Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Fenix Parts, Inc. (1615153) 10-Q published on Oct 31, 2017 at 5:05 pm
Reporting Period: Mar 30, 2017
The Credit Facility also contains financial covenants with which the Company 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). 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. There were no such mandatory prepayments for the year ended December 31, 2016 and three months ended March 31, 2017.
The combination agreements for Eiss Brothers, Inc. ("Eiss Brothers") and End of Life Vehicles Inc., Goldy Metals Incorporated, and Goldy Metals (Ottawa) Incorporated (collectively, the “Canadian Founding Companies") provide for a holdback of additional consideration which is to be payable, in part or in whole, only if certain performance targets 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 Fenix common stock, of which none, some or all is to 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 the Credit Facility, plus 280,000 Exchangeable Preferred Shares currently held in escrow, of which, none, some or all was to 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. Management’s estimate of the operating results for Eiss Brothers has not changed since its acquisition, and the entire $0.2 million in cash and 11,667 shares of Fenix common stock were released from escrow in the third quarter of 2017. The contingent consideration liability for the Canadian Founding Companies is currently in dispute, and the Company has recorded the contingent consideration liability for the Canadian Founding Companies at estimated fair value each reporting period during the year ended December 31, 2016 and as of March 31, 2017, based on the result of its 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 Fenix common stock and, with respect to the Canadian Founding Companies, currency remeasurement. Based on all these factors, the accompanying condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016 include a reduction of $0.2 million and $2.1 million, respectively, in the estimated contingent consideration liability due to the former owners of Eiss Brothers and the Canadian Founding Companies. Exchange rate gains of $0.0 million and $0.5 million related to the Canadian contingent consideration liability were also recognized in the condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016, respectively. The Company is 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 Company expects 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 the Credit Facility.
By subsequent agreement of the parties, the requested hearing was postponed while the parties work to reach a settlement of the issues raised by the fire and put in place a mutually agreeable plan of operations, both temporary and permanent. Additionally, the Toronto and Regional Conservation Authority, which, among other things, has the mandate of maintaining and improving the nearby creek, became a participant in the proceedings. The negotiations with the regulatory authorities have been productive, and the Company is currently in the final stages of preparation to install a temporary facility and become operational at partial capacity, increasing to full capacity shortly after installation. The Company anticipates that negotiations relating to a permanent facility will continue until the parties come to agreement. In addition to resolving environmental issues with the Director and the Toronto and Regional Conservation Authority and putting a plan in place for a permanent facility, the landlord must obtain the appropriate building permits to install the permanent facility.
For the discounted future cash flow analysis, with consideration of a third party valuation report, we evaluated information available through the release of the first quarter financial statements, including indications of interest received from market participants in September and October 2017, as part of the evaluation of strategic alternatives. Accordingly, key variables in the discounted cash flow analysis were updated, resulting in (a) reduced estimated cash flows based on actual results for the three months ended March 31, 2017, and updated future projections, and, (b) more importantly, an increased risk premium resulting in a WACC rate of 19.5% at March 31, 2017. As a result of these revised assumptions and quantitative analyses, the carrying value of our reporting unit exceeded its estimated fair value, as calculated under the discounted future cash flow methodology, by approximately 64% as of March 31, 2017. Therefore, we concluded that a full impairment of the remaining goodwill was necessary.
We acquired the Founding Companies on May 19, 2015 concurrently with the closing of the initial public offering of our common stock and subsequently during 2015 acquired three additional businesses. Since becoming a publicly-traded company, we have initiated and are continuing to recruit and hire additional accounting and financial personnel, establish policies and procedures for timely and accurate financial reporting, upgrade our internal accounting information systems, and make various other efforts to remediate these weaknesses in our internal control. Management understands and appreciates the need to rapidly establish an effective system of internal controls over financial reporting and has made substantive improvements in this area, including a number of improvements since December 31, 2016. Progress in this regard during 2016 and thus far through 2017 includes hiring a corporate controller, accounting manager and director of information technology, staffing an internal information systems department and reducing reliance on multiple information technology vendors, formalizing requirements for timely analyses and reconciliations of financial accounts and management reviews thereof, implementing steps to establish a company-wide system of uniform account classifications, and commencing a plan to migrate all operations to common information systems, which began with with payroll and accounts payable in January 2017. However, implementing effective processes and systems for financial reporting is a significant task and an integral part of our integration plan for the acquired businesses. 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.