Can a company acquire many different companies in a short period of time and still maintain effective controls? Fenix Parts, Inc. could not, claims the complaint for this securities class action. The alleged violations include both the Securities Act of 1933 and the Securities Exchange Act of 1934.
The class for this action is all persons who acquired shares of Fenix securities (1) in Fenix’s IPO on May 15, 2015, or (2) on the public market between May 15, 2015 and June 28, 2017.
Fenix recycles and resells auto products, operating twelve full-service recycling facilities, including what it considers to be a state-of-the-art facility in Rahway, New Jersey.
Fenix was originally formed to merge eight companies with eleven different facilities. To pay for the acquisition of the companies, the company went public, although it had at the time no operations and only two employees.
To arouse interest in the IPO, Fenix claimed it would acquire another ten to fifteen companies in the next two years, at a rate of one to three per quarter. Between August and October 2015, it acquired three companies, but did not acquire any more.
Fenix’s inventory consists of parts from damaged, totaled, and low-value cars. In the Registration Statement for its IPO, the company said its inventory was worth over $42 million, but as time went on, the value of the inventory decreased in its filings, until by June 30, 2016, it was valued at only about $28 million.
Since goodwill represents the amount paid for an acquisition over the fair value of its assets, the devaluation of inventory required that the company increase its goodwill to over $83 million, or what the complaint calls an “outrageous” amount.
The complaint alleges that Fenix did not have the internal controls or procedures to judge goodwill impairment or inventory valuation, partly due to the difficulties of merging the systems of so many different companies. It was therefore forced to take an impairment charge of $43 million just a year after the IPO.
Unfortunately, this also resulted in a violation of the company’s credit facility, which was a problem since the company’s strategy was to acquire many more companies. Less than two weeks later, the company announced that it was changing auditors.
The complaint claims that the weaknesses in internal controls over inventory valuation and goodwill were not disclosed in the Registration Statement or in later filings during the class period.
According to the complaint, these weaknesses caused the company to be delisted from NASDAQ. Also, the Securities and Exchange Commission (SEC) opened an investigation into Fenix that was still ongoing at the time of the filing of the complaint.