and surface water contamination as a result of historical releases and a petroleum hydrocarbon spill in November 2010, which we did not assume;
Potential for significant impairment of goodwill and intangibles;
Fluctuations in the prices of scrap metal and other metals;
Changes in the exchange rate for the Canadian Dollar;
Changes in the national, provincial or state laws and regulations affecting our business;
Disruptions in the information technology systems on which our business relies;
Damage to our business and reputation in the event of an unfavorable outcome to an ongoing SEC inquiry which commenced in September 2016;
Securities class action litigation filed in 2017 due to the decline in our stock price;
The impact of a fire in April 2017 at our Toronto Facility and a subsequent order by a Director of the Ontario Ministry of the Environment and Climate Change that we must submit a plan for approval prior to recommencing operations;
Material weaknesses in our internal control over financial reporting; and
Other factors discussed under the headings "Risk Factors," "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Business".

Given these risks and uncertainties, you are cautioned not to place undue reliance on our forward-looking statements. Projections and other forward-looking statements included in this filing have been prepared based on assumptions, which we believe to be reasonable, but not in accordance with GAAP or any guidelines of the SEC. Actual results may vary, perhaps materially. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by federal securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any such forward-looking statements, whether made in this Annual Report on Form 10-K or elsewhere, should be considered in the context of the various

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disclosures made by us about our business including, without limitation, the risk factors discussed above. For further discussion of these and other factors that could impact our future results, performance or transactions, please carefully read "Risk Factors."




ITEM 1.     BUSINESS
As used in this Annual Report on Form 10-K, references to "Fenix" refer to Fenix Parts, Inc. solely, and references to the "Company," "our", "we", "us" and similar terms refer to Fenix Parts, Inc., together with our Subsidiaries, as defined below.
OVERVIEW

We are in the business of automotive recycling, which is the recovery and resale of original equipment manufacturer ("OEM") 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. We purchase our vehicles primarily at auto salvage auctions. Upon receipt of vehicles, we inventory and then dismantle the vehicles and sell the recycled products. Our customers include collision repair shops (body shops), mechanical repair shops, auto dealerships and individual retail customers. We also generate a portion of our revenue from the sale as scrap of unusable parts and materials, from the sale of used cars and motorcycles, the sale of aftermarket parts, and from the sale of extended warranty contracts.

We provide customers with high quality recycled OEM products, extensive inventory and product availability, responsive customer service and fast delivery. We operate a hub and spoke distribution network allowing us to efficiently move products among our locations and expedite delivery to our customers. We distribute a variety of products to collision and mechanical repair shops, including recycled OEM products, as well as aftermarket, refurbished and remanufactured parts. Collectively, we refer to these products as alternative parts because they are not new OEM products.

History
Fenix was founded on January 2, 2014 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 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, Fenix completed the IPO and closed on the Combinations with the Founding Companies, including those Founding Companies that are designated as accounting co-predecessors, Don’s Automotive Mall, Inc., Gary’s U-Pull It, Inc., and Horseheads Automotive Recycling, Inc. (collectively, the "Beagell Group"); and Standard Auto Wreckers Inc., End of Life Vehicles Inc., Goldy Metals Incorporated, and Goldy Metals (Ottawa) Incorporated (collectively, "Standard"). The aggregate consideration paid by Fenix in the Combinations (the "Combination Consideration") is detailed in Note 4 to the consolidated financial statements in this document. Fenix raised the cash portion of the Combination Consideration in its IPO as well as from indebtedness. The operations of the Founding Companies are reflected in the consolidated statements of operations from the date of acquisition on May 19, 2015. During the third quarter and fourth quarter of 2015, Fenix acquired three additional automobile recycling companies ("Subsequent Acquisitions"). Our Founding Companies and Subsequent Acquisitions represent our operating subsidiaries ("Subsidiaries"). The operations of our Subsequent Acquisitions are also reflected in the consolidated statements of operations from their respective dates of acquisition.

Products
The recycled OEM products that we sell include mechanical parts used to repair or replace worn or damaged components, such as engines and transmissions, and collision repair parts used to repair vehicles typically involved in a collision, such as door assemblies, trunk lids, lights, fenders and other products. These products are "insurance quality," which means they are acceptable for use in a repair paid for by an insurance company. Many consumers and repair facilities use recycled OEM products because they are less expensive than new OEM products and are perceived to be of higher quality and better fit than products made by non-OEM manufacturers, known as aftermarket products. Recycled OEM products often are sold as assemblies, which shorten repair times and help reduce labor costs. In addition, insurance companies are increasingly influencing repair facilities to use recycled OEM products as a lower cost alternative to new OEM products.
Typically, damaged, totaled or low value vehicles acquired by insurance companies are resold through auto salvage auctions. Some insurance companies mandate that recycled OEM products be no older than the vehicle they are used to repair; thus, the majority of the vehicles we acquire are not more than ten years old. We employ software-based inventory management systems to determine what vehicles to purchase and at what price, based upon our estimation of the demand for the products on the vehicle, the prices we can obtain for those products and the final scrap value of the vehicle.

The demand for our products and services is influenced by several factors, including the number of vehicles on the road, the number of miles being driven, the number and age of drivers, the frequency and severity of vehicle accidents, the age of vehicles in accidents, availability and pricing of new OEM parts and weather conditions. There is no standard price for many of our products, but rather a pricing structure that varies based upon such factors as product availability, quality, demand, new OEM product prices, the age and mileage of the vehicle from which the part was obtained and competitor pricing.


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In addition, we generate revenues from the disposal of end of life vehicles, related scrap sales and the sale of extended warranties. We obtain scrap as a byproduct from vehicles that have been used in both full-service and self-service recycling operations. The sale of scrap includes catalytic converters, fluids, wheels and tires, copper wiring, cores and crushed hulls. Ancillary revenues related to the disposal of end of life vehicles and related scrap sales will vary based on fluctuations in commodity prices and the volume of materials sold.

Customers
Our customers include collision and mechanical repair shops, auto dealerships and individual retail customers. Competition for sales is based primarily on product availability, delivery times and price. Our ability to deliver insurance quality recycled OEM products on a same or next day basis is a critical service requirement of our customers. Customers can find and purchase our parts in many ways including searching our websites, by telephone (speaking with one of our sales professionals) or in-person at one of our fulfillment centers. We apply a coordinated regional approach to our inventory management and distribution activities, which allows us to increase the availability of our products and efficiently meet demand within the markets we serve. In 2016, we sold products to more than 12,000 customers. There were no significant customers that accounted for more than 10% of total revenues during 2016 or 2015.

Industry
The Auto Care Association ("ACA") estimates that the U.S. automotive aftermarket was approximately $267 billion in 2016. We operate in the U.S. collision and mechanical repair products market, a subset of the U.S. automotive aftermarket. According to ACA, the U.S. collision and mechanical repair products market was approximately $70 billion in 2016.

The automotive recycling industry is highly fragmented, with few multi-facility operators. According to the Automotive Recyclers Association ("ARA"), there are an estimated 9,400 vehicle recycling facilities in the United States and Canada. We believe that there is only one direct competitor with more than 1% market share within the automotive recycling industry. We believe this competitor has less than 10% market share.

The automotive recycling industry obtains its insurance quality recycled OEM products from damaged, totaled or low value vehicles purchased at salvage auctions. In 2016, there were over 300 salvage auction locations in the U.S. and Canada at which over 2.5 million damaged, totaled or low value vehicles were sold on behalf of automobile insurance companies and other sellers to licensed buyers, such as us.

The industry’s direct customers are collision and mechanical repair shops that use recycled OEM products in vehicle repairs. The industry also indirectly serves insurance companies as they pay for the majority of repairs to insured vehicles and thus have significant influence over the repair process. Major U.S. insurance companies are encouraging collision repair shops to reduce costs, thus influencing them to utilize recycled OEM products in the repair of damaged vehicles.

In addition, automotive recycling is considered environmentally responsible, as approximately 86% of a vehicle's material content is typically reclaimed or recycled. We believe that many environmentally conscious consumers prefer recycled products and over time government regulation will continue to favor environmentally friendly solutions.

Competition
Buyers of vehicle replacement products have the option to purchase from primarily five sources: new products produced by OEM; new products produced by companies other than the OEMs, which are commonly referred to as aftermarket products; recycled OEM products obtained by automobile recyclers from salvage vehicles; used automotive products that have been refurbished; and used automotive products that have been remanufactured. We view all suppliers of vehicle replacement products as our competitors. While we compete with all parts suppliers, there are few automobile recyclers with regional distribution networks like ours that can reach the majority of customers within the optimum delivery time. We have begun to distinguish ourselves from other suppliers primarily through our broad recycled OEM product selection, which encompasses popular and hard-to-find items or products, our distribution network, stock management systems, and our service. We compete on the basis of product breadth and depth, rapid and dependable delivery, marketing initiatives, support services, and price.

COMPETITIVE STRENGTHS

Favorable Industry Dynamics
We believe that demand for recycled OEM products is highly stable and marked by consistent long-term growth due to a number of favorable trends, including the number of vehicles on the road (commonly referred to as the "car parc"), the increasing miles driven and the number and age of drivers. Additionally, we believe the utilization of recycled OEM products over the last decade has continued to increase given the inherent favorable pricing and product availability of recycled OEM products relative to other replacement products.

Competitive Market Position
We believe that we operate the second largest network of automotive recycling companies in the eastern region of North America (U.S. and Canada) with twelve full-service and four self-service recycling locations, two of which are co-located at existing full-service facilities,

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although our Toronto, Ontario facility (the "Toronto facility") was severely damaged in a fire in April 2017. Please see the section below entitled "Facilities" and Risk Factors for a more detailed discussion of the fire and its repercussions. We believe the strength of our regional network, our customer relationships and our extensive inventory of insurance quality recycled OEM automotive products give us a competitive advantage and create high barriers to entry.

Extensive Inventory and Distribution Platform with Broad Customer Reach
Our extensive inventory of insurance quality recycled OEM automotive products and our distribution infrastructure give us the ability to help our customers reduce repair cycle time by delivering our products typically the same or next day. In order to increase the availability of our products, we maintain an extensive inventory and have developed a coordinated regional approach to inventory management and distribution. Our network enables us to reach three of the ten largest cities in North America by population. This customer base exceeds 12,000 customers with no one customer accounting for more than 3% of our consolidated net revenues in 2016 and 2015.

Dynamic Vehicle Procurement Process
A critical component of our success and growth is our ability to identify and value the products that can be recycled from a salvage vehicle. We have developed a scalable, data-driven approach, utilizing real-time sales and inventory information, which allows us to procure vehicles in a cost-efficient manner, optimize the dismantling process and profitably sell these products to our customers.

Deep Industry Expertise
We benefit from the industry expertise and deep customer relationships that have been established at the Subsidiaries over the course of their history as standalone businesses. Our key management personnel at most of the Subsidiaries have served an average of 20 years in the automotive recycling industry and many have held senior leadership positions in key industry trade groups, such as the ARA.

Experienced Management Team
Our senior management has significant experience operating and growing automotive and logistics-based businesses. Prior to co-founding Fenix, our Chief Executive Officer, Kent Robertson, held several senior leadership positions at Stericycle, Inc. ("Stericycle"), a national reverse logistics and regulated waste management company. Mr. Robertson had more than 20 years of experience managing multi-line decentralized distribution and services businesses at Stericycle and at American Medical Disposal, Inc., a company he co-founded in 1990, which was acquired by Stericycle in 2001. Under Mr. Robertson’s leadership, Stericycle successfully completed and integrated over 70 acquisitions. Our Chief Financial Officer, Scott Pettit, also a co-founder of Fenix, has significant automotive industry, public company, acquisition and integration experience, including serving from 2001 to 2007 as the Chief Financial Officer of Insurance Auto Auctions, Inc.

Attractive Financial Model
We believe our highly variable cost structure, low requirements for capital expenditures (in 2016, our maintenance capital expenditures were less than 1% of total revenues) and the stability of the collision and mechanical repair products market combine to give our business the potential to deliver strong results through a variety of business cycles. We believe that these factors should allow us to produce significant cash flow. However, our achieving these cash flows has been, and may continue to be constrained by the extraordinary levels of professional fees that we have experienced.

Organizational Structure
We operate on a decentralized basis with an emphasis on regional and local market execution supported by corporate coordination. Local management teams operate the businesses and leverage their relationships with customers and suppliers. At the same time, certain administrative functions are centralized on a regional and, in certain circumstances, a national basis, including but not limited to corporate strategy and acquisitions, accounting and related functions, marketing, human resources, information technology and systems support and environmental compliance.

STRATEGY

We believe that there is significant demand for a strong “number two” participant in the OEM automotive parts recycling business to compete with the industry leader, and that the execution of our business strategies would allow us to grow and to enhance shareholder value. However, because of our lack of liquidity (described in Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K) and lack of strong internal control over financial reporting and integrated information systems, which has led to extraordinarily high professional fees and delays in being able to publicly report financial results, we are currently not in a position to implement or continue to pursue many of these business strategies, and there is no guarantee that we will be able to do so in the future.

Enhance and Build our Network through Acquisitions
The acquisition of other OEM automotive products recycling businesses is a key element of our strategy. This would increase our customer base, grow our distribution network and expand our inventory and warehouse capacity. There are currently an estimated 9,000 facilities in the automotive recycling industry, and we believe an ample number of attractive acquisition candidates. Subsequent to our initial public offering and the acquisition of the Founding Companies, during 2015 we acquired three businesses operating in geographic areas that fit

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within our strategic growth plan. We use a disciplined approach to identify and evaluate acquisition candidates to increase customer and route density within our network and expand into new geographic markets. However, our Credit Facility and related Forbearance Agreement (described in Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K) contain financial covenants that are likely to preclude the acquisition of new businesses for the foreseeable future.

Organically Grow Market Share and Unit Volume
We have identified initiatives to increase vehicle processing throughput, inventory and product availability, and thereby grow revenue, volume and market share. However, because of our current lack of liquidity described in Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K, we may not be able to fully pursue these initiatives in the foreseeable future.
These initiatives include:

Expand Dismantling Capacity. We operate 67 dismantling bays within our full-service auto recycling facilities. We can also add bays or shifts to increase dismantling utilization. We believe these initiatives would help us increase dismantling capacity and productivity, thereby increasing inventory and product availability to meet additional demand for our products.

Develop an Integrated Technology Platform. We currently utilize third-party software solutions to support our business. We believe this software is sufficient for our current needs, but we are working to implement an integrated technology platform to support our future growth. We believe that any associated cost would be offset through improvements in salvage vehicle procurement, production management, part pricing, inventory management, marketing, sales, logistics and compliance.

Enhance Sales Force Effectiveness. We maintain sales specialists in their local markets to preserve high levels of service and existing customer relationships. We seek to provide our sales force with enhanced training and additional resources to reach new markets and customers.

Expand our Logistics Capacity. We intend to continue to expand our logistics capacity to meet the delivery expectations of our customers (typically the same or next day). Provided sufficient capital is available, we may invest in additional infrastructure, including trucks, employees or transfer hubs, to expand in existing markets and into adjacent markets.

Enhance Operating Efficiencies and Increase Profit Margins
We have identified certain best practices among our Subsidiaries that improve salvage vehicle procurement and dismantling, enhance product delivery and maximize the value of end-of-life vehicles. We have begun to implement these best practices across our network to improve our operating efficiencies and profit margins. Further, we believe an integrated operating platform within geographic areas creates opportunities for economies of scale as we grow.

INTELLECTUAL PROPERTY

We own various trade names as a result of the acquisitions of the Subsidiaries. We do not believe that our business is materially dependent on any single or group of related trade names.

EMPLOYEES

As of December 31, 2016, we had approximately 633 employees at our recycled parts facilities and approximately 33 employees at our corporate headquarters. We enjoy good relations with our employees and are not party to any labor management agreement.

RELATED PARTIES
Please refer to Item 13, "Certain Relationships and Related Transactions and Director Independence," and Note 15 Related Party Transactions, to the consolidated financial statements included in this Annual Report on Form 10-K for information about our related parties and corresponding transactions with them.

FACILITIES
We lease an office building in Westchester, Illinois, which serves as our corporate headquarters. This facility will meet our growth requirements for the foreseeable future.     
We have twelve full-service recycling facilities, concentrated in the Northeastern and Southeastern United States and Southeastern Canada. These locations include Bayville, NJ, Binghamton, NY, Forest City, NC, Greensboro, NC, Niagara Falls, NY, Pennsburg, PA, Rahway, NJ, Ottawa, Ontario, Port Hope, Ontario, Queensbury, NY, Watertown, NY, and Jacksonville, FL. Our full-service recycling facilities have a total of 67 bays for dismantling of vehicles and approximately 553,000 square feet of indoor warehouse space and approximately 226 acres of total storage. Our facilities employ state-of-the art environmental systems for removing fluids prior to dismantling. We have

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four self-service locations, two of which are co-located with full-service facilities. Our self-service locations are in Binghamton, NY, Elmira, NY, Ottawa, Ontario and Scarborough, Ontario. At these locations, we allow retail customers to directly dismantle, recover and purchase recycled OEM products. Our self-service recycling facilities have approximately 77,000 square feet of indoor storage space and are situated on approximately 55 acres.

On April 6, 2017, a fire destroyed the buildings and contents therein, including computer equipment and certain accounting records, located at our Scarborough (Toronto), Ontario facility. The vehicle inventory stored on the premises was largely undamaged. We maintain insurance for property damage and business interruption losses; however, coverage is subject to deductibles, limits and certain exclusions and may not be sufficient to cover all of the losses incurred. We plan to recommence operations as soon as practicable and rebuild the Toronto facility and infrastructure using insurance proceeds. The Ontario Ministry of Environment and Climate Change issued an order prohibiting us from receiving and processing vehicles at the Toronto facility until the Ministry has accepted a plan to recommence operations in an environmentally safe manner. We are cooperating with all environmental and licensing authorities to recommence operations as soon as practical. See Risk Factors below for further information.

ITEM 1A.     RISK FACTORS
Risks Relating to Our Business

We are in breach of certain covenants in our Credit Agreement. Our failure to successfully identify and complete a transaction that improves our liquidity during the forbearance period agreed to by our lenders could materially adversely affect our ability to continue as a going concern.

As a result of certain defaults under our Credit Agreement, we lack liquidity that is necessary to sustain our operations as a going concern. In March 2017, we entered into a forbearance agreement with our lenders that provides us with access to liquidity to continue our operations. The forbearance agreement was amended on June 23, 2017 to extend the forbearance period, which had originally expired on May 26, 2017, until August 31, 2017 (unless terminated earlier due to new defaults not anticipated in the forbearance agreement) and to resolve certain new defaults. We have engaged a financial advisor to assist us in identifying and evaluating strategic alternatives that are intended to improve our liquidity. Unless we have identified and have demonstrated progress satisfactory to our lenders toward the completion of a transaction that could include a business combination, debt and/or equity financing, or a strategic investment into us, after the expiration of the forbearance period, there can be no assurance that our lenders will continue to forbear exercising all remedies available to them under the Credit Agreement, including declaring some or all of the amounts outstanding to be immediately due and payable. If this happens, we do not expect to have sufficient liquidity to repay those amounts, nor would we be able to satisfy our significant obligations under contingent consideration agreements related to certain acquired companies, and our lenders could elect to take action resulting in our liquidation. These matters are more fully described in Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K - "Liquidity and Financial Condition" and “Ability to Continue as a Going Concern.”

We have limited combined operating history, and there are risks associated with the acquisition of our Subsidiaries that could adversely affect the results of our operations.

We were founded in January 2014, and we combined with each of our Founding Companies simultaneously with, and as a condition to, the sale of the shares in our initial public offering in May 2015. During the second half of 2015, we acquired three additional subsidiaries. While we have operated as a combined business with the Subsidiaries since each of their acquisitions, there can be no assurance that we will be able to fully integrate the operations of our Subsidiaries successfully or to institute the necessary systems and procedures, including accounting and financial reporting systems, to manage the combined enterprise on a profitable basis, reduce the extraordinary high level of auditing and accounting fees historically incurred, and report the results of operations of the combined entities on a timely basis. In addition, there can be no assurance that our management team will be able to successfully manage the combined entity and effectively implement our operating or growth strategies. Our success will depend on management’s ability to integrate our current Subsidiaries and any companies we may acquire into one organization. Our inability to successfully integrate the companies we have acquired and to coordinate and integrate certain operational, administrative, financial and information technology systems would have a material adverse effect on our financial condition and results of operations.

If our efforts to locate and acquire desirable companies in the business of providing recycled OEM automotive products are not successful or if we are unable to acquire desirable companies on commercially reasonable terms, our growth prospects will be adversely affected.

One of our principal growth strategies when Fenix was founded and during 2015 was to increase our revenue through the acquisition of additional businesses within our industry. We do not currently have sufficient liquidity or access to capital to support an acquisition strategy. If liquidity improves and the strategy to acquire additional businesses resumes, we face competition in our pursuit to acquire additional businesses, which limits the number of available companies for sale and may lead to higher acquisition prices. When we identify desirable companies, their owners may not be willing to sell their companies at all or on terms that we have determined to be

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commercially reasonable. If our efforts to locate and acquire desirable companies are not successful, our growth prospects will be adversely affected.

Our ability to acquire additional businesses may require financing that we are unable to obtain or to obtain on acceptable terms.

The timing, size and success of our acquisition efforts is directly related to our ability to obtain capital commitments, which cannot be readily predicted at this time. We have used cash and common stock for acquisitions of companies. However, the significant decline in the price of our common stock and the suspension in trading of our common stock on the Nasdaq Global Market and eventual delisting may result in the unwillingness of potential acquisition candidates to accept common stock as part of the consideration for the sale of their businesses, in which case we may be required to utilize more cash resources. Currently and until the defaults under our Credit Facility (described in Notes 1 and 4 to the consolidated financial statements included in this Annual Report on Form 10-K) are rectified or waived, there can be no further borrowings under our Credit Facility. Furthermore, even if the defaults are rectified or waived there can be no assurance that we will have available sources of financing to support our acquisition strategy or we will be able to obtain financing if and when it is needed or that it will be available on terms that we deem acceptable. Under our Credit Facility, permitted acquisitions are subject to bank review and our meeting certain financial ratios, after giving effect to such acquisition. Our cash and cash equivalents, cash provided by operating activities and funds available from bank borrowings are not sufficient for acquisitions, and we need to raise additional funds through public or private financing or other arrangements. There can be no assurance that additional funding, or refinancing of our Credit Facility, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may be costly and involve further restrictive covenants. Failure to raise capital as needed will have a material adverse impact on our acquisition strategy and on our business, operating results, and financial condition.

We may not be able to successfully integrate future acquisitions or generate sufficient revenues from future acquisitions, which could cause our business to suffer.

Assuming that we are able to finance an acquisition, there can be no assurance that we will be able to profitably manage such business or successfully integrate such business without substantial costs, delays or other operational or financial problems. There can be no assurance that the businesses we may acquire will achieve anticipated revenues and earnings. Additionally:

the key personnel of an acquired business may decide not to work for us;

changes in management at an acquired business may impair its relationships with employees and customers;

we may be unable to maintain uniform standards, controls, procedures and policies among acquired businesses;

we may be held liable for environmental risks and liabilities as a result of our acquisitions, some of which we may not have discovered during our due diligence;

our ongoing business may be disrupted or receive insufficient management attention; and

we may not be able to realize the cost savings or other financial benefits we anticipated.

Some or all of these factors could have a material adverse effect on our business, financial condition and results of operations.

If we are not able to manage our internal growth, the results of our operations will be adversely affected.

We will attempt to grow our revenues through internal growth as well as through acquisitions, although we do not currently have sufficient liquidity or access to capital to support an acquisition strategy and, as a result, management has focused over the past year on attempting to grow our revenues and increase cash flow through internal growth and integration of existing operations. There can be no assurance that our systems, procedures and controls will be adequate to support our operations as they expand. Any future growth will also impose significant additional responsibilities on management. Furthermore, as we grow, our ability to increase productivity and profitability will be limited by our ability to employ, train and retain skilled personnel to handle critical tasks within our operations and provide services to our customers and partners. There can be no assurance that we will be able to maintain an adequate skilled labor force necessary to operate efficiently or that our labor expenses will not increase as a result of a shortage in the supply of skilled personnel. To the extent that we are unable to manage our growth efficiently and effectively, or are unable to attract and retain skilled personnel, our growth prospects and thereby our financial condition and results of operations will be materially adversely affected.

If the number of vehicles involved in accidents declines or the number of cars being repaired declines, our business could suffer.


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Our business depends on vehicle accidents and mechanical failures for both the demand for repairs using our products and the supply of recycled, remanufactured and refurbished parts. The number and/or severity of accidents and mechanical failures is influenced by factors including, but not limited to, the number of vehicles on the road, the number of miles driven, the ages of drivers, the occurrence and severity of weather conditions, the congestion of traffic, the use of cellular telephones and other electronic equipment by drivers, the use of alcohol and drugs by drivers, the effectiveness and extent of adoption of accident avoidance systems in newer vehicles, the reliability of new OEM parts, and the condition of roadways. Increases in fuel prices may cause the number of vehicles on the road, the number of miles driven, and the need for mechanical repairs and maintenance to decline, as motorists seek alternative transportation options. Mild weather conditions, particularly during winter months, tend to result in a decrease in vehicle accidents. Additionally, a number of states and municipalities have adopted, or are considering adopting, legislation banning the use of handheld cellular telephones or other electronic devices while driving, and such restrictions could lead to a decline in accidents.

Systems designed to help drivers avoid accidents, including but not limited to impact warning or avoidance systems, lane and vehicle recognition systems and driverless vehicle guidance systems are becoming more prevalent and more technologically sophisticated. To the extent manufacturers install or are mandated by law to install accident avoidance systems in their vehicles, the number and severity of accidents could decrease, which could have a material adverse effect on our business.

We depend upon the services of our management team.

Our success depends, in part, upon the continuing contributions of our executive officers and key employees at the management level. This includes, in part, continuing efforts from many of the executives and managers of the Subsidiaries, whose reputations and client relationships have contributed significantly to the long-term success of those companies. Although we have employment and noncompetition agreements with certain of our key executive officers and managers, there is no guarantee that they will not leave. The loss of the services of any of our executive officers or managers, or our failure to attract other executive officers or managers could have a material adverse effect on our business or our business prospects. If we lose the services of any of our key employees at the operating or regional level, we may not be able to replace them with similarly qualified personnel, which could harm our business.

We face intense competition from local, regional, national and internet-based automotive products providers, and this competition could negatively affect our business.

The recycled vehicle replacement parts and automotive recycling industries are highly competitive and are served by local owner-operated companies, several large regional companies and internet-based parts providers. Additionally, in certain regions of the country where we operate, local automotive recycling companies have formed cooperative inventory sharing programs. We currently participate in certain of these programs, but may elect not to in the future, and as a public company, we sometimes do not qualify to participate in certain inventory sharing programs. One such cooperative disqualified us from participation because our Subsidiaries were no longer independently owned. We could also face additional competition in the future from others entering the market, such as OEMs, insurance companies, new parts producers other than OEMs, sometimes referred to as "aftermarket" suppliers, and industry consolidators. Some of our current and potential competitors may have more operational expertise and greater financial, technical, manufacturing, distribution and other resources, longer operating histories, lower cost structures and better key relationships in the insurance and automotive industries. As a result, they may be able to provide products that we are unable to supply, sell their products at lower costs or serve customers we are unable to serve.

If we fail to maintain or adequately replace our relationships with auto body shops, insurers and other customers, through which we make a significant portion of our revenue, our revenue will be adversely affected.

The majority of our products and services are sold to collision repair shops, also known as body shops, and mechanical repair shops. Additionally, we indirectly rely on insurance companies to help drive demand, as insurance companies are increasingly influencing repair facilities to use recycled OEM products as a lower cost alternative to new OEM products. We also generate a portion of our revenue from scrap sales to metal recyclers. If we are not able to continue our current or similar arrangements with these body shops, mechanical repair shops, insurers and scrap metal recyclers, the volume of our sales, revenue and profitability will be materially adversely affected.

An adverse change in our relationships with auction companies could increase our expenses and hurt our relationships with our customers.

Our inventory primarily consists of vehicles offered at salvage auctions operated by companies that own auction facilities in numerous locations across the U.S. We do not typically have contracts with these auction companies. A small number of companies control a large percentage of the salvage auction market in the U.S. and Canada. We acquire substantially all of our salvage autos from two of these auction companies. If either of these companies prohibited us from participating in its auctions, began competing with us, or significantly raised its fees, our business could be adversely affected through higher costs or the resulting potential inability to service our customers. Moreover, we face competition in the purchase of vehicles from direct competitors, rebuilders, exporters and others.


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We are subject to environmental regulations and incur costs relating to environmental matters.

Our operations, both in the U.S. and Canada, are subject to national, state, provincial and local environmental, health and safety laws and regulations governing, among other things:
 
the emission and discharge of wastes, chemicals, contaminants and other hazardous materials into the ground, air, or water;
 
the exposure to hazardous materials; and
 
the generation, handling, storage, use, treatment, identification, reporting, record-keeping, transportation and disposal of industrial by-products, waste water, storm water, solid and hazardous wastes, petroleum products and hazardous materials.

We are in the process of implementing environmental management systems that are designed to facilitate and support our compliance with these requirements and to address current outstanding environmental and operating permit issues. However, if we violate or fail to comply with these laws or regulations we could be fined or otherwise sanctioned by regulators.

Contamination resulting from vehicle recycling processes can include air, soil, surface water and ground water contamination from the release, storage, transportation, or disposal of motor oil, gasoline, or other petroleum products, antifreeze, transmission fluid, waste solvents, chlorofluorocarbons from air conditioners, other hazardous materials, or metals such as aluminum, cadmium, chromium, lead and mercury. Contamination can migrate on-site or off-site which can increase the risk and the amount of any potential liability.

We may assume the liabilities of the companies we acquire. Contamination at properties owned or operated by the Subsidiaries or companies we acquire in the future may result in liability for us under environmental laws and regulations for the full amount of assessment and remediation-related costs, including those for the investigation and cleanup of contaminated soil, surface water and ground water, building contamination, and impacts to human health, and damages to natural resources. Under certain environmental laws, including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, we and our directors and officers could be held responsible for all of the costs relating to any contamination at, or migrating to or from, the Subsidiaries’ or any newly acquired company’s past or present facilities and at third-party waste disposal sites. These laws often impose liability even if the owner or operator did not know of, or was not responsible for causing, any such contamination. The costs of complying with environmental laws and regulations and any claims concerning noncompliance or liability with respect to contamination in the future could have a material adverse effect on our financial condition or operating results.

Environmental laws are complex, change frequently and have tended to become more stringent over time. Significant capital and operating costs may be incurred at any time to keep our operations in compliance with environmental, health and safety laws and regulations. If it is not economical to make those expenditures, or if we violate any of these laws and regulations, it may be necessary to restrict or modify our operations, which could have a material adverse effect on our business, financial condition and results of operations.

One of the facilities that we lease is the subject of environmental claims.

Groundwater and surface water contamination has been detected in the past at the facility in Toronto, Ontario that we leased when we acquired the assets of Goldy Metals Incorporated ("GMI"), as a result of historical releases and a petroleum hydrocarbon spill in November 2010. Since November 2010, the Ontario Ministry of the Environment issued a series of regulatory orders under Ontario’s Environmental Protection Act that required the owner of GMI to investigate and remediate all areas that were contaminated by the spill and to take protective and remedial actions related to its property and operations as well as adjacent areas. We believe GMI has been and is taking necessary steps to remediate the surface water and groundwater contamination. Furthermore, we did not assume this liability and GMI, its shareholder and certain affiliates have agreed to indemnify us for a period of three years from the date of Combination against any liability that may be imposed on us as a result of this contamination. However, as the successor to GMI’s business and lessee of the facility, we may become legally responsible for this liability, and we and our directors and officers may be responsible under national and provincial laws and regulations for the assessment, delineation, control, clean-up, remediation, monitoring and verification of, or as a result of, any environmental contamination at that site and any affected off-site areas. The owner of GMI and certain of its affiliates have agreed, pursuant to the Combination Agreements, to continue to be responsible for the costs of an additional storm water management, control and discharge system following the completion of the Combinations. However, there can be no assurance that the owner of GMI or its affiliates will perform their obligations under such agreements and their failure to perform would require us to undertake these environmental obligations. 

The site and operations in Toronto have been operating since the 1960s. During the last decade, the surrounding parkland and agricultural area, as well as the site itself, have been designated part of a new federal urban park. Accordingly, there has been continual governmental, quasi-governmental, and non-governmental body environmental oversight and intervention, including various enforcement initiatives. We anticipate that this will continue.


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The Province of Ontario has filed a civil lawsuit against GMI and the owner of the land on which the Toronto, Ontario facility is located claiming damages of Canadian Dollars ("CAD") $10.5 million plus pre- and post-judgment interest and court costs, for alleged historical and spill-related contamination as well as for alleged property encroachment damage. The lawsuit is currently in the pre-discovery stage. We did not assume this liability, and GMI, its owner and certain affiliates have agreed to indemnify us, subject to certain limits as defined in the Combination agreements, for a period of three years from the date of Combination against any liability that may be imposed on us as a result of this liability. However, we may become legally responsible for this liability as the successor to GMI’s business and lessee of the facility. We cannot assure you that we will not become responsible for this liability, or that GMI and its owner or their affiliates will have the capacity to indemnify us in the event we become responsible for this liability in whole or in part. We also have been advised by experts retained by or on behalf of GMI, the landowner and us that the amount of damages, if any, are more likely than not to be less than $500,000; however, our responsibility for this liability in amounts exceeding the estimates of our experts could have a material adverse effect on our results of operations and financial position.

Prior to our leasing this facility, GMI was also charged by the Province of Ontario for causing or permitting an oil spill in Toronto which allegedly impaired a nearby creek. This matter was settled through a guilty plea on consent, with GMI paying a penalty of CAD $94,000. A future charge and conviction under the same or other environmental statute in Ontario could result in the imposition of a minimum fine of CAD $100,000 per day plus a 25% surcharge, up to a maximum of CAD $10 million. We did not assume this liability, and GMI, its owner and certain affiliates have agreed to indemnify us for a period of three years from the date of Combination against any liability that may be imposed on us as a result of this liability. However, we may become legally responsible for this liability as the successor to GMI’s business and lessee of the facility. We cannot assure you that we will not become responsible for this liability, or that GMI, and its shareholder or their affiliates will have the capacity to indemnify us in the event we become responsible for this liability in whole or in part. Our responsibility for this liability in whole or in significant part could have a material adverse effect on our results of operations and financial position.

GMI is also the subject of further regulatory orders relating to sedimentation monitoring and control in the creek, rehabilitating the creek area that was diverted in 2011 as well as assessing, preventing, treating and controlling off-site groundwater and surface water discharges. To address these orders, GMI intends to implement a new surface water control, management and discharge system, the details of which are in the process of being negotiated.

The recent fire at our Toronto, Ontario facility and the delay in the recommencement of operations at the facility as a result of the order from a director of the Ontario Ministry of the Environment and Climate Change to cease operations pending the acceptance of a remediation plan could have a material adverse effect on our business, financial condition and results of operations.

On April 6, 2017, there was a fire at our facility in Toronto, Ontario where two separate operations are conducted: (i) wrecking, salvaging and processing vehicles and recycling the auto parts, and (ii) selling auto parts to the public (the “self-service operation”). The fire destroyed all of the buildings on the property, although the used vehicles stored on the property were, for the most part, undamaged. Firefighters used water to extinguish the fire, reportedly (per the provincial officer's order discussed below) resulting in water seeping into the ground and surface water runoff onto the adjacent property. An emergency response team was retained to contain the water to keep it from flowing into the ground and a nearby creek. Since then, water and ash resulting from the fire were successfully contained on the premises, the ash has been hauled away, and the water will be removed once we complete testing for contaminants and determine the appropriate means of disposal. We also contracted with a restoration company to oversee the setup of both temporary and permanent structures so that we can recommence operations. We and/or our landlord maintain insurance for property damage and business interruption losses; however, coverage is subject to deductibles, limits and certain exclusions and may not be sufficient to cover all of the losses incurred.

On April 10, 2017, while we were engaged in clean-up operations, a provincial officer of the Ontario Ministry of the Environment and Climate Change entered the premises and ordered us to cease the acceptance of new vehicles and all vehicle processing on the property until such time that the officer had accepted a plan to recommence operations in an environmentally safe manner. The order did not affect the self-service operation for vehicles already processed and on the premises. However, if we are unable to accept and process additional vehicles, once the inventory of vehicles on the premises at the time of the fire is sold, we will be unable to replace it with new inventory until such time as we are able to resume full operations. We filed a request for a review and stay of the provincial officer's order (the “order”), which was denied in a ruling on April 27, 2017 by a Director of the Ontario Ministry of the Environment and Climate Change (the "Director's ruling"). The Director's ruling further provided that the Director believed that the site in its current condition had evidence of contamination, but that the Director also believed that actions could be taken to ensure that the site could be operated in an environmentally safe manner. The Director indicated that this was particularly true with respect to the receiving and processing of end-of-life vehicles, and the Director's ruling requested that the plan specifically address such end-of-life vehicle operations. The Director's ruling did not address the self-service operation, other than to note the Director's understanding that it would not be operated until the debris from the fire was cleaned up and the ash and firewater completely managed.

We have requested a hearing before the Environmental Review Tribunal with respect to the Director's ruling on the basis, among others, that there was no evidence that the fire and its extinguishment or the resumption of our processing operations in accordance with our

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prior practices would cause us to be out of compliance with any environmental law or create the opportunity for contamination of the environment. Since our leasing of this facility in 2015, our operations prior to the fire had never been cited for any non-compliance with applicable environmental laws, although certain storm water issues that arose prior to our leasing of the site remain unresolved. For additional information on these storm water issues, see the Risk Factor immediately above entitled, "One of the facilities that we lease is the subject of environmental claims."

We believe that the Director's ruling is premature and therefore without merit, as we intend to comply with applicable environmental laws and rules in the rebuilding of the facility and future operations; however, we may be unable to successfully appeal the order. The potential delay and uncertain timing as to our recommencement of operations at the facility necessitated by the requirement to obtain prior approval of a plan to do so, the possibility that the Director may impose costly remediation measures upon us or may never approve a plan, and the possible incurrence of uninsured losses could have a material adverse effect on our business, financial condition and results of operations.

Governmental agencies may refuse to grant or renew our operating licenses and environmental and other permits.

Our current Subsidiaries and future subsidiaries must receive certain licenses and permits from state and local governments to conduct their operations, including but not limited to permits required by environmental laws. We may face unexpected delays in obtaining the necessary permits and approvals required by environmental and other laws in connection with our facilities. If we violate or fail to obtain or comply with any permits required by environmental or other laws, we could be fined or otherwise sanctioned by regulators. Furthermore, when we develop or acquire a new facility, we must seek the approval of state and local units of government and satisfy applicable siting laws and regulations. Governmental agencies often resist the establishment of an automotive recycling facility in their communities. There can be no assurance that future approvals or transfers will be granted. In addition, there can be no assurance that we will be able to maintain and renew the licenses and permits we and our Subsidiaries currently hold.

We have a large amount of goodwill as a result of the acquisitions of our Subsidiaries, which was impaired and may become further impaired, in which case our earnings would be adversely affected.

As of December 31, 2016, we had recorded goodwill of $37.0 million. Goodwill represents the excess of the amount we pay for our acquisitions over the fair value of the acquired net assets. We do not amortize acquired goodwill but instead we test it for impairment on an annual basis in the fourth quarter and between annual tests if events and circumstances indicate that it is more likely than not that the fair value of our one reporting unit is less than its carrying value. We performed the annual goodwill impairment test as of October 1, 2015, updated the test as of December 31, 2015, and determined that no impairment of goodwill existed at either date.

During the first quarter of 2016, our stock price declined 32% from $6.79/share at December 31, 2015 to $4.60/share at March 31, 2016. Accordingly, using the methodology and assumptions explained in Note 11 to the consolidated financial statements included in this Annual Report on Form 10-K, management calculated a goodwill impairment of $45.3 million that was recorded in March 2016 and is reflected in the accompanying consolidated results of operations for the year ended December 31, 2016.

Testing for impairment of goodwill involves an estimation of the fair value of our net assets and involves a high degree of judgment and subjectivity. Significant judgments inherent in these analyses include assumptions about appropriate sales growth rates, weighted average cost of capital and the amount of expected future net cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows changes in the related discount rate used to evaluate the fair value of our single reporting unit and other key variables. In addition, there are two generally accepted valuation methodologies and the weighting given to each is dependent upon management's assessment of current circumstances which can change from period to period. As a result of the quantitative analyses performed at October 1, 2016 and December 31, 2016, it was calculated that the fair value of our reporting unit exceeded its carrying value and no further impairments were recorded in 2016. However, such excess of estimated fair value over book value was only 7% at December 31, 2016.

There are numerous risks that may cause the fair value of our Company to fall below its book value carrying amount, which could lead to the measurement and recognition of goodwill impairment. These risks include, but are not limited to, (i) significant underperformance relative to historical or projected future operating results and/or reductions in estimated future sales growth rates, (ii) further reduction in scrap prices, (iii) further reduction in the Canadian exchange rate, (iv) an increase in our weighted average cost of capital, (v) significant increases in our vehicle procurement costs, (vi) significant changes in the manner of or use of the assets or the strategy for our overall business, (vii) variation in vehicle accident rates or other significant negative industry trends, (viii) changes in state or federal laws, (ix) a significant economic downturn, (x) our inability to successfully complete our ongoing process to explore and ultimately consummate a strategic and /or financial transaction that will provide us with improved liquidity and maximize shareholder value, or (xi) changes in other variables that can materially impact our business. If we have any additional significant impairment to our goodwill, it would have a material adverse effect on our reported financial results for the period in which the non-cash charge is taken. For further information

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regarding the impairment testing done in 2015 and 2016, see Note 11 to the consolidated financial statements included in this Annual Report on Form 10-K.

Our annual and quarterly performance may fluctuate.

Our revenue, cost of salvage vehicles and operating results have fluctuated on a quarterly and annual basis in the past and on a consolidated basis have fluctuated and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond our control. Future factors that may affect our operating results include, but are not limited to, the following:
 
fluctuations in the market value of salvage and used vehicles;
 
the availability to procure salvage vehicles at an attractive price;
 
variations in vehicle accident rates;
 
changes in state or federal laws or regulations affecting our business;
 
our ability to successfully integrate in a timely manner and manage our acquisitions;
 
severity of weather and seasonality of weather patterns;
 
the amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our business, operations and infrastructure; and
 
declines in asset values, including but not limited to goodwill impairment.
 
declines in scrap metal prices

increases in financing costs due to our current financial condition; and

declines in the value of the Canadian Dollar relative to the US dollar.

Due to the foregoing factors, our operating results in one or more future periods can be expected to fluctuate and period-to-period comparisons of our results of operations should not be relied upon as indications of future performance. These fluctuations in our operating results may cause our results to fall below the expectations of public market analysts and investors, which could cause our stock price to decline.

Fluctuations in the prices of metals could adversely affect our financial results.

Our operations generate scrap metal. After we dismantle a salvage vehicle for parts and after vehicles have been used in our self-service business, any remaining metal is sold to processors and brokers of metal and the remaining vehicle hulks are sold to scrap processors. In addition, we receive vehicles from various sources, which we sell at scrap metal market rates calculated on a per-ton basis. The price of scrap metal has historically fluctuated, sometimes significantly, due to market factors. In addition, buyers may stop purchasing metal entirely due to excess supply. To the extent that the price of metal or the demand for scrap metal decreases materially, our revenue from such sales will be adversely impacted and a write-down of our inventory value could be required. Despite our recent experience with declining purchase prices on vehicles as a result of reduced commodity prices, there can be no assurance that our vehicle purchasing costs will continue to decrease by a corresponding amount or at the same rate as the scrap metal prices decline, and there may be a delay between the scrap metal price reductions and any vehicle purchasing cost reductions.

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

We have operations in Canada. Our Canadian operations expose us to additional risks associated with international business, which has had an adverse effect on our business, results of operations, and financial condition. We collect revenues and incur costs at our Canadian operations in Canadian dollars. The significant decline in the value of the Canadian dollar against the U.S. dollar from 2014 to 2015 has had an adverse effect on our reported results of operations and financial condition in 2016 and 2015, and could have a similar effect in the future. In addition to foreign exchange exposure, we are subject to foreign tax, foreign employment laws and regulations and other foreign and domestic laws.

If we experience problems with our fleet of trucks, our business could be harmed.

We operate a fleet of trucks throughout our network to deliver products to our customers and transfer hubs. We are subject to the risks associated with providing trucking services, including inclement weather, disruptions in the transportation infrastructure, availability and price of fuel, and liabilities arising from accidents to the extent we are not covered by insurance. In addition, our failure to deliver parts

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in a timely and accurate manner could harm our customer relationships and reputation, which could have a material adverse effect on our business.

We rely on information technology in critical areas of our operations, and a disruption relating to such technology could harm our business.

We rely on information technology for significant aspects of our business, including our financial reporting, accounting, accounts payable, payroll, procurement, inventory control, customer selling and billing, sales analysis, vehicle tracking and profitability reporting, as well as an electronic exchange system for identifying and locating parts at other selected recyclers and facilitating brokered sales to fill customer orders for items not in stock. Any disruption relating to our information systems and hardware could seriously harm our operations.

We may not be able to sell our products due to existing or new laws prohibiting or restricting the sale of recycled automotive products.

Some jurisdictions have enacted laws prohibiting or severely restricting the sale of certain recycled automotive products that we provide, such as airbags. Additional jurisdictions could enact similar laws or could prohibit additional automotive products we sell. Restrictions on the products we are able to sell could decrease our revenue and have an adverse effect on our business and operations.

Risks Relating to Our Common Stock and Financial Structure

We may incur additional costs in connection with an SEC inquiry, and an unfavorable outcome could damage our business and reputation and result in claims or additional proceedings against us.

In September 2016, we received a subpoena from the Chicago Regional Office of the Securities and Exchange Commission (the "SEC") requiring the production of various documents, which were all provided during December 2016 and January 2017. The SEC inquiry appears to be focused on our change in our independent registered public accounting firm, our previously announced business combinations and related goodwill impairment charge, the effectiveness of our internal control over financial reporting and our inventory valuation methodology. We have incurred substantial legal fees and other costs associated with production of the documents required by the SEC and may incur further costs before this inquiry is concluded. We cannot predict the duration or outcome of the inquiry, and an unfavorable outcome could damage our business and reputation and result in claims or additional proceedings against us.

Our stock is currently not listed on a national securities exchange, which can adversely affect the liquidity of our stock and its price.

Trading in our common stock on the Nasdaq Global Market was suspended on June 29, 2017, and Nasdaq will complete the delisting of our common stock after applicable appeal periods have lapsed. The suspension was due to our continuing non-compliance with Nasdaq Listing Rule 5250(c)(1) and, in particular, our failure to file the 2016 Annual Report on Form 10-K (the "Annual Report") by its due date (as extended by Nasdaq). Our common stock is currently quoted on the OTC Pink operated by the OTC Markets Group Inc. (also known as the "Pink Sheets").

Our suspension from Nasdaq has caused negative publicity and a decrease in our stock price. Trading on the Pink Sheets, instead of being listed on a national securities exchange, may cause our stock price to continue to decline or fluctuate and trading volume to decline over time (notwithstanding the increase in trading volume since the announcement of the suspension). Many institutional investors have internal policies that prohibit the purchase or maintenance of positions in stocks that trade in the Pink Sheets. These policies likely caused the sale by certain of our institutional investors of their shares of our stock and will further limit the market for our shares in the future. A limited public market for our common shares may limit the ability of investors to sell their shares and negatively impact our ability to raise capital. Additionally, stocks that trade in the Pink Sheets cannot be purchased with margin loans, which may make our stock less attractive to investors. A company trading in the Pink Sheets cannot avail itself of federal preemption of state securities or "blue sky" laws, which adds substantial compliance costs to securities issuances, including pursuant to employee stock purchase or option plans and private or public offerings of securities. Trading in our stock also may be subject to the "penny stock" rules of the SEC, which would adversely impact liquidity.

Our stock price has declined significantly and could continue to be volatile, which has exposed us, and could continue to expose us, to securities class action and shareholder derivative litigation.

The price of our common stock has declined significantly, likely due in part to the suspension from trading and eventual delisting from the Nasdaq Global Market of our common stock, our late filings of our quarterly reports on Form 10-Q and this Form 10-K, our breach of certain loan covenants in our Credit Facility, the ongoing SEC inquiry, and the operating losses reflected in the consolidated financial statements included in this Annual Report on Form 10-K, all of which are discussed in other risk factors above. There also may be volatility due to perceived uncertainties about our future as we consider strategic alternatives, as discussed in a risk factor above. This volatility may persist or increase if a decision to pursue a particular alternative is announced or if we are unable to complete a transaction to increase our liquidity.

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In addition to these specific factors, the price of our common stock, in general, could be extremely volatile and may fluctuate substantially due to the following other factors, some of which are beyond our control:

variations in our operating results;
variations between our actual operating results and the expectations of securities analysts, investors and the financial community;
announcements of developments affecting our business or expansion plans by us or others; and
conditions and trends in the auto parts industry and the economy as a whole.

Stock market volatility also has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. Downturns in the stock market may cause the price of our common stock to decline. Additionally, the market price for our common stock has been in the past, and in the future may be, adversely affected by allegations made or reports issued by short sellers, analysts or others regarding our business model, our management or our financial accounting.

In the past, securities class action and shareholder derivative litigation often has been instituted against companies following periods of volatility in the market price of their securities. Such litigation can result in substantial costs and a diversion of management’s attention and resources. Two lawsuits, Beezley v. Fenix Parts, Inc. et al, and Melanie Weiss, derivatively on behalf of Fenix Parts, Inc. v. Kent Robertson, et al, and Fenix Parts, Inc. were filed against us during 2017, as discussed in greater detail below.

We and certain of our officers have been named as defendants in a securities class action lawsuit and certain of our officers and our directors have been named as defendants in a shareholder derivative lawsuit that could divert management's time and attention from our business and have a negative effect on our results of operations.

In January 2017, a class action lawsuit entitled Beezley v. Fenix Parts, Inc. et al, was filed in the United States District Court for the District of New Jersey against us, Kent Robertson, our President and Chief Executive Officer, and Scott Pettit, our Chief Financial Officer. The lawsuit was filed on behalf of purchasers of our shares from May 14, 2015 through October 12, 2016. The complaint alleges violations of the federal securities laws. For additional information with regard to allegations in the complaint, see Note 12 to the consolidated financial statements included in this Annual Report on Form 10-K. The plaintiffs seek class certification, an award of unspecified damages, an award of reasonable costs and expenses, including attorneys' fees and expert fees, and other further relief as the Court may deem just and proper.

In July 2017, a shareholder derivative lawsuit, entitled Melanie Weiss, derivatively on behalf of Fenix Parts, Inc. v. Kent Robertson, et al, and Fenix Parts, Inc., was filed in the Circuit Court of Cook County, Illinois, Chancery Division, against Messrs. Robertson and Pettit and the members of our board of directors. The complaint alleges, among other things, breach of fiduciary duty, unjust enrichment, waste of corporate assets and gross mismanagement. For additional information with regard to allegations in the complaint, see Note 12 to the consolidated financial statements included in this Annual Report on Form 10-K. The plaintiff seeks relief which includes unspecified damages and restitution from the individual defendants, an order requiring actions to be taken to improve corporate governance and internal procedures, an award of reasonable costs and expenses, including attorneys' fees and expert fees, and other further relief as the Court may deem just and proper.

In the case of both the Beezley and Weiss lawsuits, we believe that the allegations contained in the complaints are without merit and, in conjunction with our insurance carrier, intend to vigorously defend against all claims asserted therein. Nonetheless, the lawsuits may result in costly and protracted litigation, which may require a significant commitment of our resources and time. The ultimate outcome of any litigation is uncertain and the outcome of these matters, whether favorable or unfavorable, could have a negative impact on our financial condition or results of operations due to defense costs, diversion of management resources and other factors.

We have a substantial amount of indebtedness to bank lenders and former owners of acquired Subsidiaries, which could have a material adverse effect on our financial condition and our ability to obtain financing in the future and to execute our business strategy.

As of December 31, 2016, we had $21.5 million of debt outstanding under the Credit Facility, consisting of $12.8 million under our revolving line of credit and $8.7 million under our term loan. We also have a letter of credit for $6.4 million secured under the facility. In addition, we have contingent consideration arrangements with the former owners of three acquired businesses that could result in substantial future cash obligations in 2017 as described in Management's Discussion and Analysis of Financial Condition and Results of Operations - "Liquidity and Capital Resources" and as estimated and recorded in the accompanying consolidated balance sheet as of December 31, 2016 included in this Annual Report on Form 10-K. The Credit Facility contains operating restrictions and financial covenants that can restrict our business and limit our access to additional borrowings. As of December 31, 2016, for reasons described in Note 1 to the accompanying consolidated financial statements, we were in breach of certain financial covenants in the Credit Facility, as well as the requirements for repaying over-advances and timely delivery of certain quarterly certificates and reports. As a result, all

18


of the Credit Facility debt is reported in the consolidated balance sheet as a current liability at December 31, 2016, and there can be no further borrowings of any availability under the Credit Facility until such defaults are rectified or waived. On March 27, 2017, we entered into a Forbearance Agreement to the Credit Facility (the "Forbearance Agreement"). Pursuant to the Forbearance Agreement, the banks have agreed to forbear from exercising their rights and remedies under the Credit Facility with respect to the above described defaults and any similar defaults during the forbearance period, provided no other defaults occur. The Forbearance Agreement was amended on June 23, 2017 to extend the forbearance period, which had originally expired on May 26, 2017, until August 31, 2017 and to resolve certain new defaults. Our significant amount of debt, limited borrowing capacity and our debt service and contingent consideration obligations could limit our ability to satisfy our obligations, limit our ability to operate our business, execute our expansion strategy and impair our competitive position. Moreover, even if our current defaults are rectified or waived, any new failure to comply with the covenants and restrictions in our Credit Facility (other than those anticipated and enumerated in the Forbearance Agreement, as amended) could result in a future event of default, which would permit our lender to call for the immediate repayment of some or all of the amounts outstanding under our Credit Facility, among other remedies. If this happens, we do not expect to have sufficient liquidity to pay the outstanding Credit Facility debt. In addition, we have significant obligations under contingent consideration agreements related to certain acquired companies as described in Note 6, and we would need access to additional credit to be able to satisfy these obligations. The acceleration of our obligations under the Credit Facility or the failure to ultimately satisfy our contingent consideration obligations would have a material adverse effect on our business.

We have assumed uncertain tax positions as part of the acquisitions of the Subsidiaries.
We assumed the uncertain tax positions of certain acquired Subsidiaries and have recorded reserves for these positions, including related interest and penalties, of approximately $2.2 million as of December 31, 2016. If the settlement of any unrecognized tax reserves is different than that accrued, it would impact our effective tax rate. Under certain conditions, payments made by us, including interest and penalties, for assumed uncertain tax positions are indemnified by the previous owners of the Subsidiaries for a period of three years from the dates of acquisition and we have an indemnification receivable of $2.0 million recorded in the accompanying consolidated balance sheet as of December 31, 2016 included in this Annual Report on Form 10-K. If a reserved uncertain tax position results in an actual liability and we are unable to collect on or enforce the related indemnification provision or if the actual liability occurs after the applicable three-year indemnity period has expired, there could be a material charge to our consolidated financial results and reduction of cash resources.
Future sales of our common stock or other securities may depress our stock price.

We and our stockholders may sell shares of common stock or other equity, debt or instruments which constitute an element of our debt and equity (collectively, "securities") in the future. We may also issue shares of common stock under our stock plan or in connection with future acquisitions. We cannot predict the size of future issuances of securities or the effect, if any, that future issuances and sales of shares of our common stock or other securities will have on the price of our common stock. Sales of substantial amounts of common stock (including shares issued in connection with an acquisition), the issuance of debt securities, or the perception that such sales or issuances could occur, may cause the price of our common stock to fall.

Our officers and directors and the stockholders and former equity interest holders of the Subsidiaries and their affiliates exercise significant influence over us.

As of December 31, 2016, our executive officers and directors and the stockholders and former equity interest holders of the Subsidiaries and their immediate family members beneficially owned, in the aggregate, approximately 18% of our outstanding common stock. As a result, these stockholders are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. These stockholders may have interests that are different from yours.

Provisions in our certificate of incorporation and bylaws, Delaware law and our loan documents could discourage a takeover that stockholders may consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable because they, among other things:

authorize our board of directors, without stockholder approval, to issue up to 100,000 shares of undesignated preferred stock;

do not provide for cumulative voting in the election of directors;

establish supermajority voting requirements in order to amend certain provisions in our certificate of incorporation; and

prohibit stockholders from calling a special meeting of stockholders.


19


As a Delaware corporation, we are also subject to the Delaware anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on this provision to prevent or delay an acquisition of us. In addition, our credit agreement provides that a change of control is an event of default, which could impede an acquisition, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the price of our common stock.

We do not intend to pay dividends.

We have never declared or paid any cash dividends on our capital stock and do not intend to pay dividends in the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. We cannot assure you that you will receive a return on your investment when you sell your shares or that you will not lose the entire amount of your investment.

Our internal control over financial reporting, and , as a result, our disclosure controls and procedures, have been determined to not be effective, and we may not succeed in establishing and maintaining effective internal control over financial reporting, which may adversely affect investor confidence in our Company and, as a result, the value of our common stock.

We have evaluated the effectiveness of our internal control over financial reporting and our disclosure controls and procedures as of December 31, 2016, the end of the period covered by this report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was not effective, and as a result our disclosure controls and procedures were not effective, because of material weaknesses attributable to (A) our lack during 2016 of (i) accounting personnel with an appropriate level of accounting knowledge, experience, and training commensurate with our complex accounting issues and financial reporting requirements, (ii) adequate procedures to prepare, document and review areas of significant judgments and accounting estimates, including purchase accounting, contingent consideration, potential goodwill impairment and inventory valuation, (iii) timely and systematic review by management of account reconciliations, journal entries and other analyses to appropriately document and support the recording of financial information, (iv) thorough review of significant contracts for key accounting ramifications, (v) documentation retention to support the amounts reported and (vi) segregation of duties over journal entries as well as (B) undue reliance on the findings and conclusions of third-party specialists without an appropriate level of internal review, and (C) inadequate Information Technology General Controls, including limited segregation of duties and access rights controls over information systems at Subsidiaries without compensating corporate procedures and controls. Certain of these weaknesses were previously described in our Annual Report on Form 10-K for the year ended December 31, 2015 filed on April 14, 2016. Our efforts to remediate these material weaknesses are still in progress and may require substantial resources at significant cost over an extended period of time to complete. More generally, ensuring that we have adequate internal financial, accounting and disclosure controls in place requires a costly and time-consuming effort that needs to be re-evaluated frequently. If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, our actual and/or perceived ability to timely and accurately report on our financial results on a timely basis and meet our SEC reporting obligations could continue to be adversely affected. That could result in additional loss of confidence in our Company, and the price of our common stock could further decline.

When we cease to be an "emerging growth company" as defined under the JOBS Act, our auditors will be required to express an opinion on the effectiveness of our internal controls. If our auditors are then unable to express an opinion that our internal control over financial reporting is effective there could be an additional adverse impact on trading in our common stock.

The requirements of being a public company have increasingly strained our resources, increased our costs and distracted management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company with listed equity securities, we must comply with certain laws, regulations and requirements, including corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the Securities and Exchange Commission (the "SEC") and (if we are relisted on a national stock exchange) the requirements of the stock exchange where our shares may be listed, with which we were not required to comply as a private company. Complying with these statutes, regulations and requirements occupies a significant amount of the time of our board of directors and management and results in significant costs and expenses, which will increase after we are no longer an emerging growth company under the JOBS Act. Among the actions we have taken or are in the process of taking are to:
 
institute comprehensive corporate governance and compliance functions;
 
design, establish, evaluate and maintain a system of internal control over financial reporting in compliance with the requirements of Section 404(a) of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
 
comply with rules promulgated by the NASDAQ Global Market;
 
prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

20


 
establish internal policies, such as those relating to disclosure controls and procedures and insider trading;
 
involve and retain outside counsel and accountants in connection with these activities; and
 
establish an investor relations function.

Due to the historic decentralized cash basis financial reporting at the Subsidiaries, complex accounting required by the acquisitions of Subsidiaries and our historic lack of effective controls over financial reporting, we have incurred accounting and auditing fees that are extraordinarily high for a public company of our size. In addition, these complexities have resulted in our inability to file our quarterly reports on Form 10-Q and a Form 10-K in a timely manner, which resulted in the suspension from trading (and will result in the eventual delisting) from the Nasdaq Global Market of our common stock. Please see the description elsewhere in these risk factors of our delinquencies in filing our quarterly reports on Form 10-Q and this Form 10-K. We have also incurred in the past and continue to incur considerable legal fees in connection with various matters described elsewhere in these risk factors. Total outside service and professional fees of almost $16 million have been incurred over the past two fiscal years while total revenues have been approximately $200 million over this period. Continued high legal, accounting and auditing costs of this magnitude are not sustainable and could have a material adverse effect on our financial condition, and continued late filing of routine securities filings could undermine investors’ confidence in our Company.

We are an emerging growth company and our reliance on the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies, but are not applicable to emerging growth companies. In particular, while we are an emerging growth company, we are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, we are subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and we are not required to hold nonbinding advisory votes on executive compensation or shareholder approval of any golden parachute payments not previously approved. We have taken advantage of certain reduced disclosure obligations and may elect to take advantage of other reduced burdens in future filings. Investors may find our common stock less attractive when we rely on these exemptions and relief. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline and/or become more volatile.

ITEM 1B.     UNRESOLVED STAFF COMMENTS

None.

ITEM 2.     PROPERTIES

Our properties are described in the Facilities section in Item 1 of this Annual Report on Form 10-K, and such description is incorporated by reference into this Item 2. Our properties are sufficient to meet our present needs, and we do not anticipate any difficulty in securing additional space to conduct operations or additional office space, as needed, on terms acceptable to us.

ITEM 3.     LEGAL PROCEEDINGS

From time to time, we are subject to litigation related to normal business operations. We maintain insurance for normal business risks and seek to vigorously defend ourselves in litigation.

SEC Inquiry
In September 2016, we received a subpoena from the Chicago Regional Office of the SEC requiring the production of various documents, which were all provided during December 2016 and January 2017. The SEC inquiry appears to be focused on the change during 2016 in our independent registered public accounting firm, our previously announced business combinations and related goodwill impairment charge, the effectiveness of our internal controls over financial reporting and our inventory valuation methodology. Our receipt of a subpoena from the SEC does not mean that we have violated securities laws. Although we have incurred substantial legal fees and other costs associated with production of the documents required by the SEC and may incur further costs before this inquiry is concluded, management does not believe that the inquiry will ultimately have a material impact on our financial condition, results of operations or cash flow, but cannot predict the duration or outcome of the inquiry.

Lawsuits
In January 2017, a class action lawsuit entitled Beezley v. Fenix Parts, Inc. et al, was filed in the United States District Court for the District of New Jersey against Fenix Parts, Inc., Kent Robertson, its President and Chief Executive Officer, and Scott Pettit, its Chief Financial Officer (the “Defendants”). The lawsuit was filed on behalf of purchasers of our shares from May 14, 2015 through October

21


12, 2016. The complaint asserts that all defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and SEC Rule 10b-5 and that Messrs. Robertson and Pettit violated Section 20(a) of the Exchange Act. The complaint asserts that we made false and/or misleading statements and/or failed to disclose that: (1) we had an inadequate inventory valuation methodology; (2) had an inadequate methodology to calculate goodwill impairment; (3) were engaging and/or had engaged in conduct that would result in an SEC investigation; and (4) as a result, our statements about our business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all relevant times. The plaintiffs seek class certification, an award of unspecified damages, an award of reasonable costs and expenses, including attorneys' fees and expert fees, and other further relief as the Court may deem just and proper.

In July 2017, a shareholder derivative lawsuit, entitled Melanie Weiss, derivatively on behalf of Fenix Parts, Inc. v. Kent Robertson, et al, and Fenix Parts, Inc., was filed in the Circuit Court of Cook County, Illinois, Chancery Division, against Messrs. Robertson and Pettit and the members of our board of directors.  This lawsuit contains allegations of wrongful conduct that are substantially similar to those in the Beezley lawsuit, with additional allegations that defendants’ wrongful conduct caused, among other things, our non-compliance with Credit Facility financial covenants, our failure to maintain effective internal controls, and our inability to timely file SEC-required periodic reports. Unlike the Beezley lawsuit, the plaintiff bases her demands for recovery on non-securities law claims, including breach of fiduciary duty, unjust enrichment, waste of corporate assets and gross mismanagement. The plaintiff seeks relief which includes unspecified damages and restitution from the individual defendants, an order requiring actions to be taken to improve corporate governance and internal procedures, an award of reasonable costs and expenses, including attorneys' fees and expert fees, and other further relief as the Court may deem just and proper.

In the case of both the Beezley and Weiss lawsuits, we believe that the allegations contained in the complaints are without merit and, in conjunction with our insurance carrier, intend to vigorously defend against all claims asserted therein. A reasonable estimate of the amount of any possible loss or range of loss, after applicable insurance coverage, cannot be made at this time and, as such, we have not recorded an accrual for any potential loss as of December 31, 2016.

ITEM 4.     MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SHARES

Market
Our common shares were trading under the trading symbol FENX on the NASDAQ Global Market ("NASDAQ") from May 2015 until our suspension from trading on June 29, 2017. Since that time, our common shares have been trading on the OTC Pink operated by the OTC Markets Group Inc. (also known as the "Pink Sheets"). The trading symbol continues to be FENX.

Prices
The table below sets forth the high and low sales prices during each calendar quarter since May 14, 2015, the date the IPO closed.

2016
High
Low
Fourth Quarter
$
4.60

$
2.75

Third Quarter
$
5.38

$
3.17

Second Quarter
$
5.35

$
2.94

First Quarter
$
7.01

$
4.33

2015
 
 
Fourth Quarter
$
8.50

$
5.40

Third Quarter
$
10.94

$
6.65

Second Quarter
$
11.92

$
8.59


Dividends
We have never paid cash dividends on our common shares and have no current plan to do so in the foreseeable future. The declaration and payment of dividends on our common shares are subject to the discretion of our Board of Directors. The decision of the Board of Directors to pay future dividends will depend on general business conditions, the effect of a dividend payment on our financial condition,

22


and other factors the Board of Directors may consider relevant. In addition, our bank credit agreement requires us to obtain bank approval prior to paying a dividend.

Holders
Based on information from our transfer agent and from banks and brokers as of July 20, 2017, there were approximately 43 registered stockholders and beneficial holders of our common shares. The number of registered stockholders does not include beneficial owners whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

Transfer Agent
The transfer agent and registrar for our common shares is American Stock Transfer & Trust Company, LLC, 6201 15th Avenue, Brooklyn, NY 11219.

Securities Authorized for Issuance Under Equity Compensation Plans.
See our disclosure below in "Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."

Performance Graph
The following graph compares our total return to stockholders per common share by quarter for the period of May 14, 2015, the date the IPO closed, through December 31, 2016, to that of the NASDAQ North American Auto & Parts Index and the following group of peer companies (the "Peer Group"): LKQ Inc.; Copart, Inc.; Genuine Parts, Inc.; Dorman Products Inc.; US Auto Parts Network and Advanced Auto Parts Inc. for the period beginning on May 14, 2015 (which was the date of the Company’s IPO) and ending on December 31, 2016. The stock price performance in the following graph is not necessarily indicative of future stock price performance. The graph assumes that the value of an investment in each of the Company’s common stock, the NASDAQ North American Auto & Parts Index and the Peer Group was $100 on May 14, 2015.
fenx-201512_chartx42934a01.jpg
This stock performance information is "furnished" and shall not be deemed to be "soliciting material" or subject to Rule 14A, shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this report and irrespective of any general incorporation by reference language in any such filing, except to the extent that it specifically incorporates the information by reference.

Recent Sales of Unregistered Securities

During January 2016, we issued 10,707 unregistered shares of our common stock to the former owner of an acquired Subsidiary in payment of a consulting fee. The award was valued at $50,000, based on the share price on the date of the grant. The foregoing grant was exempt from registration under the Securities Act pursuant to Section 4(a)(2) thereof on the basis that the transaction did not involve a public offering.

Effective as of May 23, 2016, we issued an aggregate of 19,332 restricted shares of common stock to five of our outside directors in lieu of cash compensation for their service as directors of the Company. The shares were issued under our 2014 Stock Plan. The number of shares issued to these directors was determined by dividing the dollar amount of the cash compensation each such director was entitled to receive for his service from January 1, 2016 until May 23, 2016, which was an aggregate of approximately $94,000, by the average closing price of our common stock on NASDAQ for that period. These shares were exempt from registration under the Securities Act pursuant to Section 4(a)(2) thereof on the basis that the transaction did not involve a public offering.


23


This information regarding the sale of unregistered securities is "furnished" and shall not be deemed to be "soliciting material" or subject to Rule 14A, shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this report and irrespective of any general incorporation by reference language in any such filing, except to the extent that it specifically incorporates the information by reference.

ITEM 6 – FENIX PARTS, INC. SELECTED FINANCIAL DATA

Selected financial data is presented below as of the end of and for each of the years ended December 31. The selected financial data should be read in conjunction with the consolidated financial statements as of and for the years ended December 31, and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report and the schedules thereto (in thousands, except share and per share data).
 
 
Fenix Parts Inc. and Subsidiaries
 
December 31,
Statement of Operations Data:
2016
2015
2014
Total revenues
$
132,100

$
68,946

$

Cost of goods sold
78,641

53,559


Gross profit
53,459

15,387


Operating loss
(47,757
)
(30,843
)
(4,747
)
Net loss
$
(42,869
)
$
(26,041
)
$
(4,746
)
Net loss available to common shareholders
$
(40,717
)
$
(24,819
)
$
(4,746
)
Basic and diluted loss per share available to common shareholders
$
(2.05
)
$
(1.86
)
$
(2.22
)
Weighted-average basic shares outstanding
19,869,316

13,332,691

2,142,994

 
 
 
 
Other Data:
 
 
 
Net cash provided by (used in):
 
 
 
Operating activities
(1,717
)
(15,750
)
(3,166
)
Investing activities
(741
)
(105,554
)

Financing activities
362

123,743

3,619


 
Fenix Parts Inc. and Subsidiaries
 
December 31,
Balance Sheet Data:
2016
2015
Cash and cash equivalents
$
738

$
2,827

Working capital
1,040

30,599

Total assets
125,397

179,838

Total Credit Facility debt, including current portion
21,094

20,438

Total Fenix Parts, Inc. shareholders’ equity before noncontrolling interest
62,229

101,384


ITEM 6A – BEAGELL GROUP AND STANDARD (DESIGNATED ACCOUNTING CO-PREDECESSORS) SELECTED FINANCIAL DATA

Selected financial data for the Beagell Group and Standard are presented below for the fiscal year ended December 31, 2014 and the period of January 1, 2015 to May 18, 2015. The selected financial data should be read in conjunction with the respective Beagell Group and Standard combined financial statements as of and for the period ended May 18, 2015 and as of and for the year ended December 31, 2014, and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report and the schedules thereto (dollars in thousands).

24


 
Beagell Group
(Designated accounting predecessor)   
 
Standard
(Designated accounting predecessor)   
 
Period From January 1, 2015 to May 18, 2015
 
Year Ended December 31, 2014
 
Period From January 1, 2015 to May 18, 2015
 
Year Ended December 31, 2014
 
 
 
 
Statement of Operations Data:
 
 
 
 
 
 
 
Total revenues
$
11,107

 
$
30,598

 
$
8,914

 
$
31,126

Gross profit
3,712

 
10,701

 
2,918

 
11,409

Operating income (loss)
528

 
2,393

 
(467
)
 
1,885

Net income (loss)
516

 
2,242

 
(245
)
 
2,043

 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
Operating activities
477

 
2,915

 
(576
)
 
2,267

Investing activities
803

 
32

 
51

 
(2,183
)
Financing activities
(1,885
)
 
(1,897
)
 

 
(246
)


25


ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is an analysis of the Company’s results of operations, liquidity and capital resources and should be read in conjunction with the consolidated financial statements and notes related thereto included in this Form 10-K. To the extent that the following Management’s Discussion and Analysis contains statements which are not of a historical nature, such statements are forward-looking statements which involve risks and uncertainties. These risks include, but are not limited to the risks and uncertainties discussed in "Item 1A Risk Factors" in this Annual Report on Form 10-K. The following discussion and analysis should be read in conjunction with the "Forward Looking Statements" and "Item 1A Risk Factors" each included in this Annual Report on Form 10-K.
Financial Statement Components

Revenue
Our combined sales consist of revenues from: (i) recycled OEM and related products, and (ii) other related and ancillary sources. Our recycled OEM and related products revenue is generated from the sale of recycled OEM and related products to collision repair shops and mechanical repair shops, parts suppliers and individual retail customers through centralized distribution facilities. Our recycled OEM and related products include mechanical parts used to repair worn or damaged components, such as engines, transmissions, transfer cases, air conditioning compressors and knee assemblies, and collision repair parts used to repair vehicles typically involved in a collision, such as doors, lids, gates, front and rear bumpers, and headlights. In addition, we purchase recycled OEM and related products from third parties for resale and distribution to our customers. For each of the years ended December 31, 2016 and 2015, recycled OEM and related product sales revenue represented approximately 86% of our combined net revenues (combined revenues as reported for 2015 on an unaudited pro forma basis).

Other ancillary revenues primarily include the disposal of end of life vehicles, related scrap sales and the sale of extended warranties. We obtain scrap as a byproduct from the vehicles that have been used in both full-service and self-service recycling operations. The sale of scrap includes catalytic converters, fluids, wheels and tires, copper wiring, cores and crushed hulls. Other ancillary revenues related to the disposal of end of life vehicles and related scrap sales will vary based on fluctuations in commodity prices and the volume of materials sold. Other ancillary revenues also include the sale of extended warranty contracts for certain mechanical products. For each of the years ended December 31, 2016 and 2015, revenue from other ancillary sources represented approximately 14% of our combined net revenues (combined revenues as reported for 2015 on an unaudited pro forma basis).

Under the acquisition method of accounting, the deferred revenue associated with the extended warranty contracts acquired during 2015 was determined to be negligible and the balance was effectively written-off as of the date of acquisition for all acquired companies. New warranty contract sales subsequent to the acquisition date are deferred and recognized ratably over the term of the contracts, or five years in the case of lifetime warranties.

Cost of Goods Sold
Our cost of goods sold for recycled OEM and related products includes the price we pay for the vehicles we purchase and, where applicable, auction, storage and towing fees and other costs of procurement and dismantling, primarily direct labor and overhead allocable to dismantling operations or, in the case of used car and motorcycle sales, to preparing the vehicle for sale. We acquire vehicles for dismantling from several sources, including auto salvage auctions and from the public. Inventory costs for recycled OEM parts are established using a retail method of accounting as described in Note 2 to the consolidated financial statements in this document. Prices for vehicles may be impacted by a variety of factors, including the demand and pricing trends for used vehicles, the number of vehicles designated as "total losses" by insurance companies, the production level of new vehicles, and the status of laws regulating the titling of "total loss" vehicles and the bidders of vehicles at auction.

Our cost of goods sold also includes the price we pay to third parties for recycled OEM and related products purchased for resale. These products are purchased to supplement our inventory for sale to our customers. Direct labor and other overhead incurred to purchase and dismantle vehicles accounted for approximately 23% of our total cost of goods sold during the year ended December 31, 2016.

Under the acquisition method of accounting, inventories acquired are adjusted to fair value as of the date of acquisition. The incremental adjustment of inventory to fair value is amortized through cost of goods sold based on the average utilization of the acquired inventory. The cost of goods sold impact of the fair value amortization amounted to $1.4 million and $8.6 million for the years ended December 31, 2016 and 2015, respectively, offset by a credit to cost of goods sold of $2.2 million during 2016 in accordance with ASU No. 2015-16 related to a change in the first quarter of 2016 in the estimated fair value of the inventories acquired in 2015. See Note 4 to the consolidated financial statements in this document for further information.

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

Operating Expenses

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Our expenses primarily consist of costs of operations and distribution as well as selling, marketing, general and administrative expenses, including outside services and professional fees, and depreciation and amortization. These costs include (1) wages for the operating management, facility and distribution personnel not directly related to the procurement and dismantling of vehicles, and related incentive compensation and employee benefits; (2) costs to occupy and operate the facilities including rent, utilities, insurance, repairs and taxes not allocated to dismantling operations; (3) costs to distribute products and scrap, including freight, vehicle operating expenses and repairs and maintenance; and (4) other facility expenses not allocated to dismantling operations. Our operations and distribution expenses are integral to the operation of each facility and primarily include our costs to prepare and deliver our products to our customers. These costs include labor costs for drivers, fuel, third party freight costs, local delivery and transfer truck leases or rentals and related repairs and maintenance, insurance, and supplies.

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

Our general and administrative expenses primarily include the costs of our corporate offices and field support services center that provide field management, treasury, accounting, legal, payroll, business development, human resources and information systems functions. These costs include wages and benefits for corporate, regional and administrative personnel, share-based compensation and other incentive compensation, IT system support and maintenance expenses, supplies, travel, director & officer insurance and other costs attributable to being a publicly-traded company.

Outside services and professional fees include third-party costs related to legal matters, accounting and auditing, tax compliance and consultation, and acquisition due diligence.

Also included in operating expenses are changes in the estimated fair value of contingent consideration liabilities, reductions in the indemnification receivables established at the acquisitions of Subsidiaries in 2015, and goodwill impairment.

Critical Accounting Policies and Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, especially as it relates to Revenue Recognition, Allowance for Doubtful Accounts, Inventories, Business Combinations, Goodwill, Intangible Assets, Income Taxes, Share-based Compensation, and Contingent Consideration. Actual results could differ from those estimates. We believe that the following accounting policies (see Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in this document) involve a higher degree of judgment and complexity and are deemed critical. We discuss our critical accounting policies with the audit committee of the Board of Directors.

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

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

Allowance for Doubtful Accounts
The allowance for doubtful accounts is management’s best estimate of the amount of credit losses in accounts receivable. In order to control and monitor the credit risk associated with our customer base, we review the credit worthiness of our customers on a recurring basis. Factors influencing the level of scrutiny include the level of business the customer has with us, the customer’s payment history and the customer’s financial stability. Receivables are considered past due if payment is not received by the date agreed upon with the customer, which is normally 30 days. Representatives of our management team review all past due accounts on a bi-weekly basis to assess collectability. At the end of each reporting period, the allowance for doubtful accounts balance is reviewed relative to management’s collectability assessment and is adjusted if deemed necessary through a corresponding charge or credit to bad debt expense, which is included in selling, general, and administrative expenses in the consolidated statements of operations. Bad debt write-offs are made when management believes it is probable a receivable will not be recovered.

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Inventories
Our recycled OEM and related product inventory cost is established based upon the price we pay for a vehicle, including auction, storage and towing fees, as well as expenditures for buying and dismantling vehicles using a retail method of accounting. Parts are dismantled from purchased vehicles and a retail price is assigned to each dismantled part. The total retail price of the inventoried parts is reduced by the estimated balance of parts that will be subsequently sold for scrap or discounted to a reduced expected selling price. These scrap and discount estimates are significant and require application of complex assumptions and judgments that are subject to change from period to period. The cost assigned to the salvaged parts and scrap is determined using the average cost-to-sales percentage at each operating facility and applying that percentage to the facility's inventory at expected selling prices. The average cost-to-sales percentage is derived from each facility’s historical sales and actual cost paid for salvage vehicles purchased at auction or procured from other sources. We also capitalize direct labor and overhead costs incurred to dismantle salvaged parts and prepare the parts for sale. With respect to self-service inventories, costs are established by calculating the average sales price per vehicle, including its scrap value and part value, applied to the total vehicles on-hand. Inventory costs for aftermarket parts, used cars and motorcycles for resale are established based upon the price we pay for these items.

All inventory is recorded at the lower of cost or market. The market value of our inventory is determined based on the nature of the inventory and anticipated demand. If actual demand differs from our earlier estimates, reductions to inventory carrying value would be necessary in the period such determination is made.

The historical cost basis of inventories acquired in conjunction with the business acquisitions made in 2015 includes an adjustment to record the inventory at its estimated fair value on the dates of acquisition. This incremental adjustment of inventory to fair value is amortized through cost of goods sold based on the average utilization of the acquired inventory. The acquisitions of the Subsidiaries contributed a $10.0 million increase in our recycled OEM and related products inventory during 2015, of which approximately $1.4 million and $8.6 million was amortized through cost of goods sold during 2016 and 2015, respectively. During the first quarter of 2016, we adjusted the estimated fair value of acquired inventory and accordingly decreased this fair value mark-up by $2.2 million, which was recorded as a credit to cost of goods sold during 2016 in accordance with ASU No. 2015-16. See Note 4 to the consolidated financial statements in this document for further information on our acquired inventory.

Acquisitions
We record our business combinations under the acquisition method of accounting, under which acquisition purchase price is allocated to the identifiable assets acquired and liabilities assumed based upon their respective fair values. We utilize management estimates and, in some instances, independent third-party valuation firms to assist in determining the fair values of the identifiable assets acquired, liabilities assumed and contingent consideration granted. Such estimates and valuations required us to make significant assumptions, including projections of future events and operating performance. The purchase price allocation is subject to change during the measurement period, which is limited to one year subsequent to the acquisition date. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. During March 2016, the Company made certain changes to the purchase price allocations of the Subsidiaries acquired in 2015 that increased goodwill by approximately $5.3 million, primarily as a result of substantial reductions in the estimated value of acquired inventories, as described in Note 4 to the consolidated financial statements in this document. Transaction and restructuring costs associated with a business combination are expensed as incurred.

Assessment of Potential Impairments of Goodwill
We are required to assess our goodwill for impairment at least annually for our one reporting unit and we do this as of October 1st. If the reporting unit has historically had a significant excess of fair value over book value and based on current operations is expected to continue to do so, the Company’s annual impairment test is performed qualitatively. If this is not the case, the first step of the goodwill impairment process ("Step 1") is completed, which involves determining whether the estimated fair value of the reporting unit exceeds the respective book value. In performing Step 1, management compares the carrying amount of the reporting unit to its estimated fair value. If the fair value exceeds the book value, goodwill of that reporting unit is not impaired.

The estimated fair value of the reporting unit is calculated using one or both of the following generally accepted valuation techniques: the income approach (discounted cash flows) and the market approach (using market multiples derived from a set of companies with comparable market characteristics). The appropriate methodology is determined by management based on available information at the time of the test. When both approaches are used, the estimated fair values are weighted. Substantial management judgment must be applied in determining such weightings.

If the Step 1 result concludes that the estimated fair value does not exceed the book value of the reporting unit, goodwill may be impaired and additional analysis is required ("Step 2"). Step 2 of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill to its carrying value. The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date, by allocating the reporting unit’s estimated fair value to its assets and liabilities including any unrecognized intangible assets. The residual amount from performing this allocation represents the implied fair value of goodwill. To the extent this amount is below the carrying value of goodwill, an impairment loss is recorded.

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On a quarterly basis, we consider whether events or circumstances are present that may lead to the determination that an indicator of impairment exists. These circumstances include, but are not limited to, deterioration in key performance indicators or industry and market conditions as well as adverse changes in cost of capital, discount rates and terminal values.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment and estimates. During the first quarter of 2016, we recorded an impairment charge of $45.3 million, and the process and assumptions used to calculate such impairment are fully described in Note 11 to the consolidated financial statements in this document. Also discussed therein are the additional tests and calculation that were performed as of October 1, 2016 and December 31, 2016, which determined that no further impairment of goodwill was required during 2016. For these calculations, management (a) performed a more comprehensive income approach calculation extending the income plan from 5 to 7 years due to anticipated changes in future business, and (b) substantially eliminated use of the market approach calculation because delays in quarterly reporting of financial results made it impracticable for the market to evaluate the value of the reporting unit at that time.

Impairment of Long-Lived Assets and Amortizable Intangible Assets
In conjunction with our third party valuation expert, we used various techniques in estimating the initial fair value attributed to intangible assets acquired in 2015, such as customer relationships, trade names and covenants not to compete, and other long lived assets. We evaluate the carrying value of intangible assets and other long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We test these assets for recoverability by comparing the net carrying value of the asset or asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset or asset group. If the assets are not recoverable, an impairment loss is recognized for any deficiency of the asset or asset group's estimated fair value compared to their carrying value. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage our business, there is significant judgment in determining the cash flows attributable to these assets, including markets and market share, customer attrition rates, sales volumes and mix, capital spending and working capital changes and we did not identify any impairment through December 31, 2016.

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

We file income tax returns in the United States and Canada. We are not currently subject to any income tax examinations; however, tax returns of Fenix for 2014 (year of inception), 2015 (consolidated after the Combinations) and 2016 (consolidated) and tax returns of the acquired Subsidiaries for tax years 2013 through pre-acquisition periods in 2015 remain open under the statute of limitations. As of December 31, 2016 and 2015, we had a net deferred tax asset of $1.7 million and $0.6 million, respectively, attributable to Canadian subsidiaries primarily because of net operating loss carryforwards generated in 2016 and 2015 and goodwill impairment in 2016. Based on the available evidence and given the uncertainties associated with generating future taxable income in Canada, we have recorded a full valuation allowance for the net Canadian deferred tax assets at both balance sheet dates.

The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We follow 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 liability as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating its tax positions, which may require periodic adjustments and which may not accurately forecast actual outcomes. Our uncertain tax position reserves include related interest and penalties and all relate to tax positions taken on returns prior to the individual acquisitions of Subsidiaries. Our policy is to include interest and penalties associated with income tax obligations in income tax expense. Our right to indemnification under certain of the combination agreements related to these uncertain tax positions is subject to a threshold of 1% of the purchase price, a cap of 40% of the purchase price paid for each individual acquisition. These indemnifications are subject to a three year limitation from date of the acquisitions. See Note 10 to the consolidated financial statements in this document for further information on our uncertain tax positions.


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Our uncertain tax position reserves, including the reserves for related interest and penalties of approximately $0.5 million and $2.4 million, were $2.2 million and $5.7 million as of December 31, 2016 and 2015, respectively. During the year ended December 31, 2016, the statute of limitations lapsed without audit for certain tax returns filed by acquired Subsidiaries for which reserves for uncertain tax positions and indemnification receivables had been established. As a result, we reversed approximately $3.4 million of uncertain tax position reserves, which included $1.9 million of accrued interest and penalties, as a credit to the income tax benefit in the consolidated statement of operations in 2016. Correspondingly, the indemnification receivables, which were $2.0 million and $5.1 million as recorded in the consolidated balance sheets as of December 31, 2016 and 2015, respectively, were reduced by $2.9 million through a charge to operating expenses in 2016. If a reserved uncertain tax position results in an actual liability and we are unable to collect on or enforce the related indemnification provision or if the actual liability occurs after the applicable indemnity period has expired, there could be a material charge to our consolidated financial results and reduction of cash resources.

Undistributed earnings of our Canadian subsidiaries are considered to be indefinitely reinvested, and accordingly no provision for U.S. income taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to adjustment for foreign tax credits) and potential withholding taxes payable in Canada. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce materially any U.S. liability.

Share-based Compensation
We recognize compensation expense for employee equity awards ratably over the requisite service period of the awards. For the equity award grants, there was no estimated annual forfeiture rate applied due to the lack of historical forfeiture experience to date, and expense of $2.6 million and $3.0 million was recorded in the consolidated statements of operations for 2016 and 2015, respectively. If actual forfeitures are significant in the future, share-based compensation expense would be reduced in future periods.

We utilize the Black-Scholes option-pricing model to estimate the fair value of stock option awards. Determining the fair value of stock options using the Black-Scholes model requires judgment, including estimates for (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 comparable companies' common shares 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; and (4) expected dividend yield – an estimate of cash dividends, which we do not currently intend to pay. For further information, see Note 8 to the consolidated financial statements in this document.

Contingent Consideration
Under arrangements with the former owners of three Founding Companies, those former owners can earn additional cash and stock if certain performance measures are achieved subsequent to the combinations. The fair value of the aggregate contingent consideration was initially estimated as $10.2 million and recorded in the consolidated financial statements at the acquisition date based on independent valuations considering our initial 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%. Subsequent to the Combinations, our management reviews the amounts of contingent consideration that are likely to be payable under current operating conditions and adjusts the initial liability as deemed necessary, including adjustments for mark-to-market fluctuations based on changes between periods in the trading price of Fenix common stock and, with respect to the Canadian Founding Companies, currency remeasurement, with such subsequent adjustments being recorded through the statement of operations as a credit or charge. In the event that there is a range of possible outcomes, we apply a probability approach to determine the estimated obligation to be recorded at the end of an accounting period. Estimating the range of possible outcomes and amount of contingent consideration that may be payable in future periods involves the application of significant judgment and assumptions about future events by our management based on the information available at the time.

During 2015, we recorded a $6.0 million increase and during 2016, an $8.2 million decrease in the contingent consideration liabilities. As of December 31, 2016, the estimated contingent consideration liability, which was all classified as current, was $7.2 million. We are in negotiations with the former owners to determine the amounts due under these covenants and schedule payment of currently due amounts. We expect to fund any cash payments to the former owners, to the extent they are ultimately deemed earned, through cash generated from future operations or, if necessary and available, through draws on the revolving Credit Facility or through other sources of capital that may be available, and through draws on the bank letter of credit for the Canadian Founding Companies, which is considered Funded Debt under the Total Leverage Ratio required under the Credit Facility. We are currently at an impasse in negotiations with the former owners of the Canadian Founding Companies regarding the calculation of contingent consideration earned, if any, and the parties have begun the process of submitting their respective calculations to binding arbitration. The ultimate resolution of the total amounts payable under these covenants could differ substantially from what is recorded at December 31, 2016, based on future developments. For further information, see Note 6 to the consolidated financial statements in this document.


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Recently Adopted Accounting Standards

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU changes the accounting for certain aspects of share-based payment awards to employees and requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. This pronouncement is effective for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. We adopted ASU 2016-09 effective April 1, 2016 and all forfeitures have been applied when they occurred.

In September 2015, FASB issued ASU No. 2015-16, Business Combinations (Topic 805), 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. We adopted ASU 2015-16 effective January 1, 2016, resulting in the recognition of certain adjustments during the first quarter of 2016 to goodwill and other balance sheet and income statement accounts as described in Note 4 to the consolidated financial statements in this document.

In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputed Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies that the guidance in ASU 2015-03 does not apply to line-of-credit arrangements. According to ASU 2015-15, debt issuance costs related to line-of-credit arrangements will continue to be deferred and presented as an asset and subsequently amortized ratably over the term of the arrangement. The amendments in ASU 2015-03 and clarifications of ASU 2015-15 were effective for us in the first quarter of 2016. The early adoption of ASU 2015-03 and the adoption of ASU 2015-15 resulted in $438,000 in original debt issuance costs incurred during 2015 and an additional $102,000 in amendment charges during 2016, being netted against the term loan balance and such amounts are being amortized over the life of the term loan as described more fully in Note 5 to the consolidated financial statements in this document.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 describes how an entity’s management should assess, considering both quantitative and qualitative factors, whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued, which represents a change from the previous literature that required consideration about an entity’s ability to continue as a going concern within one year after the balance sheet date. We adopted this standard during the fourth quarter of 2016. The implementation of this standard did not have a material impact on our consolidated financial statements and related disclosures. See the discussion of "Liquidity and Capital Resources" in this section of our Annual Report on Form 10-K for 2016.

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for us in the first quarter of 2020. We do not expect the adoption of the new accounting rules to have a material impact on our financial condition, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250), this amendment states that registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to include a description of the effect of the accounting policies that the registrant expects to apply, if determined. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. We do not expect the adoption of the new accounting rules to have a material impact on our financial condition, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of "a business" to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a

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minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. We do not expect this new guidance to have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230) (a consensus of the Emerging Issues Task Force).  ASU 2016-15 addresses eight specific cash flow issues and applies to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under ASC 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period. We have not yet adopted this update and are currently evaluating the impact it may have on its financial condition and results of operations.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables, which will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands disclosure requirements. ASU 2016-13 is effective for us beginning the first quarter of 2020 with early adoption permitted. We are currently evaluating the impact of adoption of ASU 2016-13 on its consolidated financial statements and related financial statement disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). The new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are currently evaluating the effect this standard will have on its consolidated financial statements and timing of adoption, we expect that upon adoption, we will recognize ROU assets and lease liabilities and those amounts are likely to be material.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update outlines a single, comprehensive model for accounting for revenue from contracts with customers. In August 2015, the FASB deferred the effective date by one year to January 1, 2018, while providing the option to early adopt the standard on the original effective date of January 1, 2017. We plan to adopt this update on January 1, 2018. The guidance can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the adoption alternatives, which include utilizing a bottom-up approach to analyze the standard’s impact on our contract portfolio, comparing historical accounting policies and practices to the new standard to identify potential differences from applying the requirements of the new standard to its contracts. We have not yet selected a transition method and are currently evaluating the impact it may have on its consolidated financial statements and related disclosures.

Fenix Parts, Inc.

Overview
We are in the business of automotive recycling, which is the recovery and resale of OEM parts, components and systems, such as engines, transmissions, radiators, trunks, lamps and seats reclaimed from damaged, totaled or low value vehicles. We purchase our vehicles primarily at auto salvage auctions. Upon receipt of vehicles, we inventory and then dismantle the vehicles and sell the recycled components. Our customers include collision repair shops, mechanical repair shops (body shops), auto dealerships and individual retail customers. We also generate a portion of our revenue from the sale as scrap of the unusable parts and materials, from the sale of used cars and motorcycles, the sale of aftermarket parts, and from the sale of extended warranty contracts.

Fenix was founded on January 2, 2014 for the purpose of effecting the Combinations and IPO. Fenix had no automobile recycling operations before May 2015 during which time it had two employees. From inception to May 19, 2015, Fenix incurred various legal, accounting, auditing and administrative costs in preparation for its IPO, the Combinations and for its operation as a publicly-traded company upon consummation of these transactions. After May 18, 2015, Fenix’s results include the operations of the Founding Companies and, beginning with the third quarter of 2015, of the Subsequent Acquisitions.

Liquidity and Ability to Continue as a Going Concern
Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should we be unable to continue as a going concern.


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As of June 30, 2016, September 30, 2016 and December 31, 2016, we were in breach of certain financial covenants contained in our Credit Facility as well as the requirement for timely delivery of certain quarterly certificates and reports. As a result, all of the Credit Facility debt of $21.5 million at December 31, 2016, less unamortized debt issuance costs of $0.4 million, is reported in the accompanying consolidated balance sheet as a current liability at December 31, 2016 and there can be no further borrowings on any availability under the Credit Facility until such defaults are rectified or waived. On March 27, 2017, we entered into a Forbearance Agreement to the Credit Facility (the "Forbearance Agreement") with BMO Harris Bank N.A and its Canadian affiliate, Bank of Montreal. Pursuant to the Forbearance Agreement, the banks have agreed to forbear from exercising their rights and remedies under the Credit Facility with respect to the above described defaults and any similar defaults during the forbearance period, provided no other defaults occur. The Forbearance Agreement was amended on June 23, 2017 to extend the forbearance period, which had originally expired on May 26, 2017, until August 31, 2017 and to resolve certain new defaults.

Our Board of Directors has engaged a financial advisor to advise the Board and management and to assist in pursuing a range of potential strategic and financial transactions that will provide us with improved liquidity and maximize shareholder value. The financial advisor will identify and evaluate potential alternatives including a business combination, debt and/or equity financing, or a strategic investment into the Company, and is reporting directly to a special committee of independent directors established to oversee and coordinate these activities. The Board has not set a definitive timetable for completion of this process. There can be no assurance that this process will result in a transaction or other strategic alternative of any kind. Furthermore, the June 29, 2017 suspension in trading and eventual delisting of our common stock on the Nasdaq Global Market negates our ability to pursue strategic and financial transactions available only to listed companies.

If we are unable to reach further agreement with our lenders to obtain waivers or amendments to the existing Credit Facility, find acceptable alternative financing, obtain equity contributions, or arrange a business combination our Credit Facility lenders could elect to declare some or all of the amounts outstanding under the facility to be immediately due and payable. If this happens, we do not expect to have sufficient liquidity to pay the outstanding Credit Facility debt. In addition, we have significant obligations under contingent consideration agreements related to certain acquired companies, and we will need access to additional credit to be able to satisfy these obligations. These matters, including our ability to continue as a going concern, are more fully discussed below under Liquidity and Capital Resources.

CONSOLIDATED RESULTS OF OPERATIONS

Comparison of Years Ended December 31, 2016 and 2015
(in thousands, except percentages)
December 31, 2016
 
Percent of Net Revenues
 
December 31, 2015
 
Percent of Net Revenues
Net revenues
$
132,100

 
100.0
 %
 
$
68,946

 
100.0
 %
Cost of goods sold
78,641

 
59.5
 %
 
53,559

 
77.7
 %
Gross profit
53,459

 
40.5
 %
 
15,387

 
22.3
 %
Selling, general and administrative expenses
49,888

 
37.8
 %
 
28,346

 
41.1
 %
Outside service and professional fees
6,741

 
5.1
 %
 
9,091

 
13.2
 %
Depreciation and amortization
4,601

 
3.5
 %
 
2,743

 
4.0
 %
Change in fair value of contingent consideration liabilities
(8,234
)
 
(6.2
)%
 
6,050

 
8.8
 %
Change in indemnification receivable
2,920

 
2.2
 %
 

 
 %
Goodwill impairment
45,300

 
34.3
 %
 

 
 %
Operating loss
(47,757
)
 
(36.2
)%
 
(30,843
)
 
(44.8
)%
Interest expense
(1,384
)
 
(1.0
)%
 
(263
)
 
(0.4
)%
Other (expense) income, net
(14
)
 
 %
 
(1,959
)
 
(2.8
)%
Total other expense, net
(1,398
)
 
(1.0
)%
 
(2,222
)
 
(3.2
)%
Loss before income tax benefit
(49,155
)
 
(37.2
)%
 
(33,065
)
 
(48.0
)%
Benefit from income taxes
6,286

 
4.8
 %
 
7,024

 
10.2
 %
Net loss
$
(42,869
)
 
(32.4
)%
 
$
(26,041
)
 
(37.8
)%

Pro Forma Results (Unaudited)
The following table shows the unaudited pro forma combined net revenues and net loss for 2015 as if the acquisition of all Subsidiaries had occurred on January 1, 2015, as compared to the reported results for 2016. These unaudited pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of January 1, 2015 or of future operating results:

33


 
 
(Unaudited)
 
 
Year Ended December 31,
 
Difference
(in thousands, except percentages)
 
2016 as Reported
 
2015 Pro Forma
 
$
 
%
Net revenues
 
$
132,100

 
$
126,897

 
$
5,203

 
4.1
%
Net loss
 
$
(42,869
)
 
$
(23,716
)
 
$
(19,153
)
 
80.8
%

Pro forma combined net revenues consisted of:
 
 
(Unaudited)
(in thousands, except percentages)
 
Year Ended December 31,
 
Difference
 
 
2016 as Reported
 
2015 Pro Forma
 
$
 
%
Recycled OE parts and related products
 
$
114,110

 
$
109,658

 
$
4,452

 
4.1
%
Other ancillary products (scrap)
 
17,990

 
17,239

 
751

 
4.4
%
Total
 
$
132,100

 
$
126,897

 
$
5,203

 
4.1
%

Significant adjustments to the historical revenues of the Subsidiaries include the elimination of sales between acquired 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 us in the post-acquisition periods.

Significant adjustments to expenses include eliminating the effect 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 Subsidiaries, compensation related to certain bonuses paid to owners and employees and related income tax effects.

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 consolidated financial statements and is not adjusted back to January 1, 2015, as it does not have a continuing impact. 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.

Net Revenues
Net revenues for the year ended December 31, 2016 were $132.1 million. This represents a 91.6% increase over net revenues for the year ended December 31, 2015 of $68.9 million. This change is primarily a result of having automotive recycling operations for the Founding Companies from May 18, 2015 to December 31, 2015, and for the Subsequent Acquisitions beginning in the third quarter of 2015 to December 31, 2015. Net revenues of $132.1 million represents a 4.1% increase over unaudited pro forma combined net revenues for the year ended December 31, 2015 of $126.9 million. Of this increase, $4.5 million was attributable to sales of OE parts and related products and $0.8 million was attributable to sales of scrap.

We are subject to risks and uncertainties relating to the price of scrap metal, which can fluctuate significantly from period to period. While sales of scrap metal represent a small portion of our overall revenues, significant fluctuations have been experienced in metal prices over the past 24 months which have had an effect on our reported revenues including a decline of approximately 22% in average market prices for scrap auto bodies from the year ended December 31, 2015 to the year ended December 31, 2016 (as per the American Metal Market Index, 2015 = $162/ton; 2016 = $126/ton), which had an adverse effect on our reported revenues during the year ended December 31, 2016. Continued weakness in metals prices could continue to adversely affect our revenues and profits. This trend should be viewed in light of the partially offsetting effect of lower metals prices on our cost of acquiring vehicles for recycling.

Because we have substantial operations in Canada doing business in Canadian Dollars, we are also subject to risks and uncertainties relating to foreign currency exchange rates. Because of the significant increase in the value of the U.S Dollar against the Canadian Dollar during 2015, in the fourth quarter of 2015 and continuing through 2016, we substantially reduced shipments of parts from our U.S. facilities into the Canadian markets resulting in lower revenue at our Canadian facilities as they sought to develop Canadian sources to acquire vehicles and product for recycling. Continued changes in exchange rates could result in ongoing changes to operational and financial performance of the Canadian operations that could adversely affect our future reported results of operations.

Cost of Goods Sold
Our cost of goods sold for the year ended December 31, 2016 amounted to $78.6 million, or 59.5% of net revenues and a gross profit percentage of 40.5%. This represents a 46.8% increase over cost of goods sold for the year ended December 31, 2015 of 53.6 million. This change is primarily a result of having automotive recycling operations for the Founding Companies from May 18, 2015 to December 31, 2015, and for the Subsequent Acquisitions beginning in the third quarter of 2015 to December 31, 2015. Included in the cost of goods

34


sold for the year ended December 31, 2016 is a benefit of $2.2 million from retrospective adjustments to reduce the value of acquired inventories in the business combinations and $1.8 million in lower value of acquired inventory for periods prior to December 31, 2015. These credits to cost of goods sold, recorded as of March 31, 2016, were partially offset by the impact of post-acquisition amortization of the higher inventory values that resulted from applying the purchase method of accounting of $1.4 million in the year ended December 31, 2016 as compared to $8.6 million in the year ended December 31, 2015. As of December 31, 2016, there was no remaining unamortized fair value inventory adjustment as the acquired inventory was expected to be sold within three to six months. Depreciation of $1.0 million and $0.5 million was included in cost of goods sold during the years ended December 31, 2016 and 2015, respectively.

As mentioned above, our results of operations are exposed to market risk related to price fluctuations in scrap metal and other metals. Market prices of these metals affect the amount that we pay for our inventory, in addition to the revenue that we generate from sales of these metals. As both our revenue and costs are affected by the price fluctuations, we have a natural hedge against price changes. However, there is typically a lag between the effect on our revenue from metal price fluctuations and the corresponding effect on cost of goods sold. Our cost of goods sold for recycled OEM and related products reflects the historic average cost to acquire such products, including the price to purchase vehicles, auction, storage and towing fees, and expenditures for buying and dismantling vehicles.

Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the year ended December 31, 2016 amounted to $49.9 million, or 37.8% of net revenues. This represents a 76.0% increase over selling, general and administrative expense for the year ended December 31, 2015 of $28.3 million. This change is primarily a result of having automotive recycling operations for the Founding Companies from May 18, 2015 to December 31, 2015, and for the Subsequent Acquisitions beginning in the third quarter of 2015 to December 31, 2015. Selling, general and administrative expenses consisted of (a) operating and distribution costs that are not directly related to the procurement and dismantling of vehicles, (b) selling and marketing expenses, (c) general and administrative expenses, and (d) amortization of $2.6 million and $3.0 million of non-cash share-based compensation during the years ended December 31, 2016 and 2015, respectively.

Outside Service and Professional Fees
Our outside service and professional fees for the year ended December 31, 2016 amounted to $6.7 million, or 5.1% of net revenues. This represents a 25.8% decrease from outside service and professional fees for the year ended December 31, 2015 of $9.1 million. Outside service and professional fees consisted primarily of auditing, valuation reports and opinions, tax compliance and consulting, and legal fees for the year ended December 31, 2016, and also included significant fees incurred in conjunction with our transition to a new audit firm. For the year ended December 31, 2015, outside service and professional fees included costs related to due diligence, finalizing the audits and establishing the initial accounting valuations for the acquisitions of the Founding Companies, due diligence related to the Subsequent Acquisitions, and for outside accounting services after the IPO as we had not yet recruited and staffed an internal accounting department.

Depreciation and Amortization Expense
Our depreciation and amortization not directly attributable to cost of goods sold for the year ended December 31, 2016 amounted to $4.6 million, or 3.5% of net revenues. This represents a 67.7% increase over depreciation and amortization for the year ended December 31, 2015 of $2.7 million. This change is primarily a result of having automotive recycling operations for the Founding Companies from May 18, 2015 to December 31, 2015, and for the Subsequent Acquisitions beginning in the third quarter of 2015 to December 31, 2015. Amortization expense for intangible assets established in connection with acquisitions was $3.6 million and $2.1 million for the years ended December 31, 2016 and 2015, respectively.

Change in Fair Value of Contingent Consideration Liabilities
Our estimated fair value of contingent consideration liabilities decreased by $8.2 million for the year ended December 31, 2016, resulting in income equal to 6.2% of net revenues. This compares to an increase in estimated fair value of contingent consideration liabilities and resulting loss recorded during the year ended December 31, 2015 of $6.0 million. The contingent consideration liability primarily relates to covenants allowing for additional consideration to be paid to the former owners of the Canadian Founding Companies and Jerry Brown, Ltd. (“Jerry Brown”) if specified future events occur or conditions are met, such as meeting profitability or earnings targets. The change during 2016 primarily results because the estimated contingent consideration liability for the Canadian Founding Companies was reduced by $4.2 million during the year ended December 31, 2016 in accordance with FASB ASC No. 805 “Business Combinations,” which requires that we estimate contingent consideration at fair value using probable outcomes. As the amount of the contingent consideration is currently in dispute, we recorded the estimated contingent consideration liability for the Canadian Founding Companies as of December 31, 2016 based on the results of our assessment of the possible outcomes. During the year ended December 31, 2015, we increased the contingent consideration liability by $5.1 million based on substantial operating improvements and management’s budget for Jerry Brown for 2016. Based on results actually achieved by Jerry Brown during 2016, the estimated fair value of the contingent liability was reduced by $3.8 million, resulting in a credit to income which is reflected in the consolidated statement of operations for the year ended December 31, 2016. In addition, since some of the contingent consideration is payable in shares of our stock, movements in our stock price during the respective periods and currency remeasurement resulted in changes to the contingent consideration liabilities during the years ended December 31, 2016 and 2015.


35


Change in Indemnification Receivable
Our estimated fair value of the indemnification receivable decreased by $2.9 million for the year ended December 31, 2016, resulting in an expense equal to 2.2% of net revenues. The expense was attributable to the reduction in the receivable from former owners related to the indemnification for uncertain tax positions, recorded as a benefit under income taxes.

Goodwill Impairment
Based on the result of the first step of the goodwill impairment analysis, we determined that the fair value of our reporting unit was less than its carrying value as of March 31, 2016 and, as such, we applied the second step of the goodwill impairment test. Based on the result of this second step of the goodwill impairment analysis, we recorded a $45.3 million non-cash pretax charge to reduce the carrying value of goodwill in March 2016.

Interest Expense and Other (Expense) Income, net
Our interest expense, primarily related to our Credit Facility, was $1.4 million and $0.3 million for the years ended December 31, 2016 and 2015, respectively. Our first draw on the Credit Facility was in May 2015 in connection with the closing of the Combinations, and the increase in interest expense during 2016 is attributable to higher average balances outstanding during the year at slightly higher weighted average rates. Our other (expense) income, net was $0.0 million and expense of $2.0 million for the years ended December 31, 2016 and 2015, respectively. Other (expense) income, net for 2015 includes a $1.8 million charge for the make whole provision for pre-IPO investors.

Benefit from Income Taxes
We recorded an income tax benefit of $6.3 million for the year ended December 31, 2016, with an effective rate of 12.8% of the pretax loss reported for the year. This represents a 10.5% decrease as compared to the income tax benefit for the year ended December 31, 2015 of $7.0 million with an effective tax rate of 21.2%. The benefit recorded during the year ended December 31, 2016 includes a $3.4 million reversal of uncertain tax positions. However, the effective rate for 2016 was lower than the statutory rate applied to the pretax loss of $49.2 million for the year because no significant amount of tax benefit was recorded for the goodwill impairment of $45.3 million in 2016. The tax benefit associated with the portion of this impairment charge related to future goodwill deductions by the Canadian Founding Companies was offset by a valuation allowance because of the uncertainties associated with generating future taxable income in Canada. In addition to the items discussed above, the effective rate in the years ended December 31, 2016 and 2015 differs from the U.S. federal statutory rate due to the effects of the state and Canadian income taxes and non-deductible income and expense items reported in the consolidated statements of operations, such as changes in contingent consideration and changes in indemnification receivables. See Note 10 to the consolidated financial statements in this document.

Net Loss
Net loss for the year ended December 31, 2016 and 2015 was $42.9 million and $26.0 million, respectively. This represents a 64.6% decrease which results from the $45.3 million impairment of goodwill in 2016 and the other matters described above.

Comparison of Years Ended December 31, 2015 and 2014
(in thousands, except percentages)
Year Ended 
 December 31, 2015
 
Percent of Net Revenues
 
Period from
January 2, 2014 (Inception) to
December 31, 2014
Net revenues
$
68,946

 
100.0
 %
 
$

Cost of goods sold
53,559

 
77.7
 %
 

Gross profit
15,387

 
22.3
 %
 

Selling, general and administrative expenses
28,346

 
41.1
 %
 
232

Outside service and professional fees
9,091

 
13.2
 %
 
4,515

Depreciation and amortization
2,743

 
4.0
 %
 

Change in fair value of contingent consideration liabilities
6,050

 
8.8
 %
 

Operating loss
(30,843
)
 
(44.8
)%
 
(4,747
)
Interest expense
(263
)
 
(0.4
)%
 

Other (expense) income, net
(1,959
)
 
(2.8
)%
 
1

Total other expense, net
(2,222
)
 
(3.2
)%
 
1

Loss before income tax benefit
(33,065
)
 
(48.0
)%
 
(4,746
)
Benefit for income taxes
7,024

 
10.2
 %
 

Net loss
$
(26,041
)
 
(37.8
)%
 
$
(4,746
)


36


Pro Forma Results (Unaudited)
The following table shows the unaudited combined pro forma net revenues and net loss for 2015 and 2014 as if the acquisition of all Subsidiaries had occurred on January 1, 2014. These unaudited pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of January 1, 2014 or of future operating results:
 
 
(Unaudited)
(in thousands, except percentages)
 
Year Ended December 31,
 
Difference
 
 
2015
 
2014
 
$
 
%
Net revenues
 
$
126,897

 
$
132,802

 
$
(5,905
)
 
(4.4
)%
Net loss
 
$
(23,716
)
 
$
(4,594
)
 
$
(19,122
)
 
416.2
 %

Pro forma combined net revenues consisted of:
 
 
(Unaudited)
(in thousands, except percentages)
 
Year Ended December 31,
 
Difference
 
 
2015
 
2014
 
$
 
%
Recycled OEM parts and related products
 
$
109,658

 
$
108,361

 
$
1,297

 
1.2
 %
 Other ancillary products (scrap)
 
17,239

 
24,441

 
(7,202
)
 
(29.5
)%
Total
 
$
126,897

 
$
132,802

 
$
(5,905
)
 
(4.4
)%

Significant adjustments to the historical revenues of the Subsidiaries include the elimination of sales between acquired 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 us in the post-acquisition periods.

Significant adjustments to expenses include eliminating the effect 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 Subsidiaries, compensation related to certain bonuses paid to owners and employees and related income tax effects.

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 consolidated financial statements and is not adjusted back to January 1, 2014, as it does not have a continuing impact. 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.

Net Revenues
Net revenues for the year ended December 31, 2015 were $68.9 million, reflecting our automobile recycling operations from May 19, 2015 to December 31, 2015. On an unaudited pro forma combined basis assuming the acquisition of all current Subsidiaries occurred on January 1, 2014, net revenues for the years ended December 31, 2015 and 2014 were $126.9 million and $132.8 million, respectively, representing a 4.4% decrease. Pro forma net revenues in the year ended December 31, 2015, as compared to the same period in 2014, were adversely impacted by lower prices received for scrap sales and lower reported revenues at the Canadian operations because of a stronger U.S. Dollar.

Fenix is subject to risks and uncertainties relating to the price of scrap metal. While sales of scrap metal represent a small portion of our overall revenues, the decline of approximately 66% from 2014 to 2015 in market prices for scrap autobodies (as per the American Metal Market Index) had an adverse effect on reported revenues in 2015. Continued weakness in metals prices could adversely affect our revenues and profits. This trend should be viewed in light of the partially offsetting effect of lower metals prices on our cost of acquiring vehicles for recycling.

Because we have substantial operations in Canada doing business in Canadian Dollars, we are also subject to risks and uncertainties relating to foreign currency exchange rates. During 2015, the Canadian Dollar depreciated approximately 15% against the U.S. Dollar, and this had the effect of reducing reported and pro forma revenues in the year ended December 31, 2015 as compared to pro forma revenues for the year ended December 31, 2014. The continued strengthening in the U.S. Dollar relative to the Canadian Dollar could adversely affect our future reported results of operations.

Cost of Goods Sold
Our cost of goods sold for the year ended December 31, 2015 amounted to $53.6 million, or 77.7% of revenue and a gross profit percentage of 22.3%. Cost of goods sold for 2015 includes $8.6 million, or 12.5% of net revenues, attributable to post-acquisition amortization of higher inventory values from applying the purchase method of accounting to the acquired inventories of the Subsidiaries. Without the impact of this acquisition accounting step up in initial inventory values, cost of goods sold as a percentage of net revenues was 65.2%

37


and gross profit percentage was 34.8% for the year ended December 31, 2015. As of December 31, 2015, the remaining unamortized fair value inventory adjustment is approximately $1.4 million and was fully amortized in 2016. Cost of goods sold for the year ended December 31, 2015 also includes approximately $0.5 million of depreciation.

As mentioned above, our results of operations are exposed to market risk related to price fluctuations in scrap metal and other metals. Market prices of these metals affect the amount that we pay for our inventory, in addition to the revenue that we generate from sales of these metals. As both our revenue and costs are affected by the price fluctuations, we have a natural hedge against the changes. However, there is typically a lag between the effect on our revenue from metal price fluctuations and the corresponding effect on cost of goods sold. Our cost of goods sold for recycled OEM and related products reflects the historic average cost to acquire such products, including the price to purchase vehicles, auction, storage and towing fees, and expenditures for buying and dismantling vehicles. Because of the significant drop in the value of scrap metal throughout 2015 and, in particular in the fourth quarter of 2015, the cost of goods sold reflected in our consolidated financial statements is higher than the current cost to replace that same inventory.

Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the year ended December 31, 2015 amounted to $28.3 million, or 41.1% of net revenues.

Outside Service and Professional Fees
Our outside service and professional fees for the year ended December 31, 2015 amounted to $9.1 million, or 13.2% of net revenues, and consists primarily of accounting, auditing, tax consulting, and legal professional fees. This represents a 101.4% increase from outside service and professional fees for the year ended December 31, 2014 of $4.5 million.

Depreciation and Amortization Expense
Our depreciation and amortization not directly attributable to cost of goods sold for the year ended December 31, 2015 amounted to $2.7 million, or 4.0% of net revenues, and consists primarily of amortization of intangible assets established in connection with acquisitions.

Change in Fair Value of Contingent Consideration Liabilities
Our estimated fair value of contingent consideration liabilities was increased by $6.0 million for the year ended December 31, 2015, resulting in a charge equal to 8.8% of net revenues. The charge was primarily attributable to an increase in the estimated contingent consideration to one Founding Company and minor changes in estimated contingent consideration attributable to two other Founding Companies.

Interest Expense and Other (Expense) Income, net
Our interest expense, primarily related to our Credit Facility, was $0.3 million for the year ended December 31, 2015. Our interest and other (expense) income, net for the year ended December 31, 2015 amounted to $2.0 million, or 2.8% of revenue and consists primarily of a $1.8 million non-cash charge related to make whole provisions whereby certain of our shareholders were contractually required to deliver Fenix common shares to other of our shareholders when the offering price per share was below $10. The amount equals the number of shares transferred times the public offering price of $8 per share. See Note 7, Common Stock and Preferred Shares, to consolidated financial statements in this document for a further discussion of these transactions.

Benefit for Income Taxes
The Company’s effective tax rate was 21.2% and 0.0% for the years ended December 31, 2015 and 2014, respectively. The effective rate in 2015 differs from the U.S. federal statutory rate due to the effects of the state and Canadian income taxes and non-deductible expenses reported in the statement of operations.

Net Loss
Net loss for the years ended December 31, 2015 and 2014 was $26.0 million and $4.7 million, respectively. On an unaudited pro forma basis assuming the acquisition of all current Subsidiaries occurred on January 1, 2014, net loss for the years ended December 31, 2015 and 2014 was $23.7 million and $4.6 million, respectively.

Liquidity and Capital Resources

Effective December 31, 2015, we entered into a $35.0 million amended and restated senior secured credit facility with BMO Harris Bank N.A. (the "Credit Facility" or the "Amended Credit Facility") which replaces the original Credit Facility with BMO Harris Bank N.A. (the "Original Credit Facility"). The Amended Credit Facility contained substantially the same terms as the Original Credit Facility except for adjustments to covenants which are discussed below. Previous borrowings under the Original Credit Facility remained outstanding under the Amended Credit Facility. The Credit Facility was further amended on June 27, 2016 and August 19, 2016, with retroactive effect to March 31, 2016 and June 30, 2016, respectively, pursuant to which certain financial covenant calculations, which are described below, were further clarified and amended. The Credit Facility consists of $25.0 million that is available as a revolving credit facility,

38


allocated $20.0 million in U.S. revolving loans, with a $7.5 million sublimit for letters of credit, and $5.0 million in Canadian revolving loans, with a $2.5 million sublimit for letters of credit. The remaining $10.0 million has been drawn as a term loan.

Our U.S. borrowings under the Credit Facility bear interest at fluctuating rates, at our election in advance for any applicable interest period, by reference to the "base rate," "Eurodollar rate" or "Canadian Prime Rate" plus the applicable margin within the relevant range of margins provided in the Credit Facility. 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, as described below. The borrowings were subject to interest rates ranging from 3.57% - 6.50% at December 31, 2016.

The Canadian Dollar borrowings under the Credit Facility bear interest at fluctuating rates at our election in advance for any applicable interest period, by reference to the "Canadian Prime Rate" plus the applicable margin within the relevant range of margins provided in the Credit Facility. The Canadian Prime 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 determined quarterly based on our Total Leverage Ratio, as described below. The maximum and initial margin for interest rates after March 31, 2016 on Canadian borrowings under the Credit Facility is 2.75% on base rate loans.

The Credit Facility is secured by a first-priority perfected security interest in substantially all of our assets and the stock of our domestic subsidiaries, which also guaranty the borrowings, and 66% of the stock of our direct Canadian Subsidiary, Fenix Canada (other than its exchangeable preferred shares). Proceeds of the Credit Facility can be used for capital expenditures, working capital, permitted acquisitions, and general corporate purposes. The Credit Facility expires on May 19, 2020. The Credit Facility contains customary events of default, including the failure to pay any principal, interest or other amount when due, violation of certain of our affirmative covenants or any negative covenants or a breach of representations and warranties and, in certain circumstances, a change of control. Upon the occurrence of an event of default, payment of indebtedness may be accelerated and the lending commitments may be terminated.

The Credit Facility also contains financial covenants with which we must comply on a quarterly or annual basis, which have been amended since entering into the Original Credit Facility, including a Total Funded Debt to EBITDA Ratio (or “Total Leverage Ratio”, as defined). Total Funded Debt as it relates to the Total Leverage Ratio is defined as all indebtedness (a) for borrowed money, (b) for the purchase price of goods or services, (c) secured by assets of Fenix or its Subsidiaries, (d) for any capitalized leases of property, (e) for letters of credit or other extensions of credit, (f) for payments owed regarding equity interests in Fenix or its Subsidiaries, (g) for interest rate, currency or commodities hedging arrangements, or (h) for any guarantees of any of the foregoing as of the end of the most recent fiscal quarter. Consistent with the Original Credit Facility, Permitted Acquisitions are subject to bank review and a maximum Total Leverage Ratio, after giving effect to such acquisition. We must also comply with a minimum Fixed Charge Coverage Ratio. Fixed charge coverage is defined as the ratio of (a) EBITDA less unfinanced capital expenditures for the four trailing quarterly periods to (b) fixed charges (principal and interest payments, taxes paid and other restricted payments); except that for the first three quarters of 2016, for the purposes of determining this ratio, EBITDA will be calculated based on a multiple of the then current EBITDA, instead of using the EBITDA for the prior four quarters. A similar annualization adjustment will be made for unfinanced capital expenditures for the same period. EBITDA includes after tax earnings with add backs for interest expense, income taxes, depreciation and amortization, share-based compensation expenses, and other additional items as outlined in the Credit Facility. In addition, the Credit Facility covenants include a minimum net worth covenant, which was revised effective March 31, 2016. Net worth is defined as the total shareholders’ equity, including capital stock, additional paid in capital, and retained earnings after deducting treasury stock. The Amended Credit Facility includes a mandatory prepayment clause requiring certain cash payments when EBITDA exceeds defined requirements for the most recently completed fiscal year. These prepayments will be applied first to outstanding term loans and then to the revolving credit.

We are also subject to a limitation on our indebtedness based on quarterly calculations of a Borrowing Base. The Borrowing Base is determined based upon Eligible Receivables and Eligible Inventory and is calculated separately for the United States and Canadian borrowings. If the total amount of principal outstanding for revolving loans, term loans, letters of credit and other defined obligations is in excess of the Borrowing Base, then we are required to repay the difference or be in default of the Credit Facility.

As of December 31, 2016, we owed $21.5 million under the Amended Credit Facility (consisting of term loan and revolving credit debt of $8.7 million and $12.8 million, respectively). We also had $6.4 million outstanding in standby letters of credit under the Credit Facility related to the contingent consideration agreement with the former owners of the Canadian Founding Companies and our property and casualty insurance program. As of June 30, 2016, September 30, 2016 and December 31, 2016, for reasons described in Note 1 to the consolidated financial statements in this document, we were in breach of the Credit Facility's Total Leverage Ratio and Fixed Charge Coverage Ratio requirements and the Borrowing Base requirement for repaying over-advances, as well as the requirement for timely delivery of certain quarterly certificates and reports. Since we are in default as of the date that this Annual Report on Form 10-K is being filed, all of the Credit Facility debt is reported as a current liability in the accompanying consolidated balance sheet as of December 31, 2016 and there can be no further borrowings of any availability under the Credit Facility until such defaults are rectified or waived.


39


On March 27, 2017, we entered into a Forbearance Agreement to the Credit Facility (the "Forbearance Agreement") with BMO Harris Bank N.A. and its Canadian affiliate, Bank of Montreal. Pursuant to the Forbearance Agreement, the banks have agreed to forbear from exercising their rights and remedies under the Credit Facility with respect to the above-described defaults and any similar defaults during the forbearance period, provided no other defaults occur. The Forbearance Agreement was amended on June 23, 2017 to extend the forbearance period, which had originally expired on May 26, 2017, until August 31, 2017 and to resolve certain new defaults. The Forbearance Agreement, as amended, also permits us to add the quarterly interest payments otherwise due for the first two quarters of 2017 to the principal amount of debt outstanding and defer the $250,000 principal payments due on March 31, 2017 and June 30, 2017 to the end of the forbearance period.

Our Board of Directors has engaged a financial advisor to advise the Board and Company management and to assist in pursuing a range of potential strategic and financial transactions that will provide us with improved liquidity and maximize shareholder value. The financial advisor will identify and evaluate potential alternatives including a business combination, debt and/or equity financing, or a strategic investment into the Company, and is reporting directly to a special committee of independent directors established to oversee and coordinate these activities. The Board has not set a definitive timetable for completion of this process. There can be no assurance that this process will result in a transaction or other strategic alternative of any kind. Furthermore, the June 29, 2017 suspension in trading and eventual delisting of our common stock on the Nasdaq Global Market negates our ability to pursue strategic and financial transactions available only to listed companies.

If we are unable to reach further agreement with our lenders to obtain waivers or amendments to the existing Credit Facility, find acceptable alternative financing, obtain equity contributions, or arrange a business combination, after the forbearance period (and during the forbearance period in the event of any new defaults other than those anticipated defaults enumerated in the Forbearance Agreement, as amended), our Credit Facility lenders could elect to declare some or all of the amounts outstanding under the facility to be immediately due and payable. If this happens, we do not expect to have sufficient liquidity to pay the outstanding Credit Facility debt. In addition, we have significant obligations under contingent consideration agreements related to certain acquired companies as described below and in Note 6 to the consolidated financial statements in this document, and we will need access to additional credit to be able to satisfy these obligations.

As a result of the above, substantial doubt exists regarding our ability to continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business within one year from the date of this filing.

Net cash used in operating activities totaled $1.7 million and $15.8 million for the years ended December 31, 2016 and 2015, respectively. The year ended December 31, 2015 only includes automotive recycling operations from May 19, 2015, the date of the Combinations with the Founding Companies.

Net cash used in investing activities totaled $0.7 million and $105.6 million for the years ended December 31, 2016 and 2015, respectively. Investing activities in the year ended December 31, 2016 consisted primarily of the cash used to make $0.6 million of capital expenditures associated with our automotive recycling operations. Investing activities in the year ended December 31, 2015 consisted primarily of the cash used to purchase the Subsidiaries of $105.2 million and $0.3 million of capital expenditures after the acquisitions.

Net cash provided by financing activities totaled $0.4 million and $123.7 million for the years ended December 31, 2016 and 2015, respectively. During the year ended December 31, 2016, we borrowed a net of $0.7 million on our Credit Facility. During the year ended December 31, 2015, we raised $101.3 million in net proceeds from the IPO and borrowed a net of $20.8 million on our Credit Facility.

At present, our primary source of ongoing liquidity is cash flows from our operations. Payroll and the procurement of inventory are our largest operating uses of funds. We normally pay for vehicles acquired at salvage auctions and under some direct procurement arrangements at the time that possession is taken of the vehicles. We are unable to access any available credit under the Credit Facility unless and until we are able to reach agreement with our lenders to favorably resolve the current events of default.

Over the next 12 months, in addition to any working capital needs, a modest amount of necessary capital expenditures, debt service on the term loan as discussed above, and accrued federal and state income tax payments of approximately $1.5 million to be made when the applicable 2016 tax returns are filed, we are also likely to have a need for cash to satisfy certain contingent consideration liabilities, as described more fully in Note 6 to the consolidated financial statements in this document. As part of the consideration for three of the Founding Companies, we entered into contingent consideration agreements with certain of the selling shareholders under which additional consideration will be payable to the former owners in cash and stock if specified future events occur or conditions are met, such as meeting profitability or earnings targets. We have recorded a current liability of $7.2 million for the estimated fair value of these contractual commitments in the accompanying consolidated balance sheet as of December 31, 2016, which, if earned, would all be payable over the next 12 months. Approximately $0.6 million of this potential liability is payable in stock (valued at the closing price of our common stock on December 31, 2016) and $2.9 million of the recorded liability is secured by a letter of credit totaling $5.9 million under our Credit Facility. The remainder would be payable in cash, of which $0.2 million is currently held in an escrow account as described below.

40



For the Combination with Jerry Brown, we are required to pay (a) up to an additional $1.8 million if the business achieved certain revenue targets during the twelve-month period beginning June 2015, and (b) an additional uncapped amount if the business exceeds certain EBITDA levels during 2016. Based on an evaluation of the likelihood of meeting these performance targets, we recorded a liability for the acquisition date fair value of the contingent consideration of $2.5 million and increased this liability by $5.1 million during 2015 based on substantial operating improvements and management’s budget for Jerry Brown for 2016. Based on results actually achieved during 2016, the estimated fair value of the contingent liability was reduced by $3.8 million, resulting in a credit to income which is reflected in the consolidated statement of operations for the year ended December 31, 2016. As of December 31, 2016, the total contingent consideration liability attributable to the Jerry Brown acquisition was (a) $1.8 million for achieving the revenue target, which management and the former owners of Jerry Brown agree was fully earned and is currently due and payable, and (b) $2.0 million estimated for the EBITDA target which will be determined in 2017. We are in negotiations with the former owners of Jerry Brown to schedule payment of currently due amounts, and we expect to fund these and future determined payments to the former owners of Jerry Brown, to the extent they are ultimately deemed earned, through cash generated from operations or, if necessary and available, through draws on the revolving Credit Facility or through other sources of capital that may be available.

The Combination Agreements for Eiss Brothers and the Canadian Founding Companies provide for a holdback of additional Combination Consideration which will be payable, in part or in whole, only if certain performance hurdles are achieved. The maximum amount of additional consideration that can be earned by the former owners of Eiss Brothers is $0.2 million in cash plus 11,667 shares of our common stock, of which none, some or all will be released from escrow depending upon the EBITDA of Eiss Brothers during the twelve-month period beginning June 2015. The maximum amount of additional consideration that can be earned and is subject to holdback for the Canadian Founding Companies is $5.9 million in cash, secured by a letter of credit under our Credit Facility, plus 280,000 Exchangeable Preferred Shares currently held in escrow, of which, none, some or all will be released to the former owners of the Canadian Founding Companies depending on their combined revenues from specific types of sales for the twelve-month period beginning June 2015. Based on management’s evaluation of the likelihood of meeting these performance targets for these two acquisitions, a liability of $7.8 million was recorded at the acquisition date for the fair value of the aggregate contingent consideration, which included the present value of the estimated cash portion and the then-current value of the Fenix common stock and the Exchangeable Preferred Shares held in escrow. While management’s estimate of the operating results for Eiss Brothers has not changed since its acquisition, the contingent consideration for the Canadian Founding Companies was remeasured at fair value each reporting period during the year ended December 31, 2016. As the amount of the contingent consideration is currently in dispute, we recorded the estimated contingent consideration liability for the Canadian Founding Companies as of December 31, 2016 based on the result of our assessment of the possible outcomes. These contingent consideration liabilities are also subject to mark-to-market fluctuations based on changes in the trading price of our common stock and, with respect to the Canadian Founding Companies, currency remeasurement. As a result of all these factors, the estimated fair value of the aggregate contingent consideration liability due to the former owners of Eiss Brothers and the Canadian Founding Companies was reduced by $4.3 million, and an exchange rate gain of $0.5 million was recognized in the consolidated statement of operations for the year ended December 31, 2016. We are currently at an impasse with the former owners of the Canadian Founding Companies regarding the calculation of contingent consideration earned, if any, and the parties have begun the process of submitting their respective calculations to binding arbitration. We expect that any contingent consideration payments to the former owners of the Canadian Founding Companies, to the extent they are ultimately deemed earned, will be drawn on the bank letter of credit, which is considered Funded Debt under the Total Leverage Ratio required under our Credit Facility.

Management has been and remains highly focused on maximizing cash flows from operations and, to the extent possible under the circumstances, minimizing the cost of outsourced professional fees. Although scrap metal prices increased during 2016 and have increased slightly further since December 31, 2016, and our expectation is that the current high level of professional fees should decline after the first half of 2017, we still may not be able to comply with all the financial covenants contained in our Credit Facility in future periods unless those requirements are waived or amended or unless we can reduce the amount of Credit Facility debt by obtaining new subordinated debt or equity financing. While our Board of Directors has engaged a financial advisor to advise the Board and Company management and to assist in pursuing a range of potential strategic and financial transactions that will provide us with improved liquidity and maximize shareholder value, there can be no assurance that this process will result in a transaction or other strategic alternative of any kind. In addition, there can be no assurance that additional funding, or refinancing of our Credit Facility, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may be costly and involve further restrictive covenants. Failure to raise capital or consummate a strategic investment into the Company or a business combination could have a material adverse impact on our business, operating results, and financial condition.

Contractual Obligations and Commercial Commitments

Operating leases with the former owners of the Subsidiaries or their affiliates have terms of 15 years with options for additional renewals. The sublease for corporate office space has a term of May 1, 2015 to September 30, 2018. Cash payments for rent under these leases, future payments on debt (principal only) and consulting obligations, and future contingent consideration payments described above by year are:

41


 
Payments Due By Period as of December 31, 2016
(in thousands)
Total
 
1 Year or less
 
2-3 Years
 
4-5 Years
 
More Than 5 Years
Operating leases
$
38,941

 
$
2,604

 
$
5,160

 
$
5,331

 
$
25,846

Current debt
21,094

 
21,094

 

 

 

Consulting obligations
1,226

 
394

 
201

 
100

 
531

Contingent consideration liabilities
7,156

 
7,156

 

 

 

Total
$
68,417

 
$
31,248

 
$
5,361

 
$
5,431

 
$
26,377

Operating leases — See Note 12 to the consolidated financial statements in this document for discussion of facility leases with the former owners of the Subsidiaries.
Current debt — Current debt consists of amounts owed under our Credit Facility. See Note 5, to the consolidated financial statements in this document for a summary of the amended and restated Credit Facility and reasons why this debt is all classified as a current liability.
Consulting obligations — Consulting obligations reflect non-substantive (future performance not required) consulting arrangements with former owners as agreed to during the Combinations with the Founding Companies.
Contingent consideration liabilities — Represents the estimated fair value of contingent consideration arrangements with the former owners of three Founding Companies as of December 31, 2016. Under these arrangements, the former owners of the Canadian Founding Companies and Eiss can earn up to an aggregate of $6.1 million in cash, 11,667 shares of Fenix common stock and 280,000 Exchangeable Preferred Shares. The former owners of Jerry Brown can earn up to an additional $1.8 million in cash if the business achieves certain revenue targets during the twelve-month period beginning June 2015, and an additional, uncapped amount if the business exceeds certain EBITDA levels during 2016. The estimated fair value of the contingent consideration liabilities at the Combination date was based on independent valuations considering our 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%. Subsequent to the Combination, we periodically review the amount of contingent consideration that is likely to be payable under current operating conditions and adjust the estimated liability as deemed necessary. See Note 6 to the consolidated financial statements in this document. The changes in the estimated fair value of this Combination liability resulted in a benefit of $8.2 million as compared to a net charge of $6.0 million for the years ended December 31, 2016 and 2015, respectively.
Off-Balance Sheet Arrangements — We have a $6.4 million standby letters of credit outstanding under our Credit Facility at December 31, 2016 to support contingent consideration that may be payable under the Combination Agreement for the Canadian Founding Companies ($5.9 million) and our property and casualty insurance program ($0.5 million). Other than this standby letter of credit and the operating lease commitments included above, we have no off-balance sheet arrangements that would have a current or future material effect on our financial condition, changes in financial condition, revenue, expense, results of operations, liquidity, capital expenditures or capital resources.
Inflation — We believe that inflation has not had a significant impact in the past and is not likely to have a significant impact in the foreseeable future on our results of operations.

Beagell Group

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

Results of Operations for the period from January 1, 2015 to May 18, 2015 Compared to the Year Ended December 31, 2014
Revenue decreased by $19.5 million, or 63.7% to $11.1 million for the period from January 1, 2015 to May 18, 2015 from $30.6 million for the year ended December 31, 2014. Cost of goods sold decreased by $12.5 million, or 62.8%, to $7.4 million for the period from January 1, 2015 to May 18, 2015 from $19.9 million for the year ended December 31, 2014. As a percentage of revenue, cost of goods sold increased to 66.6% of revenue for the period from January 1, 2015 to May 18, 2015 compared to 65.0% of revenue for the year ended December 31, 2014. Operating expenses decreased by $5.1 million, or 61.7%, to $3.2 million for the period from January 1, 2015 to May 18, 2015 from $8.3 million for the year ended December 31, 2014. The primary reason for these changes is the reduced number of days in the 2015 period compared to 2014.

Liquidity and Capital Resources
Prior to its acquisition by Fenix Parts on May 19, 2015, the primary source of ongoing liquidity for Beagell Group was cash flows from operations and the primary use of cash was the payment of distributions to the then-shareholders. Also, during the period from January 1, 2015 to May 18, 2015, $0.6 million in cash was provided by the liquidation of life insurance policies.

42



Standard Group

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

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

Results of Operations for the period from January 1, 2015 to May 18, 2015 Compared to the Year Ended December 31, 2014
Revenue decreased by $22.2 million, or 71.4%, to $8.9 million for the period from January 1, 2015 to May 18, 2015 from $31.1 million for the year ended December 31, 2014. Cost of goods sold decreased by $13.7 million, or 69.6%, to $6.0 million for the period from January 1, 2015 to May 18, 2015 from $19.7 million for the year ended December 31, 2014. As a percentage of revenue, cost of goods sold increased to 67.3% of revenue for the period from January 1, 2015 to May 18, 2015 compared to 63.3% of revenue for the year ended December 31, 2014. Operating expenses decreased by $6.1 million, or 64.5%, to $3.4 million for the period from January 1, 2015 to May 18, 2015 from $9.5 million for the year ended December 31, 2014. The primary reason for these changes is the reduced number of days in the 2015 period compared to 2014.

Liquidity and Capital Resources
Prior to its acquisition by Fenix Parts on May 19, 2015, the primary source of ongoing liquidity for Standard was cash flows from operations. As described in Note 6, Fire at Toronto Facility, to the combined financial statements in this document, a fire occurred at the Goldy Metals Toronto facility in March 2014 which destroyed the dismantling facility and a substantial portion of the location’s inventory. Standard received substantial insurance proceeds during the year ended December 31, 2014, which were primarily used to fund capital expenditures of $2.1 million during the period to build a new facility in Port Hope.

ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk

Our results of operations are exposed to market risk related to price fluctuations in scrap metal and other metals. Market prices of these metals affect the amount that we pay for our inventory as well as the revenue that we generate from sales of these metals. As both our revenue and costs are affected by the price fluctuations, we have a natural hedge against the changes. However, there is typically a lag between the effect on our revenue from metal price fluctuations and inventory cost changes. Therefore, we can experience positive or negative gross margin effects in periods of rising or falling metal prices, particularly when such prices move rapidly. If market prices fall at a greater rate than our vehicle acquisition costs, as occurred during 2015 and especially in the fourth quarter of 2015, we experience a decline in our reported gross margins. We have not entered into any risk mitigation strategies, as any short-term exposure would reverse in the long term.

Interest Rates
Our results of operations are affected by changes in interest rates with respect to borrowings under our Credit Facility. As of December 31, 2015, the interest rates on our borrowings denominated in both U.S. and Canadian dollars had been 2.5%. In accordance with the loan indenture, these rates increased under the formula therein to 5.75% and 5.2% on the U.S. dollar and Canadian dollar debt, respectively. Both of these rates are the maximum rate allowed under the indentures, so no further increase is expected. However, as we are currently in default of several of the terms of the Credit Facility and operating under a Forbearance Agreement with our lenders, it is impossible to forecast what likely future interest charges may be or in what manner the conditions of default will ultimately be resolved. At December 31, 2016, none of our variable interest rate debt under our Credit Facility is hedged. A 100 basis point movement in interest rates would change interest expense by approximately $0.2 million over the next twelve months.

Foreign Exchange
Our operations in Canada are exposed to changes in the relationship between the U.S. dollar and the Canadian dollar. As both our revenue and costs are affected by the price fluctuations, we have a natural hedge against the changes. Canadian dollar fluctuations can also impact the financial results we report in U.S. dollars and can impact the economics of cross-border trading of inventory between our U.S. and Canadian operations. Because of the significant increase in the value of the U.S Dollar against the Canadian Dollar during 2015, in the fourth quarter of 2015 and continuing through 2016, we substantially reduced shipments of parts from our U.S. facilities into the Canadian markets resulting in lower revenue at our Canadian facilities as they sought to develop Canadian sources to acquire vehicles and product for recycling. Our operations in Canada represented approximately 13% and 19% of our total net revenues during 2016 and 2015,



respectively. At the current relative distribution of net revenues and expenses, a 10% increase or decrease in the strength of the U.S. dollar against the Canadian dollar would have resulted in a change of approximately 1.3% in our consolidated net revenues and 1.9% in our consolidated loss before income taxes reported for the year ended December 31, 2016.

We do not hold derivative contracts to hedge Canadian dollar risk. Our net revenue is partially hedged by our Canadian dollar denominated purchases. We elected not to hedge the Canadian dollar risk related to the interest payments on Canadian borrowings as we generate cash flows in Canadian dollars that were used to fund these debt payments. As of December 31, 2016, we have C$1.2 million in revolving credit borrowings outstanding under our Credit Facility.




ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Fenix Parts, Inc.
Westchester, IL

We have audited the accompanying consolidated balance sheet of Fenix Parts, Inc. as of December 31, 2016 and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with standards of the Public Company Accounting Oversight Board (United States). Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fenix Parts, Inc. at December 31, 2016, and the results of its operations and its cash flows for the year ended December 31, 2016 in conformity with U.S. generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in 2016 the Company adopted ASU No. 2014-15 Presentation of Financial Statements - Going Concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring losses from operations, was out of compliance with certain of its credit facility covenants during 2016 and has been operating under forbearance agreements with its lender, with the latest forbearance agreement maturing on August 31, 2017. The Company does not have sufficient liquidity to make full payment on the debt. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to these matters.

/s/ Crowe Horwath LLP
Oak Brook, IL
August 15, 2017


45




Report of Independent Registered Public Accounting Firm



Board of Directors and Stockholders
Fenix Parts, Inc.
Westchester, IL


We have audited the accompanying consolidated balance sheet of Fenix Parts, Inc. as of December 31, 2015 and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for the year ended December 31, 2015 and the period from January 2, 2014 (inception) to December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fenix Parts, Inc. at December 31, 2015, and the results of its operations and its cash flows for the year ended December 31, 2015 and the period from January 2, 2014 (inception) to December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.


/s/ BDO USA LLP

Chicago, IL

April 14, 2016


46


Fenix Parts, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, 2016
December 31, 2015
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$
738

$
2,827

Accounts receivable, net of allowance
7,203

6,834

Inventories
32,568

38,892

Prepaid expenses and other current assets
435

545

Total current assets
40,944

49,098

Property and equipment, net
10,089

11,609

Goodwill
37,027

76,812

Intangible assets, net
32,211

33,786

Indemnification receivables
2,009

5,078

Other non-current assets
3,117

3,455

TOTAL ASSETS
$
125,397

$
179,838

LIABILITIES
 
 
Current liabilities:
 
 
Account payable
$
4,955

$
3,456

Accrued expenses
4,800

2,847

Contingent consideration liabilities - current
7,156

9,345

Current portion of long-term debt under Credit Facility
21,094

793

Other current liabilities
1,899

2,058

Total current liabilities
39,904

18,499

Deferred warranty revenue, net of current portion
558

227

Long-term related party debt, net of current portion
832

2,071

Long-term debt under Credit Facility, net of current portion

19,645

Contingent consideration liabilities, net of current portion

6,085

Deferred income tax liabilities
8,170

15,624

Reserve for uncertain tax positions
2,180

5,733

Other non-current liabilities
3,124

2,170

Total non-current liabilities
14,864

51,555

TOTAL LIABILITIES
54,768

70,054

COMMITMENTS AND CONTINGENCIES


SHAREHOLDERS’ EQUITY


Common stock, $0.001 par value; 30,000,000 shares authorized; 20,038,489 and 19,926,868 shares issued and outstanding at December 31, 2016 and 2015, respectively
20

20

Additional paid-in capital
139,193

136,398

Accumulated other comprehensive loss
(3,328
)
(4,247
)
Accumulated deficit
(73,656
)
(30,787
)
Total Fenix Parts, Inc. shareholders’ equity before noncontrolling interest
62,229

101,384

Noncontrolling interest
8,400

8,400

Total shareholders’ equity
70,629

109,784

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
125,397

$
179,838

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



47


Fenix Parts, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)
Year Ended December 31, 2016
 
Year Ended December 31, 2015
 
Period from
January 2, 2014 (Inception) to
December 31, 2014
Net revenues
$
132,100

 
$
68,946

 
$

Cost of goods sold
78,641

 
53,559

 

Gross profit
53,459

 
15,387

 

Selling, general and administrative expenses
49,888

 
28,346

 
232

Outside service and professional fees
6,741

 
9,091

 
4,515

Depreciation and amortization
4,601

 
2,743

 

Change in fair value of contingent consideration liabilities
(8,234
)
 
6,050

 

 Change in indemnification receivable
2,920

 

 

 Goodwill impairment
45,300

 

 

Operating loss
(47,757
)
 
(30,843
)
 
(4,747
)
 
 
 
 
 
 
Interest expense
(1,384
)
 
(263
)
 

Other (expense) income, net
(14
)
 
(1,959
)
 
1

Total other expense, net
(1,398
)
 
(2,222
)
 
1

Loss before income tax benefit
(49,155
)
 
(33,065
)
 
(4,746
)
Benefit for income taxes
6,286

 
7,024

 

Net loss
$
(42,869
)
 
$
(26,041
)
 
$
(4,746
)
 
 
 
 
 
 
Loss per share available to common shareholders:
 
 
 
 
 
Basic & Diluted
$
(2.05
)
 
$
(1.86
)
 
$
(2.22
)
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
Basic & Diluted
19,869,316

 
13,332,691

 
2,142,994

 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
 
 
 
 
 
 
 
 
 
Net loss
$
(42,869
)
 
$
(26,041
)
 
$
(4,746
)
Foreign currency translation adjustment
919

 
(4,247
)
 

Net comprehensive loss
$
(41,950
)
 
$
(30,288
)
 
$
(4,746
)
 
 
 
 
 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.


48


Fenix Parts, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share data)
Common Stock
 
Additional 
paid-in
capital
 
Accumulated
other
comprehensive
loss
 
Accumulated
deficit
 
Noncontrolling
interest
 
Total
shareholders
equity
 
Shares
 
Amount
 
 
 
 
 
Balance at January 2, 2014 (inception)

 
$

 
$

 
$

 
$

 
$

 
$

Shareholder contributions
2,429,333

 
2

 
3,616

 

 

 

 
3,618

Net loss

 

 

 

 
(4,746
)
 

 
(4,746
)
Balance at December 31, 2014
2,429,333

 
$
2

 
$
3,616

 
$

 
$
(4,746
)
 
$

 
$
(1,128
)
Shareholder contributions prior to initial public offering
319,594

 

 
3,904

 

 

 

 
3,904

Net proceeds from initial public offering
13,800,000

 
14

 
101,265

 

 

 

 
101,279

Issuance of Fenix shares for Combination Consideration
3,083,962

 
3

 
24,568

 

 

 

 
24,571

Issuance of Fenix Canada preferred shares to non-controlling interest for Combination Consideration

 

 

 

 

 
8,400

 
8,400

Compensation for pre-IPO services
20,000

 

 
217

 

 

 

 
217

Leesville retention bonus
271,111

 
1

 
1,378

 

 

 

 
1,379

Share based compensation to employees and directors
2,868

 

 
1,450

 

 

 

 
1,450

Foreign currency translation adjustment

 

 

 
(4,247
)
 

 

 
(4,247
)
Net loss

 

 

 

 
(26,041
)
 

 
(26,041
)
Balance at December 31, 2015
19,926,868

 
$
20

 
$
136,398

 
$
(4,247
)
 
$
(30,787
)
 
$
8,400

 
$
109,784

Leesville retention bonus

 

 
790

 

 

 

 
790

Share based compensation to employees and directors
65,039

 

 
1,847

 

 

 

 
1,847

Employee Stock Purchase Plan
46,582

 

 
158

 

 

 

 
158

Foreign currency translation adjustment

 

 

 
919

 

 

 
919

Net loss

 

 

 

 
(42,869
)
 

 
(42,869
)
Balance at December 31, 2016
20,038,489

 
$
20

 
$
139,193

 
$
(3,328
)
 
$
(73,656
)
 
$
8,400

 
$
70,629

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


49


Fenix Parts, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, 2016
 
Year Ended December 31, 2015
 
Year Ended December 31, 2014
Cash flows from operating activities
 
 
 
 
 
Net loss
$
(42,869
)
 
$
(26,041
)
 
$
(4,746
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
 
 
Depreciation and amortization
5,657

 
3,571

 

Share-based compensation expense
2,637

 
3,046

 

Deferred income taxes
(4,460
)
 
(8,662
)
 

Deferral of warranty sales
836

 
772

 

Non-cash rent expense
1,083

 
567

 

Reversal of reserves for uncertain tax positions
(3,404
)
 

 

Reduction in indemnification receivables
2,920

 

 

Amortization of inventory fair value adjustment
1,402

 
8,585

 

Retrospective inventory opening balance sheet adjustment
(2,221
)
 

 

Lower value of acquired inventory
(1,777
)
 

 

Change in fair value of contingent consideration liabilities
(8,234
)
 
6,050

 

Make whole provision for pre-IPO investors

 
1,827

 

           Loss on disposal of fixed assets
221

 

 

Goodwill impairment
45,300

 

 

Change in assets and liabilities, net of acquired businesses in 2015:
 
 
 
 
 
Accounts receivable
(273
)
 
(4,760
)
 

Inventories
(1,633
)
 
(276
)
 

Prepaid expenses and other current assets
405

 
647

 
(397
)
Accounts payable
1,490

 
(806
)
 
1,673

Accrued expenses
2,272

 
(1,046
)
 
304

Other current liabilities
(270
)
 

 

Due to related parties
(799
)
 
776

 

Net cash used in operating activities
(1,717
)
 
(15,750
)
 
(3,166
)
Cash flows from investing activities
 
 
 
 
 
Capital expenditures
(592
)
 
(330
)
 

Purchases of companies, net of cash acquired
(149
)
 
(105,224
)
 

Net cash used in investing activities
(741
)
 
(105,554
)
 

Cash flows from financing activities
 
 
 
 
 
Net proceeds from initial public offering

 
101,279

 

Net proceeds from other issuances of common stock

 
2,077

 
3,619

Borrowings on revolving credit line
1,615

 
21,200

 

Payments on term loan
(960
)
 
(375
)
 

Proceeds from the Employee Stock Purchase Plan
237

 

 

Debt issuance cost
(102
)
 
(438
)
 

Additional financing payments
(428
)
 

 

Net cash provided by financing activities
362

 
123,743

 
3,619

Effect of foreign exchange fluctuations on cash and cash equivalents
7

 
(65
)
 

(Decrease) increase in cash and cash equivalents
(2,089
)
 
2,374

 
453

Cash and cash equivalents, beginning of period
2,827

 
453

 

Cash and cash equivalents, end of period
$
738

 
$
2,827

 
$
453


50


Supplemental cash flow disclosures:
 
 
 
 
 
Cash paid for interest
$
1,044

 
$
229

 
$

Cash paid for income taxes
$
497

 
$
129

 
$

Noncash transactions:
 
 
 
 
 
Equity issued for purchases of the Subsidiaries
$

 
$
32,971

 
$

Accrued non-substantive consulting fees for acquisitions
$

 
$
1,787

 
$