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Form 10-Q MOTORCAR PARTS AMERICA For: Dec 31

February 11, 2019 5:04 PM

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2018

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

FOR THE TRANSITION PERIOD FROM       TO

Commission File No. 001-33861

MOTORCAR PARTS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)

New York
 
11-2153962
(State or other jurisdiction of  incorporation or organization)
 
(I.R.S. Employer  Identification No.)

2929 California Street, Torrance, California
 
90503
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (310) 212-7910

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 ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No☐

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

Large accelerated filer ☐
Accelerated filer ☑
Non-accelerated filer  ☐
Smaller reporting company ☐
 
Emerging growth company ☐

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.  ☐

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

There were 18,809,102 shares of Common Stock outstanding at February 4, 2019.



MOTORCAR PARTS OF AMERICA, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
 
 
4
 
4
 
5
 
6
 
7
 
8
 
36
  49
  49
     
PART II — OTHER INFORMATION
 
  50
  50
  50
 
51
 
52
  54

MOTORCAR PARTS OF AMERICA, INC.

GLOSSARY

The following terms are frequently used in the text of this report and have the meanings indicated below.

“Used Core” — An automobile part which has been used in the operation of a vehicle. Generally, the Used Core is an original equipment (“OE”) automobile part installed by the vehicle manufacturer and subsequently removed for replacement. Used Cores contain salvageable parts which are an important raw material in the remanufacturing process. We obtain most Used Cores by providing credits to our customers for Used Cores returned to us under our core exchange program. Our customers receive these Used Cores from consumers who deliver a Used Core to obtain credit from our customers upon the purchase of a newly remanufactured automobile part. When sufficient Used Cores cannot be obtained from our customers, we will purchase Used Cores from core brokers, who are in the business of buying and selling Used Cores. The Used Cores purchased from core brokers or returned to us by our customers under the core exchange program, and which have been physically received by us, are part of our raw material and work-in-process inventory. Used Cores returned by consumers to our customers but not yet returned to us are classified as contract assets until we physically receive these Used Cores.

“Remanufactured Core” — The Used Core underlying an automobile part that has gone through the remanufacturing process and through that process has become part of a newly remanufactured automobile part. The remanufacturing process takes a Used Core, breaks it down into its component parts, replaces those components that cannot be reused and reassembles the salvageable components of the Used Core and additional new components into a remanufactured automobile part. Upon adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contract with Customers, (“ASC 606”) on April 1, 2018, the Remanufactured Cores at our facilities, which were previously segregated from cores held at customers locations, were reclassified from long-term core inventory to our on-hand finished goods inventory. Remanufactured Cores held for sale at our customer locations are included in long-term contract assets. In addition, upon the adoption of ASC 606, the Remanufactured Core portion of stock adjustment returns are classified as contract assets until we physically receive them.

PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

   
December 31, 2018
   
March 31, 2018
 
ASSETS
 
(Unaudited)
   
(As Adjusted)
 
Current assets:
       
(Note 4)
 
Cash and cash equivalents
 
$
8,591,000
   
$
13,049,000
 
Short-term investments
   
2,868,000
     
2,828,000
 
Accounts receivable — net
   
54,761,000
     
63,174,000
 
Inventory— net
   
205,075,000
     
161,210,000
 
Inventory unreturned
   
10,746,000
     
7,508,000
 
Contract assets (see Note 9)
   
26,965,000
     
23,206,000
 
Income tax receivable
   
12,887,000
     
7,972,000
 
Prepaid expenses and other current assets
   
7,946,000
     
8,608,000
 
Total current assets
   
329,839,000
     
287,555,000
 
Plant and equipment — net
   
32,349,000
     
28,322,000
 
Long-term deferred income taxes
   
7,607,000
     
6,698,000
 
Long-term contract assets (see Note 9)
   
222,999,000
     
222,731,000
 
Goodwill
   
3,402,000
     
2,551,000
 
Intangible assets — net
   
8,762,000
     
3,766,000
 
Other assets
   
891,000
     
804,000
 
TOTAL ASSETS
 
$
605,849,000
   
$
552,427,000
 
LIABILITIES AND SHAREHOLDERS’  EQUITY
               
Current liabilities:
               
Accounts payable
 
$
101,730,000
   
$
73,273,000
 
Accrued liabilities
    13,382,000      
12,048,000
 
Customer finished goods returns accrual
   
19,236,000
     
17,805,000
 
Contract liabilities (see Note 12)
   
29,239,000
     
32,603,000
 
Revolving loan
   
78,406,000
     
54,000,000
 
Other current liabilities
   
5,019,000
     
4,471,000
 
Current portion of term loan
   
3,685,000
     
3,068,000
 
Total current liabilities
    250,697,000      
197,268,000
 
Term loan, less current portion
   
25,109,000
     
13,913,000
 
Long-term contract liabilities (see Note 12)
   
42,527,000
     
48,183,000
 
Long-term deferred income taxes
   
234,000
     
226,000
 
Other liabilities
   
7,494,000
     
5,957,000
 
Total liabilities
    326,061,000      
265,547,000
 
Commitments and contingencies
               
Shareholders’ equity:
               
Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued
   
-
     
-
 
Series A junior participating preferred stock; par value $.01 per share, 20,000 shares authorized; none issued
   
-
     
-
 
Common stock; par value $.01 per share, 50,000,000 shares authorized; 18,812,102 and 18,893,102 shares issued and outstanding at December 31, 2018 and March 31, 2018, respectively
   
188,000
     
189,000
 
Additional paid-in capital
   
212,621,000
     
213,609,000
 
Retained earnings
   
74,172,000
     
78,510,000
 
Accumulated other comprehensive loss
   
(7,193,000
)
   
(5,428,000
)
Total shareholders’ equity
   
279,788,000
     
286,880,000
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
605,849,000    
$
552,427,000
 

The accompanying condensed notes to consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended
December 31,
   
Nine Months Ended
December 31,
 
   
2018
   
2017
   
2018
   
2017
 
                         
         
(As Adjusted)
         
(As Adjusted)
 
Net sales
 
$
124,113,000
   
$
102,878,000
   
$
343,720,000
   
$
307,834,000
 
Cost of goods sold
   
102,952,000
     
76,817,000
     
280,496,000
     
229,894,000
 
Gross profit
   
21,161,000
     
26,061,000
     
63,224,000
     
77,940,000
 
Operating expenses:
                               
General and administrative
   
12,331,000
     
11,915,000
     
33,419,000
     
26,418,000
 
Sales and marketing
   
5,149,000
     
4,048,000
     
14,078,000
     
10,899,000
 
Research and development
   
2,054,000
     
1,678,000
     
5,574,000
     
3,920,000
 
Total operating expenses
   
19,534,000
     
17,641,000
     
53,071,000
     
41,237,000
 
Operating income
   
1,627,000
     
8,420,000
     
10,153,000
     
36,703,000
 
Interest expense, net
   
5,764,000
     
3,953,000
     
16,538,000
     
10,789,000
 
(Loss) income before income tax (benefit) expense
   
(4,137,000
)
   
4,467,000
     
(6,385,000
)
   
25,914,000
 
Income tax (benefit) expense
   
(1,035,000
)
   
6,994,000
     
(1,301,000
)
   
15,026,000
 
Net (loss) income
 
$
(3,102,000
)
 
$
(2,527,000
)
 
$
(5,084,000
)
 
$
10,888,000
 
Basic net (loss) income per share
 
$
(0.16
)
 
$
(0.13
)
 
$
(0.27
)
 
$
0.58
 
Diluted net (loss) income per share
 
$
(0.16
)
 
$
(0.13
)
 
$
(0.27
)
 
$
0.56
 
Weighted average number of shares outstanding:
                               
Basic
   
18,810,702
     
19,069,152
     
18,861,617
     
18,814,967
 
Diluted
   
18,810,702
     
19,069,152
     
18,861,617
     
19,400,744
 

The accompanying condensed notes to consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

   
Three Months Ended
December 31,
   
Nine Months Ended
December 31,
 
   
2018
   
2017
   
2018
   
2017
 
                         
         
(As Adjusted)
         
(As Adjusted)
 
Net (loss) income
 
$
(3,102,000
)
 
$
(2,527,000
)
 
$
(5,084,000
)
 
$
10,888,000
 
Other comprehensive (loss) income, net of tax:
                               
Unrealized gain on short-term investments (net of tax of $0, $55,000, $0 and $133,000)
   
-
     
83,000
     
-
     
199,000
 
Foreign currency translation (loss) gain
   
(302,000
)
   
247,000
     
(1,019,000
)
   
1,084,000
 
Total other comprehensive (loss) gain, net of tax
   
(302,000
)
   
330,000
     
(1,019,000
)
   
1,283,000
 
Comprehensive (loss) income
 
$
(3,404,000
)
 
$
(2,197,000
)
 
$
(6,103,000
)
 
$
12,171,000
 

The accompanying condensed notes to consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

   
Nine Months Ended
December 31,
 
   
2018
   
2017
 
Cash flows from operating activities:
       
(As Adjusted)
 
Net (loss) income
 
$
(5,084,000
)
 
$
10,888,000
 
Adjustments to reconcile net (loss) income to net cash used in operating activities:
               
Depreciation
   
4,313,000
     
2,805,000
 
Amortization of intangible assets
   
620,000
     
517,000
 
Amortization and write-off of debt issuance costs
   
798,000
     
864,000
 
Amortization of interest on contract liabilities, net
   
725,000
     
378,000
 
Gain due to change in fair value of the warrant liability
   
-
     
(2,313,000
)
Loss on short-term investments
   
240,000
     
-
 
Net provision for inventory reserves
   
6,997,000
     
4,954,000
 
Net provision for customer payment discrepancies
   
602,000
     
1,194,000
 
Net provision for doubtful accounts
   
221,000
     
17,000
 
Deferred income taxes
   
(962,000
)
   
(2,430,000
)
Share-based compensation expense
   
3,151,000
     
2,658,000
 
Loss on disposal of plant and equipment
   
24,000
     
9,000
 
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
   
8,432,000
     
(4,240,000
)
Inventory
   
(49,431,000
)
   
(34,643,000
)
Inventory unreturned
   
(3,238,000
)
   
332,000
 
Income tax receivable
   
(4,921,000
)
   
(69,000
)
Prepaid expenses and other current assets
   
1,398,000
     
(33,000
)
Other assets
   
(129,000
)
   
(153,000
)
Accounts payable and accrued liabilities
   
27,968,000
     
(15,946,000
)
Customer finished goods returns accrual
   
1,431,000
     
(1,705,000
)
Contract assets, net
   
(4,027,000
)
   
(16,208,000
)
Contract liabilities, net
   
(10,794,000
)
   
41,175,000
 
Other liabilities
   
1,338,000
     
2,146,000
 
Net cash used in operating activities
   
(20,328,000
)
   
(9,803,000
)
Cash flows from investing activities:
               
Purchase of plant and equipment
   
(8,548,000
)
   
(4,765,000
)
Purchase of business, net of cash acquired
   
(4,417,000
)
   
(4,993,000
)
Change in short-term investments
   
(279,000
)
   
(287,000
)
Net cash used in investing activities
   
(13,244,000
)
   
(10,045,000
)
Cash flows from financing activities:
               
Borrowings under revolving loan
   
64,900,000
     
62,000,000
 
Repayments of revolving loan
   
(40,494,000
)
   
(37,000,000
)
Borrowings under term loan
   
13,594,000
     
-
 
Repayments of term loan
   
(1,719,000
)
   
(2,344,000
)
Payments for debt issuance costs
   
(1,780,000
)
   
(462,000
)
Payments on capital lease obligations
   
(1,071,000
)
   
(612,000
)
Exercise of stock options
   
244,000
     
295,000
 
Cash used to net share settle equity awards
   
(322,000
)
   
(596,000
)
Settlement of warrant
   
-
     
4,000,000
 
Repurchase of common stock, including fees
   
(4,062,000
)
   
(4,476,000
)
Net cash provided by financing activities
   
29,290,000
     
20,805,000
 
Effect of exchange rate changes on cash and cash equivalents
   
(176,000
)
   
46,000
 
Net (decrease) increase in cash and cash equivalents
   
(4,458,000
)
   
1,003,000
 
Cash and cash equivalents — Beginning of period
   
13,049,000
     
9,029,000
 
Cash and cash equivalents  — End of period
 
$
8,591,000
   
$
10,032,000
 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest, net
 
$
14,846,000
   
$
9,508,000
 
Income taxes, net of refunds
   
3,263,000
     
16,598,000
 
Non-cash investing and financing activities:
               
Plant and equipment acquired under capital lease
 
$
207,000
   
$
582,000
 
Contingent consideration
    3,560,000      
-
 

The accompanying condensed notes to consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements
December 31, 2018
(Unaudited)

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended December 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2019. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2018, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2018.

The accompanying consolidated financial statements have been prepared on a consistent basis with, and there have been no material changes to, except as noted below, the accounting policies described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

1.
Company Background and Organization

Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading manufacturer, remanufacturer, and distributor of aftermarket automotive and light truck applications. The Company also, to a lesser extent, is a manufacturer, remanufacturer, and distributor of heavy duty truck and industrial and agricultural application parts. These replacement parts are sold for use on vehicles after initial vehicle purchase. These automotive parts are sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake master cylinders, and (iv) other products which include turbochargers, brake power boosters, and diagnostic equipment. As a result of the July 2017 acquisition of D&V Electronics Ltd. (“D&V”), the Company’s business also now includes developing and selling diagnostics systems for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles. In addition, the Company completed the acquisition of Mechanical Power Conversion, LLC, in December 2018, which includes the design and manufacture of advanced power emulators (AC and DC) and custom power electronic products (see Note 5).

The Company obtains used automotive parts, commonly known as Used Cores, primarily from its customers under the Company’s core exchange program. It also purchases Used Cores from vendors (core brokers). The customers grant credit to the consumer when the used part is returned to them, and the Company in turn provides a credit to the customers upon return to the Company. These Used Cores are an essential raw material needed for the remanufacturing operations.

The Company has remanufacturing, warehousing and shipping/receiving operations for automotive parts in North America and Asia. In addition, the Company utilizes various third party warehouse distribution centers in North America.

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) ASC for segment reporting, the Company has identified its chief executive officer as chief operating decision maker (“CODM”), has reviewed the documents used by the CODM, and understands how such documents are used by the CODM to make financial and operating decisions. The Company has determined through this review process that it has one reportable segment for purposes of recording and reporting its financial results.

2.
Impact on Previously Issued Financial Statements for the Correction of an Error

Revision of Prior Period Financial Statements

During the quarter ended September 30, 2018, the Company identified and corrected immaterial errors that affected previously issued consolidated financial statements. These errors primarily related to historical misapplication of GAAP related to the timing of recognizing certain expenses incurred in connection with allowances paid for core inventory purchase obligations at the start of a new business relationship. The Company previously recorded the difference between the acquisition price of Remanufactured Cores purchased from customers generally in connection with new business, and the related inventory cost as a sales allowance reducing revenue when the purchases were made. These sales allowances are now recorded as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered (as further described under the caption “Contract Assets” in Note 4). The Company also corrected errors resulting from differences between the original cost estimate and the actual cost of the Remanufactured Cores held at customers’ locations.

The Company also corrected other immaterial errors, which primarily relate to bonus accruals and core inventory, and recorded certain adjustments to income taxes, including reflecting the tax effect of the aforementioned adjustments. In addition, the Company reclassified certain customer contract related prepayments from prepaid expenses and other current assets and other assets to contract assets related to the adoption of ASC 606 on April 1, 2018 (see Note 4).

In order to correctly present the errors noted above, previously issued comparative financial statements, which were revised during the quarter ended September 30, 2018, are presented as “As Revised” in the tables presented in the following footnotes. In addition, upon the adoption of ASC 606 on April 1, 2018, the Company adjusted its revised consolidated financial statements and related footnotes for the year ended March 31, 2018 and applicable interim periods within the fiscal year ended March 31, 2018. These consolidated financial statements and tables are presented as “As Adjusted”.

The effect of the above corrections on the consolidated statement of operations for the fiscal year ended March 31, 2018 is as follows:

   
Year Ended March 31, 2018
 
Revised Consolidated Statement of Operations Amounts:
 
As Previously
Reported
   
Adjustment
   
As Revised
 
                   
Net sales
 
$
428,072,000
   
$
(1,081,000
)
 
$
426,991,000
 
Cost of goods sold
   
322,199,000
     
(1,750,000
)
   
320,449,000
 
Gross profit
   
105,873,000
     
669,000
     
106,542,000
 
Operating expenses:
                       
General and administrative
   
35,527,000
     
(50,000
)
   
35,477,000
 
Sales and marketing
   
15,030,000
     
-
     
15,030,000
 
Research and development
   
5,692,000
     
-
     
5,692,000
 
Total operating expenses
   
56,249,000
     
(50,000
)
   
56,199,000
 
Operating income
   
49,624,000
     
719,000
     
50,343,000
 
Interest expense, net
   
15,445,000
     
-
     
15,445,000
 
Income before income tax expense (benefit)
   
34,179,000
     
719,000
     
34,898,000
 
Income tax expense (benefit)
   
17,863,000
     
(1,791,000
)
   
16,072,000
 
Net income
 
$
16,316,000
   
$
2,510,000
   
$
18,826,000
 
Basic net income per share
 
$
0.87
   
$
0.13
   
$
1.00
 
Diluted net income per share
 
$
0.84
   
$
0.13
   
$
0.96
 

The effect of the above corrections on the consolidated statement of comprehensive income for the fiscal year ended March 31, 2018 is as follows:

   
Year Ended March 31, 2018
 
Revised Consolidated Statement of Comprehensive Income Amounts:
 
As Previously
Reported
   
Adjustment
   
As Revised
 
                   
Net income
 
$
16,316,000
   
$
2,510,000
   
$
18,826,000
 
Comprehensive income
 
$
18,329,000
   
$
2,510,000
   
$
20,839,000
 

The effect of the above corrections on the consolidated balance sheet at March 31, 2018 is as follows:

   
March 31, 2018
 
Revised Consolidated Balance Sheet Amounts:
 
As Previously
Reported
   
Adjustment
   
As Revised
 
ASSETS
                 
Income tax receivable
 
$
7,796,000
   
$
176,000
   
$
7,972,000
 
Prepaid expenses and other current assets
   
11,491,000
     
3,613,000
     
15,104,000
 
Long-term core inventory — net
   
301,656,000
     
(3,362,000
)
   
298,294,000
 
Long-term deferred income taxes
   
10,556,000
     
(3,619,000
)
   
6,937,000
 
Other assets
   
7,392,000
     
14,603,000
     
21,995,000
 
TOTAL ASSETS
 
$
494,497,000
   
$
11,411,000
   
$
505,908,000
 
LIABILITIES AND SHAREHOLDERS’  EQUITY
                       
Accrued liabilities
 
$
11,799,000
   
$
249,000
   
$
12,048,000
 
TOTAL LIABILITIES
 
$
219,521,000
   
$
249,000
   
$
219,770,000
 
Retained earnings
 
$
66,606,000
   
$
11,162,000
   
$
77,768,000
 
TOTAL SHAREHOLDERS’ EQUITY
 
$
274,976,000
   
$
11,162,000
   
$
286,138,000
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
494,497,000
   
$
11,411,000
   
$
505,908,000
 

The effect of the above corrections on the consolidated statement of shareholders’ equity for the fiscal year ended March 31, 2018 is as follows:

   
Year Ended March 31, 2018
 
Revised Consolidated Statement of Shareholders’ Equity Amounts:
 
As Previously
Reported
   
Adjustment
   
As Revised
 
                   
Retained earnings at March 31, 2017
 
$
50,290,000
   
$
8,652,000
   
$
58,942,000
 
Net income
   
16,316,000
     
2,510,000
     
18,826,000
 
Retained earnings at March 31, 2018
 
$
66,606,000
   
$
11,162,000
   
$
77,768,000
 

The effect of the above corrections on the consolidated statement of cash flows for the fiscal year ended March 31, 2018 is as follows:

   
Year Ended March 31, 2018
 
Revised Consolidated Statement of Cash Flow from Operating Activities Amounts:
 
As Previously
Reported
   
Adjustment
   
As Revised
 
Net income
 
$
16,316,000
   
$
2,510,000
   
$
18,826,000
 
Deferred income taxes
   
3,055,000
     
(1,560,000
)
   
1,495,000
 
Income tax receivable
   
(6,081,000
)
   
(231,000
)
   
(6,312,000
)
Prepaid expenses and other current assets
   
(2,507,000
)
   
(318,000
)
   
(2,825,000
)
Other assets
   
(384,000
)
   
788,000
     
404,000
 
Accounts payable and accrued liabilities
   
(11,621,000
)
   
(50,000
)
   
(11,671,000
)
Long-term core inventory
   
(45,839,000
)
   
(1,139,000
)
   
(46,978,000
)
Net cash used in operating activities
 
$
(13,944,000
)
 
$
-
   
$
(13,944,000
)

The effect of the above corrections on the consolidated statements of operations for the three and nine months ended December 31, 2017 is as follows:

   
Three Months Ended December 31, 2017
   
Nine Months Ended December 31, 2017
 
Revised Consolidated Statement of Operations Amounts:
 
As Previously
Reported
   
Adjustment
   
As Revised
   
As Previously
Reported
   
Adjustment
   
As Revised
 
                                     
Net sales
 
$
100,127,000
   
$
1,586,000
   
$
101,713,000
   
$
306,964,000
   
$
(159,000
)
 
$
306,805,000
 
Cost of goods sold
   
77,583,000
     
(1,750,000
)
   
75,833,000
     
231,419,000
     
(1,750,000
)
   
229,669,000
 
Gross profit
   
22,544,000
     
3,336,000
     
25,880,000
     
75,545,000
     
1,591,000
     
77,136,000
 
Operating expenses:
                                               
General and administrative
   
11,915,000
     
-
     
11,915,000
     
26,717,000
     
(299,000
)
   
26,418,000
 
Sales and marketing
   
4,048,000
     
-
     
4,048,000
     
10,899,000
     
-
     
10,899,000
 
Research and development
   
1,678,000
     
-
     
1,678,000
     
3,920,000
     
-
     
3,920,000
 
Total operating expenses
   
17,641,000
     
-
     
17,641,000
     
41,536,000
     
(299,000
)
   
41,237,000
 
Operating income
   
4,903,000
     
3,336,000
     
8,239,000
     
34,009,000
     
1,890,000
     
35,899,000
 
Interest expense, net
   
3,953,000
     
-
     
3,953,000
     
10,789,000
     
-
     
10,789,000
 
Income before income tax expense (benefit)
   
950,000
     
3,336,000
     
4,286,000
     
23,220,000
     
1,890,000
     
25,110,000
 
Income tax expense (benefit)
   
7,756,000
     
(820,000
)
   
6,936,000
     
16,099,000
     
(1,357,000
)
   
14,742,000
 
Net (loss) income
 
$
(6,806,000
)
 
$
4,156,000
   
$
(2,650,000
)
 
$
7,121,000
   
$
3,247,000
   
$
10,368,000
 
Basic net (loss) income per share
 
$
(0.36
)
 
$
0.22
   
$
(0.14
)
 
$
0.38
   
$
0.17
   
$
0.55
 
Diluted net (loss) income per share
 
$
(0.36
)
 
$
0.22
   
$
(0.14
)
 
$
0.37
   
$
0.17
   
$
0.53
 

The effect of the above corrections on the consolidated statements of comprehensive (loss) income for the three and nine months ended December 31, 2017 is as follows:

   
Three Months Ended December 31, 2017
   
Nine Months Ended December 31, 2017
 
Revised Consolidated Statement of Comprehensive (Loss) Income Amounts:
 
As Previously
Reported
   
Adjustment
   
As Revised
   
As Previously
Reported
   
Adjustment
   
As Revised
 
                                     
Net (loss) income
 
$
(6,806,000
)
 
$
4,156,000
   
$
(2,650,000
)
 
$
7,121,000
   
$
3,247,000
   
$
10,368,000
 
Comprehensive (loss) income
 
$
(6,476,000
)
 
$
4,156,000
   
$
(2,320,000
)
 
$
8,404,000
   
$
3,247,000
   
$
11,651,000
 

The effect of the above corrections on the consolidated statements of cash flows for the nine months ended December 31, 2017 is as follows:

   
Nine Months Ended December 31, 2017
 
Revised Consolidated Statement of Cash Flow from Operating Activities Amounts:
 
As Previously
Reported
   
Adjustment
   
As Revised
 
Net income
 
$
7,121,000
   
$
3,247,000
   
$
10,368,000
 
Deferred income taxes
   
(909,000
)
   
(1,805,000
)
   
(2,714,000
)
Prepaid expenses and other current assets
   
(2,093,000
)
   
448,000
     
(1,645,000
)
Other assets
   
289,000
     
(452,000
)
   
(163,000
)
Accounts payable and accrued liabilities
   
(15,647,000
)
   
(299,000
)
   
(15,946,000
)
Long-term core inventory
   
(37,222,000
)
   
(1,139,000
)
   
(38,361,000
)
Net cash used in operating activities
 
$
(9,803,000
)
 
$
-
   
$
(9,803,000
)

3.
New Accounting Pronouncements

New Accounting Pronouncements Recently Adopted

Revenue Recognition

Effective April 1, 2018, the Company adopted ASC 606 using the full retrospective transition method. Under this method, the Company adjusted its revised consolidated financial statements (see Note 2) for the years ended March 31, 2018 and 2017, and applicable interim periods within the fiscal year ended March 31, 2018, as if ASC 606 had been effective for those periods. Periods prior to the fiscal year ended March 31, 2017 were not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605, Revenue Recognition. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are distinct performance obligations. See Note 4 for additional discussion of the adoption of ASC 606 and the impact on the Company’s financial statements.

Financial Instruments

In January 2016, the FASB issued guidance that amends the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the update clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company applied the amendments in the new guidance by means of a cumulative-effect adjustment of $746,000, net of tax, to the opening balance of retained earnings on April 1, 2018. Short-term investments are recorded at fair value with $420,000 and $240,000 of unrealized loss now recorded as a component of general and administrative expense for the three and nine months ended December 31, 2018, respectively.

Modifications to Share-Based Payment Awards

In May 2017, the FASB issued guidance to provide clarity and reduce (i) the diversity in practice and (ii) the cost and complexity when applying the accounting guidance for equity-based compensation to a change to the terms or conditions of a share-based payment award. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. This guidance should be applied prospectively to an award modified on or after that adoption date. The adoption of this guidance on April 1, 2018 did not have any impact on the Company’s consolidated financial statements.

Business Combinations

In January 2017, the FASB issued guidance 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 new guidance was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. A reporting entity should apply the amendment prospectively. The adoption of this guidance on April 1, 2018 did not have any impact on the Company’s consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued new guidance that requires balance sheet recognition of a right-of-use asset and lease liability by lessees for all leases, other than leases with a term of 12 months or less if the short-term lease exclusion expedient is elected. There have been further amendments, including practical expedients, issued in January 2018 and July 2018. The new guidance also requires new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new guidance requires a modified retrospective approach with optional practical expedients. The FASB provided entities with an additional transition method, which allows an entity to apply this guidance as of the beginning of the period of adoption instead of the beginning of the earliest comparative period presented in the entity’s financial statements. The Company has elected to adopt this guidance under the additional transition method. The Company will adopt this guidance in the first quarter of fiscal 2020. The Company has developed and is executing on an implementation plan to adopt this new guidance. The Company has identified all of its material leases and is assessing those leases pursuant to ASC 842. The Company is currently developing its methodology for determining its incremental borrowing rate. The adoption is anticipated to have a significant increase to the Company’s long-term assets and liabilities on the consolidated balance sheets, as the Company will now be required to recognize the underlying right of use asset and corresponding lease liability, and an insignificant impact on the consolidated statements of operations.

Goodwill Impairment

In January 2017, the FASB issued guidance which simplifies the test for goodwill impairment. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This guidance must be applied on a prospective basis. The Company is currently evaluating the impact the provisions of this guidance will have on its consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the guidance allows for early adoption in any interim period after issuance of the update. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

Reporting Comprehensive Income

In February 2018, the FASB issued guidance that permits, but does not require, companies to reclassify the stranded tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued guidance, which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

4.
Revenue Recognition

Update to Significant Accounting Policies

Revenue Recognition

Upon the adoption of ASC 606 effective April 1, 2018, the Company revised its accounting policy on revenue recognition from the policy provided in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended March 31, 2018. The revised accounting policy for revenue recognition is provided below.

Through the Company’s agreements with customers, the Company now has a single performance obligation, to fulfill customer orders for automotive goods. Revenue is recognized when obligations under the terms of a contract with its customers are satisfied; generally, this occurs with the transfer of control of its manufactured, remanufactured, or distributed products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Revenue is recognized net of all anticipated returns, including Used Core returns under the core exchange program, marketing allowances, volume discounts, and other forms of variable consideration.

For products shipped free-on-board (“FOB”) shipping point, revenue is recognized on the date of shipment. For products shipped FOB destination, revenues are recognized on the estimated or actual date of delivery. The Company includes shipping and handling charges in the gross invoice price to customers and classify the total amount as revenue. All shipping and handling costs are expensed as incurred and included in cost of sales.

The Company now has a single performance obligation; however, the price of a finished remanufactured product sold to customers is generally comprised of separately invoiced amounts for the Remanufactured Core included in the product (“Remanufactured Core value”) and the unit value. The unit value is recorded as revenue based on the Company’s then current price list, net of applicable discounts and allowances. The Remanufactured Core value is recorded as a net revenue based upon the estimate of Used Cores that will not be returned by the customer for credit. These estimates are subjective and based on management’s judgement and knowledge of historical, current, and projected return rates. As reconciliations are completed with the customers the actual rates at which Used Cores are not being returned may differ from the current estimates. This may result in periodic adjustments of the estimated contract asset and liability amounts recorded and may impact the projected revenue recognition rates used to record the estimated future revenue. These estimates may also be revised if there are changes in contractual arrangements with customers, or changes in business practices. A significant portion of the remanufactured automotive parts sold to customers are replaced by similar Used Cores sent back for credit by customers under the core exchange program (as described in further detail below). The number of Used Cores sent back under the core exchange program is generally limited to the number of similar Remanufactured Cores previously shipped to each customer.

Revenue Recognition — Core Exchange Program

Full price Remanufactured Cores: When remanufactured products are shipped, certain customers are invoiced for the Remanufactured Core value of the product at the full Remanufactured Core sales price. For these Remanufactured Cores, revenue is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange program. The remainder of the full price Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as the Company expects these Remanufactured Cores to be returned for credit under its core exchange program.

Nominal price Remanufactured Cores: Certain other customers are invoiced for the Remanufactured Core value of the product shipped at a nominal (generally $0.01 or less) Remanufactured Core price. For these nominal Remanufactured Cores, revenue is only recognized based upon an estimate of the rate at which these customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the core exchange program. Revenue amounts are calculated based on contractually agreed upon pricing for these Remanufactured Cores for which the customers are not returning similar Used Cores. The remainder of the nominal price Remanufactured Core value invoiced to these customers is established as a long-term contract liability rather than being recognized as revenue in the period the products are shipped as the Company expects these Remanufactured Cores to be returned for credit under its core exchange program.

Revenue Recognition; General Right of Return

Customers are allowed to return goods that their end-user customers have returned to them, whether or not the returned item is defective (warranty returns). In addition, under the terms of certain agreements and industry practice, customers from time to time are allowed stock adjustments when their inventory of certain product lines exceeds the anticipated sales to end-user customers (stock adjustment returns). Customers have various contractual rights for stock adjustment returns, which are typically less than 5% of units sold. In some instances, a higher level of returns is allowed in connection with significant restocking orders. In addition, customers are allowed to return goods that their end-user consumers have returned to them. The aggregate returns are generally limited to less than 20% of unit sales.

The allowance for warranty returns is established based on a historical analysis of the level of this type of return as a percentage of total unit sales. Stock adjustment returns do not occur at any specific time during the year, and the expected level of these returns cannot be reasonably estimated based on a historical analysis. The allowance for stock adjustment returns is based on specific customer inventory levels, inventory movements, and information on the estimated timing of stock adjustment returns provided by customers. The return rate for stock adjustments is calculated based on expected returns within the normal operating cycle, which is generally one year.

The unit value of the warranty and stock adjustment returns are treated as reductions of revenue based on the estimations made at the time of the sale. The Remanufactured Core value of warranty and stock adjustment returns are provided for as indicated in the paragraph “Revenue Recognition – Core Exchange Program”.

Contract Assets

Contract assets consists of (i) the core portion of the finished goods shipped to the Company’s customers, (ii) upfront payments to customers in connection with customer contracts, (iii) core premiums paid to customers, and (iv) long-term core inventory deposits.

Remanufactured Cores held at customers’ locations as a part of the finished goods sold to the customer are classified as long-term contract assets. These assets are valued at the lower of cost or net realizable value, based on the most recent purchases of inventory on hand. For these Remanufactured Cores, the Company expects the finished good containing the Remanufactured Core to be returned under the Company’s general right of return policy or a similar Used Core to be returned to the Company by the customer, under the Company’s core exchange program in each case, for credit. The Remanufactured Core portion of stock adjustment returns and the Used Cores returned by consumers to the Company’s customers but not yet returned to the Company are classified as short-term contract assets until the Company physically receives them during its normal operating cycle, which is generally one year.

Upfront payments to customers represent the marketing allowances, such as sign-on bonuses, slotting fees, and promotional allowances provided by the Company to its customers. These allowances are recognized as an asset and amortized over the appropriate period of time as a reduction of revenue if the Company expects to generate future revenues associated with the upfront payment. If the Company does not expect to generate additional revenue, then the upfront payment is recognized in the consolidated statements of operations when payment occurs as a reduction of revenue. Upfront payments expected to be amortized during the Company’s normal operating cycle, which is generally one year, are classified as short-term contract assets.

Core premiums paid to customers represent the difference between the Remanufactured Core acquisition price purchased from customers generally in connection with new business, and the related inventory cost of the core, which is treated as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered. The Company considers, among other things, the length of its largest ongoing customer relationships, duration of customer contracts, and the average life of vehicles on the road in determining the appropriate period of time over which to amortize these premiums. These core premiums are amortized over a period typically ranging from six to eight years, adjusted for specific circumstances associated with the arrangement. Core premiums are recorded as long-term contract assets. Core premiums expected to be amortized within the Company’s normal operating cycle, which is generally one year, are classified as short-term contract assets.

Long-term core inventory deposits represent the cost of Remanufactured Cores the Company has purchased from customers, which are held by the customers and remain on the customers’ premises. The costs of these Remanufactured Cores were established at the time of the transaction based on the then current cost. The selling value of these Remanufactured Cores was established based on agreed upon amounts with these customers. The Company expects to realize the selling value and the related cost of these Remanufactured Cores should its relationship with a customer end, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience.

Contract Liability

Contract liability consists of: (i) customer allowances earned, (ii) accrued core payments, (iii) customer core returns accruals, and (iv) customer deposits.

Customer allowances earned includes all marketing allowances provided to customers. Such allowances include sales incentives and concessions. Voluntary marketing allowances related to a single exchange of product are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered. Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in accordance with a schedule set forth in the relevant contract. Sales incentive amounts are recorded based on the value of the incentive provided. Customer allowances earned are considered to be short-term contract liabilities.

Accrued core payments represent the sales price of Remanufactured Cores purchased from customers, generally in connection with new business, which are held by these customers and remain on their premises. The sales price of these Remanufactured Cores will be realized when the Company’s relationship with a customer ends, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience. The payments to be made to customers for purchases of Remanufactured Cores within the Company’s normal operating cycle, which is generally one year, are considered short-term contract liabilities.

Customer core returns accruals represent the full and nominally priced Remanufactured Cores shipped to the Company’s customers. When the Company ships the product, it recognizes an obligation to accept a similar Used Core sent back under the core exchange program based upon the Remanufactured Core price agreed upon by the Company and its customer. The Contract liability related to Used Cores returned by consumers to the Company’s customers but not yet returned to the Company are classified as short-term contract liabilities until the Company physically receives these Used Cores as they are expected to be returned during the Company’s normal operating cycle, which is generally one year.

Customer deposits represent the receipt of prepayments from customers for the obligation to transfer goods or services in the future. The Company classifies these customer deposits as short-term contract liabilities as the Company expects to satisfy these obligations within its normal operating cycle, which generally one year.

Inventory

Inventory is comprised of (i) Used Core and component raw materials, (ii) work-in-process, (iii) remanufactured finished goods, and (iv) purchased finished goods.

Inventory is stated at the lower of cost or net realizable value. The cost of inventory is evaluated at least quarterly during the fiscal year and adjusted as necessary to reflect current lower of cost or net realizable value levels. These adjustments are determined for individual items of inventory within each of the classifications of inventory as follows:


Component raw materials are recorded at average cost, which is based on the actual purchase price of raw materials on hand. This average cost is used in the inventory costing process and is the basis for allocation of materials to finished goods during the production process.


Used Core raw materials are recorded at average historical purchase prices determined based on actual purchases of inventory on hand. The purchase price for core buy-backs made from the Company’s customers are deemed the same as the purchase price of Used Cores for which sufficient recent purchases have occurred. The average purchase prices of Used Cores for more recent automobile models are retained as the cost for these Used Cores in subsequent periods even as the source of these Used Cores shifts to the core exchange program. The Company purchases Used Cores from core brokers to supplement its yield rates and the under return by consumers. In the absence of sufficient recent purchases, the Company uses the net selling price its customers have agreed to pay for Used Cores that are not returned to the Company under the Company’s core exchange program to assess whether Used Core cost exceeds Used Core net realizable value on a customer by customer basis.


Work-in-process is in various stages of production and is valued at the average cost of materials issued pursuant to open work orders. Historically, work-in-process inventory has not been material compared to the total inventory balance.


The cost of remanufactured finished goods includes the average cost of Used Core and component raw materials and allocations of labor and variable and fixed overhead costs. The allocations of labor and variable and fixed overhead costs are determined based on the average actual use of the production facilities over the prior twelve months which approximates normal capacity. This method prevents the distortion in allocated labor and overhead costs that would occur during short periods of abnormally low or high production. In addition, the Company excludes certain unallocated overhead such as severance costs, duplicative facility overhead costs, start-up costs, training, and spoilage from the calculation and expenses these unallocated overhead as period costs. The cost of purchased finished goods inventory approximates average historical purchase prices paid, and an allocation of fixed overhead costs.

The Company records an allowance for potentially excess and obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and a forecast of potential use of the inventory. The Company periodically reviews inventory to identify excess quantities and part numbers that are experiencing a reduction in demand. Any part numbers with quantities identified during this process are reserved for at rates based upon management’s judgment, historical rates, and consideration of possible scrap and liquidation values which may be as high as 100% of cost if no liquidation market exists for the part. The Company had recorded reserves for excess and obsolete inventory of $9,799,000 at December 31, 2018 and $6,682,000 at March 31, 2018. The quantity thresholds and reserve rates are subjective and based on management’s judgment and knowledge of current industry demand and management’s projections of industry demand. The reserve estimates may, therefore, be revised if there are changes in the overall market for the Company’s products or market changes that in management’s judgment, impact its ability to sell or liquidate potentially excess or obsolete inventory.

The Company records vendor discounts as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold.

Inventory Unreturned

Inventory unreturned represents the Company’s estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that the Company expects to be returned, under its general right of return policy, after the balance sheet date. Inventory unreturned includes only the added unit value of a finished good. The return rate is calculated based on expected returns within the normal operating cycle, which is generally one year. As such, the related amounts are classified in current assets. Inventory unreturned is valued in the same manner as the Company’s finished goods inventory.

Impact of the Adoption of the New Accounting Standard

As a result of the adoption of ASC 606 and the resultant changes in Company policy noted above, the effect of the adoption on the consolidated statements of operations was an increase to the Company’s revised retained earnings as of April 1, 2016 by approximately $345,000, net of tax. The effects of adoption were also a decrease to revised revenues for the year ended March 31, 2017 of $824,000 and an increase to revised revenues for the year ended March 31, 2018 of $557,000. The revenue changes were accompanied by related changes to cost of goods sold - a decrease to revised cost of goods sold for the year ended March 31, 2017 of $758,000, and an increase to revised cost of goods sold for the year ended March 31, 2018 of $66,000.

The primary result of the adoption effects upon the financial statement was due to an acceleration of revenue recognition for Remanufactured Cores not expected to be returned to the Company upon the initial recognition of revenue. Prior to adopting ASC 606, the Company had delayed recognizing revenue for sales of cores not expected to be replaced by a similar Used Core sent back under the core exchange program until it believed all of the following criteria were met:


·
The Company has a signed agreement with the customer covering the nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program. This agreement must specify the number of Remanufactured Cores its customer will pay cash for in lieu of sending back a similar Used Core and the basis on which the nominally priced Remanufactured Cores are to be valued (normally the average price per Remanufactured Core stipulated in the agreement).


·
The contractual date for reconciling the Company’s records and customer’s records of the number of nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program must be in the current or a prior period.


·
The reconciliation of the nominally priced Remanufactured Cores must be completed and agreed to by the customer.


·
The amount must be billed to the customer.

In order to properly determine the transaction price related to the Company’s sales contracts, the Company has also analyzed its various forms of consideration paid to its customers, including upfront payments for future contracts. Based on the analysis performed, the Company identified no changes to its legacy accounting practices as a result of the adoption of ASC 606 to account for upfront payments to the Company’s customers. Accordingly, if the Company expects to generate future revenues associated with an upfront payment, then an asset is recognized and amortized over the appropriate period of time as a reduction of revenue. If the Company does not expect to generate additional revenue, then the upfront payment is recognized in the consolidated statements of operations when payment occurs as a reduction of revenue.

Similarly, the Company has analyzed discounts and promotions offered to customers. In reviewing these discounts, the Company assessed whether any discounts were offered incremental to the range of discounts typically given for its goods to specific customer classes. In performing this analysis, the Company determined that there are no incremental discounts offered to customers and as such, its discounts do not represent a material right to the Company’s customers. As such, the Company will account for these discounts as variable consideration, as a reduction of revenue in the consolidated statements of operations when the product the discount is applicable to is sold.

The adoption of the new revenue recognition standard impacted the revised consolidated statements of operations for the three and nine months ended December 31, 2017 as follows:

   
Three Months Ended December 31, 2017
   
Nine Months Ended December 31, 2017
 
   
As Revised
   
Adoption of
ASC 606
   
As Adjusted
   
As Revised
   
Adoption of
ASC 606
   
As Adjusted
 
                                     
Net sales
 
$
101,713,000
   
$
1,165,000
   
$
102,878,000
   
$
306,805,000
   
$
1,029,000
   
$
307,834,000
 
Cost of goods sold
   
75,833,000
     
984,000
     
76,817,000
     
229,669,000
     
225,000
     
229,894,000
 
Gross profit
   
25,880,000
     
181,000
     
26,061,000
     
77,136,000
     
804,000
     
77,940,000
 
Operating expenses:
                                               
General and administrative
   
11,915,000
     
-
     
11,915,000
     
26,418,000
     
-
     
26,418,000
 
Sales and marketing
   
4,048,000
     
-
     
4,048,000
     
10,899,000
     
-
     
10,899,000
 
Research and development
   
1,678,000
     
-
     
1,678,000
     
3,920,000
     
-
     
3,920,000
 
Total operating expenses
   
17,641,000
     
-
     
17,641,000
     
41,237,000
     
-
     
41,237,000
 
Operating income
   
8,239,000
     
181,000
     
8,420,000
     
35,899,000
     
804,000
     
36,703,000
 
Interest expense, net
   
3,953,000
     
-
     
3,953,000
     
10,789,000
     
-
     
10,789,000
 
Income before income tax expense
   
4,286,000
     
181,000
     
4,467,000
     
25,110,000
     
804,000
     
25,914,000
 
Income tax expense
   
6,936,000
     
58,000
     
6,994,000
     
14,742,000
     
284,000
     
15,026,000
 
Net (loss) income
 
$
(2,650,000
)
 
$
123,000
   
$
(2,527,000
)
 
$
10,368,000
   
$
520,000
   
$
10,888,000
 
Basic net (loss) income per share
 
$
(0.14
)
 
$
0.01
   
$
(0.13
)
 
$
0.55
   
$
0.03
   
$
0.58
 
Diluted net (loss) income per share
 
$
(0.14
)
 
$
0.01
   
$
(0.13
)
 
$
0.53
   
$
0.03
   
$
0.56
 
Weighted average number of shares outstanding:
                                               
Basic
   
19,069,152
     
19,069,152
     
19,069,152
     
18,814,967
     
18,814,967
     
18,814,967
 
Diluted
   
19,069,152
     
19,069,152
     
19,069,152
     
19,400,744
     
19,400,744
     
19,400,744
 

Also, as a result of the adoption of ASC 606 and the resultant changes in Company policy noted above, the effect of the adoption on the consolidated balance sheets was to create contract asset and contract liability accounts to reflect those balance sheet items being impacted by the new revenue recognition requirements. The main drivers of the reclassifications were (i) the need to accommodate the aggregation of Remanufactured Core and Unit portion of the product sales under one single performance obligation and (ii) the creation of contract asset and contract liability accounts to appropriately segregate those balance sheet items related to the ongoing transactions under the Company’s customer contracts.

Detailed impacts on specific consolidated balance sheet account can be found in the individual footnotes covering the separate line items on the face of the consolidated balance sheet.

The adoption of the new revenue recognition standard impacted the revised consolidated balance sheet at March 31, 2018 as follows:

   
March 31, 2018
 
   
As Revised
   
Adoption of
ASC 606
   
As Adjusted
 
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
 
$
13,049,000
   
$
-
   
$
13,049,000
 
Short-term investments
   
2,828,000
     
-
     
2,828,000
 
Accounts receivable — net
   
15,738,000
     
47,436,000
     
63,174,000
 
Inventory— net
   
76,275,000
     
84,935,000
     
161,210,000
 
Inventory unreturned
   
7,508,000
     
-
     
7,508,000
 
Contract assets
   
-
     
23,206,000
     
23,206,000
 
Income tax receivable
   
7,972,000
     
-
     
7,972,000
 
Prepaid expenses and other current assets
   
15,104,000
     
(6,496,000
)
   
8,608,000
 
Total current assets
   
138,474,000
     
149,081,000
     
287,555,000
 
Plant and equipment — net
   
28,322,000
     
-
     
28,322,000
 
Long-term core inventory — net
   
298,294,000
     
(298,294,000
)
   
-
 
Long-term core inventory deposits
   
5,569,000
     
(5,569,000
)
   
-
 
Long-term deferred income taxes
   
6,937,000
     
(239,000
)
   
6,698,000
 
Long-term contract assets
   
-
     
222,731,000
     
222,731,000
 
Goodwill
   
2,551,000
     
-
     
2,551,000
 
Intangible assets — net
   
3,766,000
     
-
     
3,766,000
 
Other assets
   
21,995,000
     
(21,191,000
)
   
804,000
 
TOTAL ASSETS
 
$
505,908,000
   
$
46,519,000
   
$
552,427,000
 
LIABILITIES AND SHAREHOLDERS’  EQUITY
                       
Current liabilities:
                       
Accounts payable
 
$
73,273,000
   
$
-
   
$
73,273,000
 
Accrued liabilities
   
12,048,000
     
-
     
12,048,000
 
Customer finished goods returns accrual
   
17,805,000
     
-
     
17,805,000
 
Accrued core payment
   
16,536,000
     
(16,536,000
)
   
-
 
Contract liabilities
   
-
     
32,603,000
     
32,603,000
 
Revolving loan
   
54,000,000
     
-
     
54,000,000
 
Other current liabilities
   
4,471,000
     
-
     
4,471,000
 
Current portion of term loan
   
3,068,000
     
-
     
3,068,000
 
Total current liabilities
   
181,201,000
     
16,067,000
     
197,268,000
 
Term loan, less current portion
   
13,913,000
     
-
     
13,913,000
 
Long-term accrued core payment
   
18,473,000
     
(18,473,000
)
   
-
 
Long-term deferred income taxes
   
226,000
     
-
     
226,000
 
Long-term contract liabilities
   
-
     
48,183,000
     
48,183,000
 
Other liabilities
   
5,957,000
     
-
     
5,957,000
 
Total liabilities
   
219,770,000
     
45,777,000
     
265,547,000
 
Commitments and contingencies
                       
Shareholders’ equity:
                       
Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued
   
-
     
-
     
-
 
Series A junior participating preferred stock; par value $.01 per share, 20,000 shares authorized; none issued
   
-
     
-
     
-
 
Common stock; par value $.01 per share, 50,000,000 shares authorized; 18,893,102 shares issued and outstanding at March 31, 2018
   
189,000
     
-
     
189,000
 
Additional paid-in capital
   
213,609,000
     
-
     
213,609,000
 
Retained earnings
   
77,768,000
     
742,000
     
78,510,000
 
Accumulated other comprehensive loss
   
(5,428,000
)
   
-
     
(5,428,000
)
Total shareholders’ equity
   
286,138,000
     
742,000
     
286,880,000
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
505,908,000
   
$
46,519,000
   
$
552,427,000
 

The adoption of the new revenue recognition standard impacted the revised statement of cash flows for the nine months ended December 31, 2017 as follows:

   
Nine Months Ended December 31, 2017
 
Cash flows from operating activities:
 
As Revised
   
Adoption of
ASC 606
   
As Adjusted
 
Net income
 
$
10,368,000
   
$
520,000
   
$
10,888,000
 
Deferred income taxes
   
(2,714,000
)
   
284,000
     
(2,430,000
)
Accounts receivable
   
23,127,000
     
(27,367,000
)
   
(4,240,000
)
Inventory
   
(11,162,000
)
   
(23,481,000
)
   
(34,643,000
)
Prepaid expenses and other current assets
   
(1,576,000
)
   
1,543,000
     
(33,000
)
Other assets
   
(163,000
)
   
10,000
     
(153,000
)
Long-term core inventory
   
(38,361,000
)
   
38,361,000
     
-
 
Contract assets, net
   
-
     
(16,208,000
)
   
(16,208,000
)
Contract liabilities, net
   
-
     
41,175,000
     
41,175,000
 
Accrued core payments
   
14,837,000
     
(14,837,000
)
   
-
 
Net cash used in operating activities
 
$
(9,803,000
)
 
$
-
   
$
(9,803,000
)

5.
Acquisition

On December 21, 2018, the Company completed the acquisition of Mechanical Power Conversion, LLC (“E&M”), a privately held company operating as E&M Power and engaged in the design and manufacture of advanced power emulators (AC and DC) and custom power electronic products, based in Binghamton, New York. The addition of new products from E&M will drive the Company’s revenue potential and increase its product portfolio. The acquisition was consummated pursuant to an asset purchase agreement dated December 21, 2018 for an initial cash purchase price of $4,417,000, including $360,000, which is being held in escrow to be paid to the former owners of E&M, subject to certain working capital adjustments. In addition, the Company is contingently obligated to make additional payments to the former owners of E&M up to an aggregate of $5,200,000 over the next 2-3 years. The preliminary fair value of the contingent consideration obligations as of the acquisition date was $3,560,000 determined using a probability weighted method and a Monte Carlo Simulation model.

The Company preliminarily allocated the initial purchase consideration to identified finite-lived intangible assets as follows: $2,660,000 for developed technology with an estimated useful life of 5 years, $2,630,000 for customer relationships with an estimated useful life of 8 years, and $370,000 to order backlog with an estimated useful life of 6 months. In addition, $1,683,000 was allocated to inventory and $217,000 to other net liabilities. The remaining excess purchase price over identifiable tangible and intangible assets acquired of $851,000 was recorded as goodwill, which is not deductible for income tax purposes. Initial accounting for the acquisition is preliminary as the Company has not finalized the valuation of intangible assets and goodwill. The Company incurred $287,000 in acquisition costs during the nine months ended December 31, 2018, which were recorded in general and administrative expenses. The assets and results of operations of E&M were not significant to the Company’s consolidated financial position or results of operations, and thus pro forma information is not presented.

6.
Goodwill and Intangible Assets

Goodwill

The following summarizes the changes in the Company’s goodwill:

   
Nine Months Ended
December 31,
 
   
2018
   
2017
 
Balance at beginning of period
 
$
2,551,000
   
$
2,551,000
 
Goodwill acquired
    851,000      
-
 
Translation adjustment
   
-
     
-
 
Impairment
   
-
     
-
 
Balance at end of period
 
$
3,402,000    
$
2,551,000
 

Intangible Assets

The following is a summary of acquired intangible assets subject to amortization:


 
Weighted
Average
Amortization
Period
 
December 31, 2018
   
March 31, 2018
 
 
Gross Carrying
Value
   
Accumulated
Amortization
   
Gross Carrying
Value
   
Accumulated
Amortization
 
Intangible assets subject to amortization
                                   
Trademarks
 
9 years
 
$
876,000
   
$
424,000
   
$
885,000
   
$
316,000
 
Customer relationships
 
11 years
   
8,515,000
     
3,333,000
     
5,900,000
     
2,937,000
 
Order backlog
 
6 months
   
368,000
     
20,000
     
-
     
-
 
Developed technology
 
5 years
   
2,929,000
     
149,000
     
301,000
     
67,000
 
Total
     
$
12,688,000
   
$
3,926,000
   
$
7,086,000
   
$
3,320,000
 

Amortization expense for acquired intangible assets is as follows:

   
Three Months Ended
December 31,
   
Nine Months Ended
December 31,
 
   
2018
   
2017
   
2018
   
2017
 
                         
Amortization expense
 
$
236,000
   
$
192,000
   
$
620,000
   
$
517,000
 

The estimated future amortization expense for acquired intangible assets is as follows:

Year Ending March 31,
     
2019 - remaining three months
 
$
588,000
 
2020
   
1,723,000
 
2021
   
1,468,000
 
2022
   
1,436,000
 
2023
   
1,436,000
 
Thereafter
   
2,111,000
 
Total
 
$
8,762,000
 

7.
Accounts Receivable — Net

The adoption of the new revenue recognition standard (see Note 4) impacted the previously reported accounts receivable—net, at March 31, 2018 as follows:

   
March 31, 2018
 
   
As Previously
Reported
   
Adoption of
ASC 606

 
As Adjusted
 
Accounts receivable — trade
 
$
83,700,000
   
$
-
   
$
83,700,000
 
Allowance for bad debts
   
(4,142,000
)
   
-
     
(4,142,000
)
Customer allowances earned
   
(11,370,000
)
   
11,370,000
 (1)

 
-
 
Customer payment discrepancies
   
(1,110,000
)
   
-
     
(1,110,000
)
Customer returns RGA issued
   
(15,274,000
)
   
-
     
(15,274,000
)
Customer core returns accruals
   
(36,066,000
)
   
36,066,000
(2)

 
-
 
Less: total accounts receivable offset accounts
   
(67,962,000
)
   
47,436,000
     
(20,526,000
)
Total accounts receivable — net
 
$
15,738,000
   
$
47,436,000
   
$
63,174,000
 



(1)
Customer allowances earned have been reclassified to contract liabilities in the consolidated balance sheet at March 31, 2018.

(2)
Customer core returns accruals of $4,697,000 have been reclassified to contract liabilities and customer core returns accruals of $31,369,000 have been reclassified to long-term contract liabilities in the consolidated balance sheet at March 31, 2018.

Accounts receivable — net includes offset accounts related to customer payment discrepancies, returned goods authorizations (“RGA”) issued for in-transit unit returns, and potential bad debts.

Accounts receivable — net is comprised of the following:

   
December 31, 2018
   
March 31, 2018
 
Accounts receivable — trade
 
$
82,208,000
   
$
83,700,000
 
Allowance for bad debts
   
(4,363,000
)
   
(4,142,000
)
Customer payment discrepancies
   
(811,000
)
   
(1,110,000
)
Customer returns RGA issued
   
(22,273,000
)
   
(15,274,000
)
Less: total accounts receivable offset accounts
   
(27,447,000
)
   
(20,526,000
)
Total accounts receivable — net
 
$
54,761,000
   
$
63,174,000
 

Warranty Returns

The Company allows its customers to return goods that their customers have returned to them, whether or not the returned item is defective (“warranty returns”). The Company accrues an estimate of its exposure to warranty returns based on a historical analysis of the level of this type of return as a percentage of total unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales. At December 31, 2018 and March 31, 2018, the Company’s total warranty return accrual was $19,152,000 and $16,646,000, respectively, of which $7,738,000 and $7,204,000, respectively, was included in the customer returns RGA issued balance in the above table for expected credits to be issued against accounts receivable and $11,414,000 and $9,442,000, respectively, was included in the customer finished goods returns accrual in the consolidated balance sheets for estimated future warranty returns.

The following summarizes the changes in the Company’s warranty return accrual:

   
Three Months Ended
December 31,
   
Nine Months Ended
December 31,
 

 
2018
   
2017
   
2018
   
2017
 
Balance at beginning of period
 
$
16,410,000
   
$
14,799,000
   
$
16,646,000
   
$
14,286,000
 
Charged to expense/additions
   
29,655,000
     
38,269,000
     
84,408,000
     
89,834,000
 
Amounts processed
   
(26,913,000
)
   
(24,048,000
)
   
(81,902,000
)
   
(75,100,000
)
Balance at end of period
 
$
19,152,000
   
$
29,020,000
   
$
19,152,000
   
$
29,020,000
 

8.
Inventory

The adoption of the new revenue recognition standard (see Note 4) impacted the revised inventory at March 31, 2018 as follows:

   
March 31, 2018
 
   
As Revised
   
Adoption of
ASC 606
     
As Adjusted
 
Inventory
                   
Raw materials
 
$
25,805,000
   
$
51,330,000
 
(1
)
$
77,135,000
 
Work-in-process
   
635,000
     
1,948,000
 
(1
)
 
2,583,000
 
Finished goods
   
53,973,000
     
34,201,000
 
(2
)
 
88,174,000
 
     
80,413,000
     
87,479,000
       
167,892,000
 
Less allowance for excess and obsolete inventory
   
(4,138,000
)
   
(2,544,000
)
(3
)
 
(6,682,000
)
Total
 
$
76,275,000
   
$
84,935,000
     
$
161,210,000
 
                           
Inventory unreturned

$
7,508,000


$
-


  $
7,508,000

Long-term core inventory
                         
Used cores held at the Company’s facilities
 
$
53,278,000
   
$
(53,278,000
)
(1
)
$
-
 
Used cores expected to be returned by customers
   
12,970,000
     
(12,970,000
)
(4
)
 
-
 
Remanufactured cores held in finished goods
   
34,201,000
     
(34,201,000
)
(2
)
 
-
 
Remanufactured cores held at customers’ locations
   
200,389,000
     
(200,389,000
)
(5
)
 
-
 
     
300,838,000
     
(300,838,000
)
     
-
 
Less allowance for excess and obsolete inventory
   
(2,544,000
)
   
2,544,000
 
(3
)
 
-
 
Total
 
$
298,294,000
   
$
(298,294,000
)
   
$
-
 
                           
Long-term core inventory deposits
 
$
5,569,000
   
$
(5,569,000
)
(6
)
$
-
 



(1)
Used cores held at the Company’s facilities of $53,278,000 have been reclassified to raw materials and work-in-process in the consolidated balance sheet at March 31, 2018.

(2)
Remanufactured Cores held in finished goods of $34,201,000 have been reclassified to finished goods in the consolidated balance sheet at March 31, 2018.

(3)
The allowance for excess and obsolete inventory related to Used cores held at the Company’s facilities of $2,544,000, which was previously included in long-term core inventory, has been reclassified to inventory—net in the consolidated balance sheet at March 31, 2018.

(4)
Used cores expected to be returned by customers of $12,970,000 have been reclassified to contract assets in the consolidated balance sheet at March 31, 2018.

(5)
Remanufactured cores held at customers’ locations of $200,389,000 have been reclassified to current and long-term contract assets in the consolidated balance sheet at March 31, 2018.

(6)
Long-term core inventory deposits of $5,569,000 have been reclassified to long-term contract assets in the consolidated balance sheet at March 31, 2018.

Inventory–net is comprised of the following:

   
December 31, 2018
   
March 31, 2018
 
Inventory - net
           
Raw materials
 
$
87,717,000
   
$
77,135,000
 
Work-in-process
   
4,394,000
     
2,583,000
 
Finished goods
   
122,763,000
     
88,174,000
 
     
214,874,000
     
167,892,000
 
Less allowance for excess and obsolete inventory
   
(9,799,000
)
   
(6,682,000
)
Total inventory - net
 
$
205,075,000
   
$
161,210,000
 
                 
Inventory unreturned
 
$
10,746,000
   
$
7,508,000
 

9.
Contract Assets

Contract assets (see Note 4) are comprised of the following:

   
December 31, 2018
   
March 31, 2018
 
Short-term contract assets
   
(As Adjusted)
 
Cores expected to be returned by customers
 
$
19,585,000
   
$
15,614,000
 
Upfront payments to customers
   
3,228,000
     
3,979,000
 
Core premiums paid to customers
   
4,152,000
     
3,613,000
 
   
$
26,965,000
   
$
23,206,000
 
Long-term contract assets
 
Remanufactured cores held at customers’ locations
 
$
198,348,000
   
$
197,067,000
 
Upfront payments to customers
   
3,330,000
     
5,492,000
 
Core premiums paid to customers
   
15,752,000
     
14,603,000
 
Long-term core inventory deposits
   
5,569,000
     
5,569,000
 
   
$
222,999,000
   
$
222,731,000
 
Total contract assets
 
$
249,964,000
   
$
245,937,000
 

10.
Significant Customer and Other Information

Significant Customer Concentrations

The Company’s largest customers accounted for the following total percentage of net sales:

   
Three Months Ended
December 31,
   
Nine Months Ended
December 31,
 
   
2018
   
2017
   
2018
   
2017
 
Net sales
       
(As Adjusted)
         
(As Adjusted)
 
Customer A
   
33
%
   
41
%
   
36
%
   
43
%
Customer B
   
20
%
   
27
%
   
23
%
   
26
%
Customer C
   
26
%
   
18
%
   
23
%
   
16
%

The Company’s largest customers accounted for the following total percentage of accounts receivable – trade:

   
December 31, 2018
   
March 31, 2018
 
Accounts receivable - trade
           
Customer A
   
29
%
   
36
%
Customer B
   
13
%
   
16
%
Customer C
   
29
%
   
22
%

Geographic and Product Information

The Company’s products are predominantly sold in the U.S. and accounted for the following total percentage of net sales:

   
Three Months Ended
December 31,
   
Nine Months Ended
December 31,
 
   
2018
   
2017
   
2018
   
2017
 
         
(As Adjusted)
         
(As Adjusted)
 
Rotating electrical products
   
81
%
   
77
%
   
79
%
   
77
%
Wheel hub products
   
14
%
   
18
%
   
15
%
   
18
%
Brake master cylinders products
   
1
%
   
2
%
   
2
%
   
3
%
Other products
   
4
%
   
3
%
   
4
%
   
2
%
     
100
%
   
100
%
   
100
%
   
100
%

Significant Supplier Concentrations

The Company had no suppliers that accounted for more than 10% of inventory purchases for the three and nine months ended December 31, 2018 and 2017.

11.
Debt

The Company was party to a $145,000,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $120,000,000 revolving loan facility, subject to borrowing base restrictions and a $15,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $25,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility were scheduled to mature on June 3, 2020. In connection with the Credit Facility, the lenders were granted a security interest in substantially all of the assets of the Company. The Credit Facility permitted the payment of up to $15,000,000 of dividends per calendar year, subject to a minimum availability threshold and pro forma compliance with financial covenants. The Term Loans required quarterly principal payments of $781,250. The interest rate on the Company’s Term Loans and Revolving Facility was 4.42% and 4.52%, respectively, as of March 31, 2018.

In June 2018, the Company entered into an amendment and restatement of the Credit Facility (as so amended and restated, the “Amended Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $200,000,000 revolving loan facility, subject to borrowing base restrictions, a $20,000,000 sublimit for borrowings by Canadian borrowers, and a $15,000,000 sublimit for letters of credit (the “Amended Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Amended Term Loans”). The loans under the Amended Credit Facility mature on June 5, 2023. The Amended Credit Facility permits the payment of up to $20,000,000 of dividends per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants. In connection with the Amended Credit Facility, the lenders were granted a security interest in substantially all of the assets of the Company. The Company wrote-off $303,000 of previously capitalized debt issuance costs and capitalized $1,780,000 of new debt issuance costs in connection with the Amended Credit Facility.

The Amended Term Loans require quarterly principal payments of $937,500 beginning October 1, 2018. The Amended Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on the Company’s Amended Term Loans and Amended Revolving Facility was 4.85% and 4.97%, respectively, as of December 31, 2018.

On November 14, 2018, the Company entered into the First Amendment to the Amended Credit Facility (the “First Amendment”). The First Amendment, among other things, extended the due date for the quarterly financial statements required to be delivered under the Amended Credit Facility for the quarter ended September 30, 2018.

The Amended Credit Facility, among other things, requires the Company to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all financial covenants as of December 31, 2018.

In addition to other covenants, the Amended Credit Facility places limits on the Company’s ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by the Company and its subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.

The following summarizes information about the Company’s term loans at:

   
December 31, 2018
   
March 31, 2018
 
Principal amount of term loan
 
$
29,063,000
   
$
17,188,000
 
Unamortized financing fees
   
(269,000
)
   
(207,000
)
Net carrying amount of term loan
   
28,794,000
     
16,981,000
 
Less current portion of term loan
   
(3,685,000
)
   
(3,068,000
)
Long-term portion of term loan
 
$
25,109,000
   
$
13,913,000
 


Future repayments of the Company’s Amended Term Loans are as follows:

Year Ending March 31,
     
2019 - remaining three months
   
938,000
 
2020
   
3,750,000
 
2021
   
3,750,000
 
2022
   
3,750,000
 
2023
   
3,750,000
 
Thereafter
   
13,125,000
 
Total payments
 
$
29,063,000
 

The Company had $78,406,000 and $54,000,000 outstanding under the revolving facility at December 31, 2018 and March 31, 2018, respectively. In addition, $879,000 was reserved for letters of credit at December 31, 2018. At December 31, 2018, after certain adjustments, $117,304,000 was available under the Amended Revolving Facility.

12.
Contract Liabilities

Contract liabilities (see Note 4) are comprised of the following:

   
December 31, 2018
   
March 31, 2018
 
Short-term contract liabilities
 
Customer allowances earned
 
$
10,331,000
   
$
11,370,000
 
Customer core returns accruals
   
4,046,000
     
4,697,000
 
Customer deposits
   
2,720,000
     
-
 
Accrued core payment, net
   
12,142,000
     
16,536,000
 
   
$
29,239,000
   
$
32,603,000
 
Long-term contract liabilities
 
Customer core returns accruals
 
$
25,624,000
   
$
29,710,000
 
Accrued core payment, net
   
16,903,000
     
18,473,000
 
   
$
42,527,000
   
$
48,183,000
 
Total contract liabilities
 
$
71,766,000
   
$
80,786,000
 

13.
Accounts Receivable Discount Programs

The Company uses receivable discount programs with certain customers and their respective banks. Under these programs, the Company may sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow the Company to accelerate receipt of payment on customers’ receivables.

The following is a summary of the Company’s accounts receivable discount programs:

   
Nine Months Ended
December 31,
 
   
2018
   
2017
 
Receivables discounted
 
$
287,206,000
   
$
263,833,000
 
Weighted average days
   
340
     
341
 
Annualized weighted average discount rate
   
4.2
%
   
3.2
%
Amount of discount as interest expense
 
$
11,377,000
   
$
7,854,000
 

14.
Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options and warrants, which would result in the issuance of incremental shares of common stock.

The following presents a reconciliation of basic and diluted net (loss) income per share:

   
Three Months Ended
December 31,
   
Nine Months Ended
December 31,
 
   
2018
   
2017
   
2018
   
2017
 
                         
         
(As Adjusted)
         
(As Adjusted)
 
Net (loss) income
 
$
(3,102,000
)
 
$
(2,527,000
)
 
$
(5,084,000
)
 
$
10,888,000
 
Basic shares
   
18,810,702
     
19,069,152
     
18,861,617
     
18,814,967
 
Effect of potentially dilutive securities
   
-
     
-
     
-
     
585,777
 
Diluted shares
   
18,810,702
     
19,069,152
     
18,861,617
     
19,400,744
 
Net (loss) income per share:
                               
Basic net (loss) income per share
 
$
(0.16
)
 
$
(0.13
)
 
$
(0.27
)
 
$
0.58
 
Diluted net (loss) income per share
 
$
(0.16
)
 
$
(0.13
)
 
$
(0.27
)
 
$
0.56
 

Potential common shares that would have the effect of increasing diluted net income per share or decreasing diluted net loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted net (loss) income per share. For the three months ended December 31, 2018 and 2017, there were 1,519,480 and 1,170,441, respectively, of potential common shares not included in the calculation of diluted net income per share because their effect was anti-dilutive. For the nine months ended December 31, 2018 and 2017, there were 1,519,480 and 289,572, respectively, of potential common shares not included in the calculation of diluted net (loss) income per share because their effect was anti-dilutive.

15.
Income Taxes

The Company recorded an income tax benefit of $1,035,000, or an effective tax rate of 25.0%, and $1,301,000 or an effective tax rate of 20.4%, for the three and nine months ended December 31, 2018, respectively. The effective tax rates for the three and nine months ended December 31, 2018 were impacted by the statute lapses for various uncertain tax positions and return to provision adjustments, and finalization of provisional estimates under Staff Accounting Bulletin (“SAB”) 118. The estimated effective tax rate for the entire year is based on current estimates and any changes to those estimates in future periods could result in an effective tax rate that is materially different from the current estimate.

The Company recorded an income tax expense, as adjusted, of $6,994,000, or an effective tax rate of 156.6% and $15,026,000, or an effective tax rate of 58.0%, for the three and nine months ended December 31, 2017, respectively. The effective tax rates, as adjusted, for these periods were significantly impacted by the enactment of the Tax Cuts and Jobs Act (the “Act”) on December 22, 2017. In addition, the effective tax rates were impacted by valuation allowances recorded in connection with the Company’s July 2017 acquisition of D&V.

The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. During the year ended March 31, 2018, the Company recorded provisional amounts by applying the guidance in SAB 118, as the Company had not yet completed the accounting for the tax effects of enactment of the Act. The Company had recorded a one-time provisional non-cash tax charge of $2,709,000 due to the revaluation of deferred tax assets and liabilities. The one-time transition tax was estimated and recorded as a one-time provisional income tax expense of $530,000 at March 31, 2018.

As the measurement period under SAB 118 ended during the nine months ended December 31, 2018, the Company completed its accounting analysis of the cumulative foreign earnings, transitional tax liability, and non-cash tax charge for deferred revaluation under the Act. The three months ended December 31, 2018 included a reduction of $50,000 to the provisional transition tax amount and a $102,000 increase to non-cash tax charge due to the revaluation of deferred tax assets and liabilities previously reported under SAB 118. Additionally, the Company’s U.S. tax return for the period ended March 31, 2018 was filed and any changes to the tax positions for temporary differences compared to the estimates used resulted in an adjustment of the estimated tax expense recorded as of March 31, 2018. Despite the completion of the Company’s accounting for the Act under SAB 118, many aspects of the law remain unclear and the Company expects ongoing guidance to be issued at both the federal and state levels.  The Company will continue to monitor and assess the impact of any new developments.

The Company remains subject to examination for the fiscal years beginning with March 31, 2015. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

16.
Financial Risk Management and Derivatives

Purchases and expenses denominated in currencies other than the U.S. dollar, which are primarily related to the Company’s facilities overseas, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign currencies. The Company’s primary risk exposure is from fluctuations in the value of the Mexican peso and to a lesser extent the Chinese yuan. To mitigate these risks, the Company enters into forward foreign currency exchange contracts to exchange U.S. dollars for these foreign currencies. The extent to which forward foreign currency exchange contracts are used is modified periodically in response to the Company’s estimate of market conditions and the terms and length of anticipated requirements.

The Company enters into forward foreign currency exchange contracts in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in exchange rates between the U.S. dollar and the foreign currencies. The Company does not hold or issue financial instruments for trading purposes. The forward foreign currency exchange contracts are designated for forecasted expenditure requirements to fund foreign operations.

The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $31,416,000 and $31,304,000 at December 31, 2018 and March 31, 2018, respectively. These contracts generally have a term of one year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are reflected in current period earnings and accounted for as an increase or offset to general and administrative expenses.

The following shows the effect of the Company’s derivative instruments on its consolidated statements of operations:

   
Gain (Loss) Recognized within General and Administrative Expenses
 
Derivatives Not Designated as
 
Three Months Ended
December 31,
   
Nine Months Ended
December 31,
 
Hedging Instruments
 
2018
   
2017
   
2018
   
2017
 
Forward foreign currency exchange contracts
 
$
(860,000
)
 
$
(1,784,000
)
 
$
(1,628,000
)
 
$
(1,062,000
)

The fair value of the forward foreign currency exchange contracts of $449,000 is included in other current liabilities in the consolidated balance sheets at December 31, 2018. The fair value of the forward foreign currency exchange contracts of $1,179,000 is included in prepaid and other current assets in the consolidated balance sheet at March 31, 2018.

17.
Fair Value Measurements

The following summarizes the Company’s financial assets and liabilities measured at fair value, by level within the fair value hierarchy:


 
December 31, 2018
   
March 31, 2018
 

       
Fair Value Measurements
Using Inputs Considered as
         
Fair Value Measurements
Using Inputs Considered as
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Assets
                                               
Short-term investments
                                               
Mutual funds
 
$
2,868,000
   
$
2,868,000
     
-
     
-
   
$
2,828,000
   
$
2,828,000
     
-
     
-
 
Prepaid expenses and other current assets
                                                               
Forward foreign currency exchange contracts
   
-
     
-
     
-
     
-
     
1,179,000
     
-
   
$
1,179,000
     
-
 
                                                                 
Liabilities
                                                               
Accrued liabilities
                                                               
Short-term contingent consideration
    1,830,000      
-
     
-
   
$
1,830,000      
-
     
-
     
-
     
-
 
Other current liabilities
                                                               
Deferred compensation
   
2,868,000
     
2,868,000
     
-
     
-
     
2,828,000
     
2,828,000
     
-
     
-
 
Forward foreign currency exchange contracts
   
449,000
     
-
   
$
449,000
     
-
     
-
     
-
     
-
     
-
 
Other liabilities
                                                               
Long-term contingent consideration
   
1,730,000
     
-
     
-
     
1,730,000
     
-
     
-
     
-
     
-
 

Short-term Investments and Deferred Compensation

The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.

Forward Foreign Currency Exchange Contracts

The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. During the three months ended December 31, 2018 and 2017, losses of $860,000 and $1,784,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts. During the nine months ended December 31, 2018 and 2017, losses of $1,628,000 and $1,062,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts.

Contingent Consideration

The preliminary estimate of the fair value of the contingent consideration associated with the E&M acquisition discussed in Note 5 was $3,560,000. The contingent consideration was recorded in accrued expenses and other liabilities in the Company’s consolidated balance sheet at December 31, 2018, and was a Level 3 liability that was measured at fair value.

Research and Development (“R&D”) Event Milestone

The preliminary fair value of the two-year R&D event milestone based on technology development and transfer was $2,080,000 as of the acquisition date determined using a probability weighted method with the following assumptions commensurate with the term of the contingent consideration: (i) counter party risk discount rate ranging from 8.62% to 8.63%, and (ii) total probability of 90% to 100%. Any subsequent changes from the initial recognition of the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.

Gross Profit Earn-out Consideration

The preliminary fair value of the three-year gross profit earn-out consideration was $1,480,000 as of the acquisition date determined using a Monte Carlo Simulation Model.

The assumptions used to determine the fair value of the contingent consideration were:

   
December 31, 2018
 
Risk free interest rate
   
2.61
%
Counter party rate
    8.61
%
Expected volatility
   
30.00
%
Weighted average cost of capital
   
17.00
%

Any subsequent changes from the initial recognition of the fair value of the contingent consideration liability will be recorded in current period earnings as a general and administrative expense.

The following table summarizes the activity for financial assets and liabilities utilizing Level 3 fair value measurements:

     
Three Months Ended December 31,
   
Nine Months Ended December 31,
 
 
2018
   
2017
   
2018
   
2017
 
 
Contingent
Consideration
   
Contingent
Consideration
   
Contingent
Consideration
   
Contingent
Consideration
 
Beginning balance
 
$
-
   
$
-
   
$
-
   
$
-
 
Newly issued
    3,560,000      
-
      3,560,000      
-
 
Total (gain) loss included in net income (loss)
   
-
     
-
     
-
     
-
 
Exercises/settlements
   
-
     
-
     
-
     
-
 
Net transfers in (out) of Level 3
   
-
     
-
     
-
     
-
 
Ending balance
 
$
3,560,000    
$
-
   
$
3,560,000    
$
-
 

During the nine months ended December 31, 2018, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on the variable nature of interest rates and current rates for instruments with similar characteristics.

18.
Share-based Payments

Stock Options

The Company granted options to purchase 256,236 and 169,000 shares of common stock during the nine months ended December 31, 2018 and 2017, respectively. The cost associated with stock options is estimated using the Black-Scholes option-pricing model. This model requires the input of subjective assumptions including the expected volatility of the underlying stock and the expected holding period of the option. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value.

The following assumptions were used to derive the weighted average fair value of the stock options granted:

   
Nine Months Ended
December 31,
 
   
2018
   
2017
 
Weighted average risk free interest rate
   
2.83
%
   
1.91
%
Weighted average expected holding period (years)
   
5.94
     
5.82
 
Weighted average expected volatility
   
43.91
%
   
47.31
%
Weighted average expected dividend yield
   
-
     
-
 
Weighted average fair value of options granted
 
$
8.75
   
$
12.66
 

The following is a summary of stock option transactions:

   
Number of
Shares
   
Weighted Average
Exercise Price
 
Outstanding at March 31, 2018
   
1,143,298
   
$
16.97
 
Granted
   
256,236
   
$
19.12
 
Exercised
   
(39,032
)
 
$
6.24
 
Forfeited
   
(16,666
)
 
$
24.82
 
Outstanding at December 31, 2018
   
1,343,836
   
$
17.59
 

At December 31, 2018, options to purchase 420,474 shares of common stock were unvested at the weighted average exercise price of $22.61.

At December 31, 2018, there was $3,203,000 of total unrecognized compensation expense related to unvested stock option awards. The compensation expense is expected to be recognized over a weighted average vesting period of approximately 1.9 years.

Restricted Stock Units (“RSUs”)

During the nine months ended December 31, 2018 and 2017, the Company granted 104,725 and 77,854 shares of RSUs, respectively, with an estimated grant date fair value of $2,075,000 and $2,157,000, respectively, which was based on the closing market price on the grant date.

The following is a summary of non-vested RSUs:

   
Number of
Shares
   
Weighted Average
Grant Date Fair
Value
 
Outstanding at March 31, 2018
   
133,828
   
$
28.37
 
Granted
   
104,725
   
$
19.81
 
Vested
   
(58,742
)
 
$
28.90
 
Forfeited
   
(4,167
)
 
$
24.36
 
Outstanding at December 31, 2018
   
175,644
   
$
23.18
 

At December 31, 2018, there was $3,155,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 2.0 years.

19
Accumulated Other Comprehensive Income (Loss)

The following summarizes changes in accumulated other comprehensive income (loss):

   
Three Months Ended December 31, 2018
   
Three Months Ended December 31, 2017
 
   
Unrealized
Gain
on Short-Term
Investments
   
Foreign
Currency
Translation
   
Total
   
Unrealized
Gain (Loss)
on Short-Term
Investments
   
Foreign
Currency
Translation
   
Total
 
Balance at September 30, 2018 and 2017
 
$
-
   
$
(6,891,000
)
 
$
(6,891,000
)
 
$
644,000
   
$
(7,132,000
)
 
$
(6,488,000
)
Other comprehensive income (loss), net of tax
   
-
     
(302,000
)
   
(302,000
)
   
83,000
     
247,000
     
330,000
 
Amounts reclassified from accumulated other comprehensive loss, net of tax
   
-
     
-
     
-
     
-
     
-
     
-
 
Balance at December 31, 2018 and 2017
 
$
-
   
$
(7,193,000
)
 
$
(7,193,000
)
 
$
727,000
   
$
(6,885,000
)
 
$
(6,158,000
)

     
Nine Months Ended December 31, 2018
   
Nine Months Ended December 31, 2017
 
Unrealized
Gain
on Short-Term
Investments
   
Foreign
Currency
Translation
   
Total
   
Unrealized
Gain
on Short-Term
Investments
   
Foreign
Currency
Translation
   
Total
 
Balance at March 31, 2018 and 2017
 
$
746,000
   
$
(6,174,000
)
 
$
(5,428,000
)
 
$
528,000
   
$
(7,969,000
)
 
$
(7,441,000
)
Cumulative-effect adjustment [see Note 3]
   
(746,000
)
   
-
     
(746,000
)
   
-
     
-
     
-
 
Balance at April 1, 2018 and 2017
 
$
-
   
$
(6,174,000
)
 
$
(6,174,000
)
 
$
528,000
   
$
(7,969,000
)
 
$
(7,441,000
)
Other comprehensive (loss) income, net of tax
   
-
     
(1,019,000
)
   
(1,019,000
)
   
199,000
     
1,084,000
     
1,283,000
 
Amounts reclassified from accumulated other comprehensive loss, net of tax
   
-
     
-
     
-
     
-
     
-
     
-
 
Balance at December 31, 2018 and 2017
 
$
-
   
$
(7,193,000
)
 
$
(7,193,000
)
 
$
727,000
   
$
(6,885,000
)
 
$
(6,158,000
)

20.
Share Repurchase Program

As of December 31, 2018, the Company’s board of directors had approved a stock repurchase program of up to $37,000,000 of its common stock.  As of December 31, 2018, $15,692,000 of the $37,000,000 had been utilized and $21,308,000 remained available to repurchase shares under the authorized share repurchase program, subject to the limit in the Amended Credit Facility. The Company retired the 675,561 shares repurchased under this program through December 31, 2018. The Company’s share repurchase program does not obligate it to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

21.
Subsequent Events

Acquisition

On January 9, 2019, the Company completed the acquisition of all the equity interests of Dixie Electric, Ltd (“Dixie”), a privately held manufacturer and remanufacturer of alternators and starters for automotive, medium and heavy truck, industrial, farm and marine applications, based in Ontario, Canada. The initial purchase price was $8,035,000, subject to certain working capital adjustments, including up to $1,134,000 the Company is contingently obligated to pay to the former owners of Dixie over the next two years. The Company incurred $421,000 in acquisition costs during the nine months ended December 31, 2018, which were recorded in general and administrative expenses. The assets and results of operations of Dixie, and in the aggregate with the E&M acquisition, were not significant to the Company’s consolidated financial position or results of operations, and thus pro forma information is not presented.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2018 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 14, 2018.

Disclosure Regarding Private Securities Litigation Reform Act of 1995

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. Various factors could cause actual results to differ materially from those expressed or implied by such statements. These factors include, but are not limited to: concentration of sales to a small number of customers; changes in the financial condition of or our relationship with any of our major customers; increases in the average accounts receivable collection period; the loss of sales to customers; delays in payments by customers; the increasing customer pressure for lower prices and more favorable payment and other terms; lower revenues than anticipated from new and existing contracts; the increasing demands on our working capital; the significant strain on working capital associated with large inventory purchases from customers; any meaningful difference between expected production needs and ultimate sales to our customers; investments in operational changes or acquisitions; our ability to obtain any additional financing we may seek or require; our ability to maintain positive cash flows from operations; potential future changes in our previously reported results as a result of the identification and correction of errors in our accounting policies or procedures or the potential material weaknesses in our internal controls over financial reporting; our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults; increases in interest rates; the impact of high gasoline prices; consumer preferences and general economic conditions; increased competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers; difficulty in obtaining Used Cores and component parts or increases in the costs of those parts; political, criminal or economic instability in any of the foreign countries where we conduct operations; currency exchange fluctuations; potential tariffs; unforeseen increases in operating costs; risks associated with cyber-attacks; risks associated with conflict minerals; the impact of new accounting pronouncements and tax laws and interpretations thereof; uncertainties affecting our ability to estimate our tax rate and other factors discussed herein and in our other filings with the Securities and Exchange Commission (the “SEC”). These and other risks and uncertainties may cause our actual results to differ materially and adversely from those expected in any forward-looking statements. Readers are directed to risks and uncertainties identified under “Risk Factors” included in our Annual Report on Form 10-K filed with the SEC on June 14, 2018 and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Management Overview

We are a leading manufacturer, remanufacturer, and distributor of aftermarket automotive and light truck applications. We also, to a lesser extent, are a manufacturer, remanufacturer, and distributor of heavy duty truck and industrial and agricultural application parts. These replacement parts are sold for use on vehicles after initial vehicle purchase. These automotive parts are sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). Our products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake master cylinders, and (iv) other products which include turbochargers, brake power boosters, and diagnostic equipment. As a result of our July 2017 acquisition of D&V Electronics Ltd. (“D&V”), our business now includes developing and selling diagnostics systems for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles. In addition, we completed the acquisition of Mechanical Power Conversion, LLC, in December 2018, which includes the design and manufacture of advanced power emulators (AC and DC) and custom power electronic products (see Note 5, Acquisition).

The automotive and light truck parts aftermarket is divided into two markets. The first is the do-it-yourself (“DIY”) market, which is generally serviced by the large retail chain outlets. Consumers who purchase parts from the DIY channel generally install parts into their vehicles themselves. In most cases, this is a less expensive alternative than having the repair performed by a professional installer. The second is the professional installer market, commonly known as the do-it-for-me (“DIFM”) market. The traditional warehouse distributors, the dealer networks, and the commercial divisions of retail chains service this market. Generally, the consumer in this channel is a professional parts installer. Our products are distributed to both the DIY and DIFM markets.

The heavy duty truck, industrial and agricultural aftermarket has some overlap with the automotive aftermarket as discussed above, but also has specialty distribution channels through the OES channel and auto-electric distributor channels.

In addition, we are in the business of diagnostic equipment for alternators, starters, belt-starter generators (stop start and hybrid technology), and electric power trains for electric vehicles. The smallest but fastest growing segment of the global market for diagnostics is the electric vehicle market.

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), for segment reporting, we have identified our chief executive officer as our chief operating decision maker (“CODM”), have reviewed the documents used by the CODM, and understand how such documents are used by the CODM to make financial and operating decisions. We have determined through this review process that we have one reportable segment for purposes of recording and reporting our financial results.

Revision of Prior Period Financial Statements

During the quarter ended September 30, 2018, we identified and corrected immaterial errors that affected previously issued consolidated financial statements. These errors primarily related to historical misapplication of GAAP related to the timing of recognizing certain expenses incurred in connection with new business. These expenses were primarily allowances paid for core inventory purchase obligations at the start of a new business relationship. We previously recorded the difference between the acquisition price of Remanufactured Cores purchased from customers generally in connection with new business, and the related inventory cost as a sales allowance reducing revenue when the purchases were made. These sales allowances are now recorded as an asset and recognized as a reduction of revenue through the later of the date at which related revenue is recognized or the date at which the sales incentive is offered. We also corrected errors resulting from differences between the original cost estimate and the actual cost of the Remanufactured Cores held at customers’ locations.

We also corrected other immaterial errors, which primarily relate to bonus accruals and core inventory, and recorded certain adjustments to income taxes, including reflecting the tax effect of the aforementioned adjustments (see Note 2, Impact on Previously Issued Financial Statements for the Correction of an Error). In addition, we reclassified certain customer contract related prepayments from prepaid expenses and other current assets and other assets to contract assets related to the adoption of ASC 606 on April 1, 2018 (see Note 4, Revenue Recognition).

In order to correctly present the errors noted above, previously issued financial statements have been revised. In addition, upon the adoption of ASC 606 on April 1, 2018, we adjusted our revised consolidated financial statements, which are presented as “As Adjusted” in the following tables.

Results of Operations for the Three Months Ended December 31, 2018 and 2017

The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.

The following summarizes certain key operating data:

   
Three Months Ended
December 31,
 
   
2018
   
2017
 
         
(As Adjusted)
 
Gross profit percentage
   
17.0
%
   
25.3
%
Cash flow used in operations
 
$
(13,919,000
)
 
$
(1,655,000
)
Finished goods turnover (annualized) (1)
   
3.6
     
3.3
 


(1)
Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of goods sold for the quarter by 4 and dividing the result by the average between beginning and ending finished goods inventory values for the fiscal quarter. With the adoption of ASC 606, our inventory now includes all on-hand core inventory. We believe this provides a useful measure of our ability to turn our inventory into revenues.

Net Sales and Gross Profit

The following summarizes net sales and gross profit:

   
Three Months Ended
December 31,
 
   
2018
   
2017
 
         
(As Adjusted)
 
Net sales
 
$
124,113,000
   
$
102,878,000
 
Cost of goods sold
   
102,952,000
     
76,817,000
 
Gross profit
   
21,161,000
     
26,061,000
 
Gross profit percentage
   
17.0
%
   
25.3
%

Net Sales. Our net sales for the three months ended December 31, 2018 increased by $21,235,000, or 20.6%, to $124,113,000 compared to net sales for the three months ended December 31, 2017 of $102,878,000. We have experienced growth mainly in rotating electrical products due to higher replenishment orders and new business awarded to us. In addition, we had significant customer allowances related to new business, as discussed below in the Gross Profit paragraph.

Gross Profit. Our gross profit percentage was 17.0% for the three months ended December 31, 2018 compared to 25.3% for the three months ended December 31, 2017. Gross profit for the three months ended December 31, 2018 was impacted by (i) transition expenses of $2,078,000 in connection with the expansion of our operations in Mexico, (ii) net tariff costs of $1,526,000 paid for products sold before price increases were effective, (iii) $1,710,000 of customer allowances and stock adjustment costs related to new business and product line expansion, (iv) $1,051,000 of amortization of core buy back premiums paid to customers related to new business, (v) core sales of $7,753,000, less related cost of goods sold of $7,750,000, and a fixed allowance cost of $767,000 in connection with the cancellation of a customer contract. In addition, gross margins were impacted by several factors including higher freight and wage costs, higher returns, the introduction of electric vehicle test systems, overtime and other costs related to the increase in new business, and other strategic initiatives for long-term growth.

Gross profit for the three months ended December 31, 2017 was impacted by (i) $921,000 of amortization of core premiums paid to customers related to new business, (ii) transition expenses of $803,000 in connection with the expansion of our operations in Mexico, (iii) $735,000 for customer allowances related to new business, and (iv) a cost of goods sold impact of $40,000 for inventory step-up in connection with our July 2017 acquisition of D&V.

In addition, our gross profit was further impacted by the non-cash quarterly revaluation write-down for remanufactured cores held at customers’ locations of $2,619,000 for the three months ended December 31, 2018 and $2,187,000 for the three months ended December 31, 2017.

Operating Expenses

The following summarizes operating expenses:

   
Three Months Ended
December 31,
 
   
2018
   
2017
 
         
(As Adjusted)
 
General and administrative
 
$
12,331,000
   
$
11,915,000
 
Sales and marketing
   
5,149,000
     
4,048,000
 
Research and development
   
2,054,000
     
1,678,000
 
                 
Percent of net sales
               
                 
General and administrative
   
9.9
%
   
11.6
%
Sales and marketing
   
4.1
%
   
3.9
%
Research and development
   
1.7
%
   
1.6
%

General and Administrative. Our general and administrative expenses for the three months ended December 31, 2018 were $12,331,000, which represents an increase of $416,000, or 3.5%, from general and administrative expenses for the three months ended December 31, 2017 of $11,915,000. This increase was primarily due to (i) $510,000 of increased general and administrative expenses primarily at our Mexico locations to support our growth initiatives, (ii) $428,000 of acquisition costs, (iii) $289,000 of net increases in general and administrative expenses due primarily to fluctuations in Asian foreign currency exchange rates during the quarter, and (iv) $261,000 of increased general and administrative expenses attributable to our July 2017 acquisition of D&V. These increases were partially offset by a $924,000 decrease in the loss recorded due to the change in the fair value of the forward foreign currency exchange contracts.

Sales and Marketing. Our sales and marketing expenses for the three months ended December 31, 2018 increased $1,101,000, or 27.2%, to $5,149,000 from $4,048,000 for the three months ended December 31, 2017. The increase was due primarily to (i) $449,000 of increased commissions, (ii) $408,000 of increased trade show expense, and (iii) $193,000 of increased marketing expense in connection with new business.

Research and Development. Our research and development expenses increased by $376,000, or 22.4%, to $2,054,000 for the three months ended December 31, 2018 from $1,678,000 for the three months ended December 31, 2017. The increase was due primarily to (i) $300,000 for personnel to support our growth initiatives, (ii) $177,000 of increased supplies, and (iii) $45,000 of increased travel.  These increases in research and development expenses were partially offset by $199,000 of decreased research and development expenses attributable to our July 2017 acquisition of D&V.

Interest Expense

Interest Expense, net. Our interest expense, net for the three months ended December 31, 2018 increased $1,811,000, or 45.8%, to $5,764,000 from $3,953,000 for the three months ended December 31, 2017. The increase in interest expense was due primarily to a (i) an increase in the utilization of our accounts receivable discount programs, (ii) increased average outstanding borrowings as we build our inventory levels to support anticipated higher sales, and (iii) higher interest rates on our average outstanding borrowings under our credit facility.

Provision for Income Taxes

Income Tax. We recorded an income tax benefit of $1,035,000, or an effective tax rate of 25.0%, for the three months ended December 31, 2018, which was impacted by the statute lapses for various uncertain tax positions and return to provision adjustments, and finalization of provisional estimates under Staff Accounting Bulletin (“SAB”) 118. We recorded income tax expense, as adjusted, for the three months ended December 31, 2017 of $6,994,000, or an effective tax rate of 156.6%, which was significantly impacted by the enactment of the Tax Cuts and Jobs Act (the “Act”) on December 22, 2017. In addition, the effective tax rate was impacted by valuation allowances recorded in connection with our July 2017 acquisition of D&V. The estimated effective tax rate for the entire year is based on current estimates and any changes to those estimates in future periods could result in an effective tax rate that is materially different from the current estimate.

The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. During the year ended March 31, 2018, we recorded provisional amounts by applying the guidance in SAB 118, as we had not yet completed the accounting for the tax effects of enactment of the Act. We recorded a one-time provisional non-cash tax charge of $2,709,000 due to the revaluation of deferred tax assets and liabilities. The one-time transition tax was estimated and recorded as a one-time provisional income tax expense of $530,000 at March 31, 2018.

As the measurement period under SAB 118 ended during the three months ended December 31, 2018, we completed our accounting analysis of the cumulative foreign earnings, transitional tax liability, and non-cash tax charge for deferred revaluation under the Act. The three months ended December 31, 2018 included a reduction of $50,000 to the provisional transition tax amount and a $102,000 increase to non-cash tax charge due to the revaluation of deferred tax assets and liabilities previously reported under SAB 118. Additionally, our U.S. tax return for the period ended March 31, 2018 was filed and any changes to the tax positions for temporary differences compared to the estimates used resulted in an adjustment of the estimated tax expense recorded as of March 31, 2018. Despite the completion of our accounting for the Act under SAB 118, many aspects of the law remain unclear and we expect ongoing guidance to be issued at both the federal and state levels. We will continue to monitor and assess the impact of any new developments.

Results of Operations for the Nine Months Ended December 31, 2018 and 2017

The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.

The following summarizes certain key operating data:

   
Nine Months Ended
December 31,
 
   
2018
   
2017
 
         
(As Adjusted)
 
Gross profit percentage
   
18.4
%
   
25.3
%
Cash flow used in operations
 
$
(20,328,000
)
 
$
(9,803,000
)
Finished goods turnover (annualized) (1)
   
3.5
     
4.4
 


(1)
Annualized finished goods turnover for the fiscal period is calculated by multiplying cost of goods sold for the period by 1.3 and dividing the result by the average between beginning and ending finished goods inventory values for the fiscal period. With the adoption of ASC 606, our inventory now includes all on-hand core inventory. We believe this provides a useful measure of our ability to turn our inventory into revenues.

Net Sales and Gross Profit

The following summarizes net sales and gross profit:

   
Nine Months Ended
December 31,
 
   
2018
   
2017
 
         
(As Adjusted)
 
Net sales
 
$
343,720,000
   
$
307,834,000
 
Cost of goods sold
   
280,496,000
     
229,894,000
 
Gross profit
   
63,224,000
     
77,940,000
 
Gross profit percentage
   
18.4
%
   
25.3
%

Net Sales. Our net sales for the nine months ended December 31, 2018 increased by $35,886,000, or 11.7%, to $343,720,000 compared to net sales for the nine months ended December 31, 2017 of $307,834,000. We have experienced year-over-year market share growth mainly in rotating electrical products. In addition, our net sales were positively impacted by sales of diagnostics equipment, which resulted from our July 2017 acquisition of D&V. Our net sales of wheel hub products and brake master cylinder products continued to be softer. In addition, we had significant customer allowances related to new business and increased stock adjustment accruals related to commitments for future update orders.  These allowances and return accruals were a reduction to our recognized sales, as discussed below in the Gross Profit paragraph.

Gross Profit. Our gross profit percentage was 18.4% for the nine months ended December 31, 2018 compared to 25.3% for the nine months ended December 31, 2017. Gross profit for the nine months ended December 31, 2018 was impacted by (i) transition expenses of $5,666,000 in connection with the expansion of our operations in Mexico, (ii) $4,083,000 of customer allowances and stock adjustment costs related to new business and product line expansion, (iii) $3,033,000 of amortization of core buy back premiums paid to customers related to new business, (iv) net tariff costs of $1,526,000 paid for products sold before price increases were effective, (v) core sales of $7,753,000, less related cost of goods sold of $7,750,000, and a fixed allowance cost of $767,000 in connection with the cancellation of a customer contract. In addition, gross margins were impacted by several factors including higher freight and wage costs, higher returns, the introduction of electric vehicle test systems, overtime and other costs related to the increase in new business, and other strategic initiatives for long-term growth.

Gross profit for the nine months ended December 31, 2017 was impacted by (i) $3,231,000 for customer allowances and initial return and stock adjustment accruals related to new business less a cost of goods sold offset of $362,000, (ii) $2,666,000 of amortization of core premiums paid to customers related to new business, and (iii) transition expenses of $803,000 in connection with the expansion of our operations in Mexico, and (iv) a cost of goods sold impact of $269,000 for inventory step-up in connection with our July 2017 acquisition of D&V.

In addition, our gross profit was further impacted by the non-cash quarterly revaluation write-down for remanufactured cores held at customers’ locations of $11,466,000 for the nine months ended December 31, 2018 and $6,263,000 for the nine months ended December 31, 2017.

Operating Expenses

The following summarizes operating expenses:


 
 
   
Nine Months Ended
December 31,
 
   
2018
   
2017
 
         
(As Adjusted)
 
General and administrative
 
$
33,419,000
   
$
26,418,000
 
Sales and marketing
   
14,078,000
     
10,899,000
 
Research and development
   
5,574,000
     
3,920,000
 
                 
Percent of net sales
               
                 
General and administrative
   
9.7
%
   
8.6
%
Sales and marketing
   
4.1
%
   
3.5
%
Research and development
   
1.6
%
   
1.3
%

General and Administrative. Our general and administrative expenses for the nine months ended December 31, 2018 were $33,419,000, which represents an increase of $7,001,000, or 26.5%, from general and administrative expenses for the nine months ended December 31, 2017 of $26,418,000. This increase was primarily due to (i) $1,003,000 of increased general and administrative expenses primarily at our Mexico location to support our growth initiatives, (ii) $739,000 of increased general and administrative expenses attributable to our July 2017 acquisition of D&V, (iii) $708,000 of acquisition costs, (iv) $566,000 of increased loss recorded due to the change in the fair value of the forward foreign currency exchange contracts, (v) $542,000 of increased depreciation, (vi) $493,000 of increased share-based compensation expense, (vii) $486,000 of net increases in general and administrative expenses due primarily to fluctuations in Asian foreign currency exchange rates, and (viii) $247,000 of increased professional services for transactions during the period relating to expansion and fees related to the adoption of ASC 606 and ASC 842. In addition, the nine months ended December 31, 2017 included a gain of $2,313,000 recorded due to the change in the fair value of the warrant liability, which was settled on September 8, 2017.

Sales and Marketing. Our sales and marketing expenses for the nine months ended December 31, 2018 increased $3,179,000, or 29.2%, to $14,078,000 from $10,899,000 for the nine months ended December 31, 2017. The increase was due primarily to (i) $716,000 of increased commissions, (ii) $679,000 of increased sales and marketing expenses attributable to our July 2017 acquisition of D&V, (iii) $626,000 of increased trade show expenses, (iv) $594,000 for personnel to support our growth initiatives, and (v) $495,000 of increased marketing expenses in connection with new business.

Research and Development. Our research and development expenses increased by $1,654,000, or 42.2%, to $5,574,000 for the nine months ended December 31, 2018 from $3,920,000 for the nine months ended December 31, 2017. The increase was due primarily to (i) $861,000 for personnel to support our growth initiatives, (ii) $398,000 of increased supplies, and (iii) $316,000 of increased research and development expenses attributable to our July 2017 acquisition of D&V.

Interest Expense

Interest Expense, net. Our interest expense, net for the nine months ended December 31, 2018 increased $5,749,000, or 53.3%, to $16,538,000 from $10,789,000 for the nine months ended December 31, 2017. The increase in interest expense was due primarily to (i) an increase in the utilization of and higher interest rates on our accounts receivable discount programs, (ii) increased average outstanding borrowings as we build our inventory levels to support anticipated higher sales, (iii) the write-off of $303,000 of previously capitalized debt issuance costs in connection with the amendment to our credit facility, and (iv) higher interest rates on our average outstanding borrowings under our credit facility.

Provision for Income Taxes

Income Tax. We recorded an income tax benefit of $1,301,000 or an effective tax rate of 20.4%, for the nine months ended December 31, 2018, which was impacted by the statute lapses for various uncertain tax positions and return to provision adjustments, and finalization of provisional estimates under Staff Accounting Bulletin (“SAB”) 118. We recorded income tax expense, as adjusted, for the nine months ended December 31, 2017 of $15,026,000, or an effective tax rate of 58.0%, which was significantly impacted by the enactment of the Act on December 22, 2017. In addition, the effective tax rate was impacted by valuation allowances recorded in connection with our July 2017 acquisition of D&V. The estimated effective tax rate for the entire year is based on current estimates and any changes to those estimates in future periods could result in an effective tax rate that is materially different from the current estimate.

The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. During the year ended March 31, 2018, we recorded provisional amounts by applying the guidance in SAB 118, as we had not yet completed the accounting for the tax effects of enactment of the Act. We recorded a one-time provisional non-cash tax charge of $2,709,000 due to the revaluation of deferred tax assets and liabilities. The one-time transition tax was estimated and recorded as a one-time provisional income tax expense of $530,000 at March 31, 2018.

As the measurement under SAB 118 ended during the nine months ended December 31, 2018, we completed our accounting analysis of the cumulative foreign earnings, transitional tax liability, and non-cash tax charge for deferred revaluation under the Act. The nine months ended December 31, 2018 included a reduction of $50,000 to the provisional transition tax amount and a $102,000 increase to non-cash charge due to the revaluation of deferred tax assets and liabilities previously reported under SAB 118. Additionally, our U.S. tax return for the period ended March 31, 2018 was filed and any changes to the tax positions for temporary differences compared to the estimates used resulted in an adjustment of the estimated tax expense recorded as of March 31, 2018. Despite the completion of our accounting for the Act under SAB 118, many aspects of the law remain unclear and we expect ongoing guidance to be issued at both the federal and state levels.  We will continue to monitor and assess the impact of any new developments.

Liquidity and Capital Resources

Overview

We had working capital (current assets minus current liabilities) of $79,142,000 and $90,287,000, a ratio of current assets to current liabilities of 1.3:1.0 and 1.5:1.0, at December 31, 2018 and March 31, 2018, respectively. The decrease in working capital was due primarily to increased borrowing under our credit facility.

We generated cash during the nine months ended December 31, 2018 from the use of receivable discount programs as well as from our credit facility. The cash generated from these activities was used primarily to build our inventory levels to support anticipated higher sales and to purchase shares under our share repurchase program.

In June 2018, we entered into an amended and restated credit facility consisting of a $200,000,000 revolving loan facility and a $30,000,000 term loan facility, maturing in June 2023.

In November 2018, we entered into the First Amendment to the Amended Credit Facility (the “First Amendment”). The First Amendment, among other things, extended the due date for the quarterly financial statements required to be delivered under the Amended Credit Facility for the quarter ended September 30, 2018.

We believe our cash and cash equivalents, short-term investments, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working capital needs, repayment of the current portion of our term loans, and lease and capital expenditure obligations over the next 12 months.

Share Repurchase Program

As of December 31, 2018, our board of directors had approved a stock repurchase program of up to $37,000,000 of our common stock.  As of December 31, 2018, $15,692,000 of the $37,000,000 had been utilized and $21,308,000 remained available to repurchase shares under the authorized share repurchase program, subject to the limit in our credit facility. We retired the 675,561 shares repurchased under this program through December 31, 2018. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

Cash Flows

The following summarizes cash flows as reflected in the consolidated statements of cash flows:

   
Nine Months Ended
December 31,
 
   
2018
   
2017
 
Cash provided by (used in):
           
Operating activities
 
$
(20,328,000
)
 
$
(9,803,000
)
Investing activities
   
(13,244,000
)
   
(10,045,000
)
Financing activities
   
29,290,000
     
20,805,000
 
Effect of exchange rates on cash and cash equivalents
   
(176,000
)
   
46,000
 
Net decrease in cash and cash equivalents
 
$
(4,458,000
)
 
$
1,003,000
 
                 
Additional selected cash flow data:
               
Depreciation and amortization
 
$
4,933,000
   
$
3,322,000
 
Capital expenditures
   
8,548,000
     
4,765,000
 

Net cash used in operating activities was $20,328,000 and $9,803,000 during the nine months ended December 31, 2018 and 2017, respectively. Our operating activities were significantly impacted by our growth initiatives which includes (i) the build-up of inventory to support anticipated higher sales, (ii) expenses incurred in connection with the expansion of our Mexico operations, and (iii) payments made to customers of $21,396,000 during the nine months ended December 31, 2018 for previous core buybacks made in connection with new business expansion in prior periods.

Net cash used in investing activities was $13,244,000 and $10,045,000 during the nine months ended December 31, 2018 and 2017, respectively. The significant change in our investing activities during the nine months ended December 31, 2018 as compared to the nine months ended December 31, 2017 was due primarily to increased capital expenditures for the purchase of equipment for our current operations and the expansion of our operations in Mexico. In addition, less cash was used for business acquisitions during the nine months ended December 31, 2018 as compared to the nine months ended December 31, 2017.

Net cash provided by financing activities was $29,290,000 and $20,805,000 during the nine months ended December 31, 2018 and 2017, respectively. The significant change in our financing activities during the nine months ended December 31, 2018 as compared to the nine months ended December 31, 2017 was due mainly to increased net borrowing under our credit facility. In addition, the nine months ended December 31, 2017 included cash received upon the settlement of outstanding warrants.

Capital Resources

Credit Facility

We were a party to a $145,000,000 senior secured financing, (as amended from time to time, the “Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $120,000,000 revolving loan facility, subject to borrowing base restrictions and a $15,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $25,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility were scheduled to mature on June 3, 2020. In connection with the Credit Facility, the lenders were granted a security interest in substantially all of our assets. Our Credit Facility permitted the payment of up to $15,000,000 of dividends per calendar year, subject to a minimum availability threshold and pro forma compliance with financial covenants. The Term Loans required quarterly principal payments of $781,250. The interest rate on our Term Loans and Revolving Facility was 4.42% and 4.52%, respectively, as of March 31, 2018.

In June 2018, we entered into an amendment and restatement of the Credit Facility (as so amended and restated, the “Amended Credit Facility”) with a syndicate of lenders, and PNC Bank, National Association, as administrative agent, consisting of (i) a $200,000,000 revolving loan facility, subject to borrowing base restrictions, a $20,000,000 sublimit for borrowings by Canadian borrowers, and a $15,000,000 sublimit for letters of credit (the “Amended Revolving Facility”) and (ii) a $30,000,000 term loan facility (the “Amended Term Loans”). The loans under the Amended Credit Facility mature on June 5, 2023. The Amended Credit Facility permits the payment of up to $20,000,000 of dividends per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants. In connection with the Amended Credit Facility, the lenders were granted a security interest in substantially all of our assets. We wrote-off $303,000 of previously capitalized debt issuance costs and capitalized $1,780,000 of new debt issuance costs in connection with the Amended Credit Facility.

The Amended Term Loans require quarterly principal payments of $937,500 beginning October 1, 2018. The Amended Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.25%, 2.50% or 2.75% or a reference rate plus a margin of 1.25%, 1.50% or 1.75%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.375% to 0.50%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Amended Term Loans and Amended Revolving Facility was 4.85% and 4.97%, respectively, as of December 31, 2018.

On November 14, 2018, we entered into the First Amendment to the Amended Credit Facility (the “First Amendment”). The First Amendment, among other things, extended the due date for the quarterly financial statements required to be delivered under the Amended Credit Facility for the quarter ended September 30, 2018.

The Amended Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all financial covenants as of December 31, 2018.

The following summarizes the financial covenants required under the Amended Credit Facility:

   
Calculation as of
December 31, 2018
   
Financial covenants
required under the
Amended Credit
Facility
 
Maximum senior leverage ratio
   
1.56
     
3.00
 
Minimum fixed charge coverage ratio
   
1.23
     
1.10
 

In addition to other covenants, the Amended Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.

We had $78,406,000 and $54,000,000 outstanding under the revolving facility at December 31, 2018 and March 31, 2018, respectively. In addition, $879,000 was reserved for letters of credit at December 31, 2018. At December 31, 2018, after certain adjustments, $117,304,000 was available under the Amended Revolving Facility.

Receivable Discount Programs

We use receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allows us to accelerate receipt of payment on customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands, if customers extend their payment to us, or if the discount period is extended to reflect more favorable payment terms to customers.

The following is a summary of the receivable discount programs:

   
Nine Months Ended
December 31,
 
   
2018
   
2017
 
Receivables discounted
 
$
287,206,000
   
$
263,833,000
 
Weighted average days
   
340
     
341
 
Annualized weighted average discount rate
   
4.2
%
   
3.2
%
Amount of discount as interest expense
 
$
11,377,000
   
$
7,854,000
 

Off-Balance Sheet Arrangements

At December 31, 2018, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.

Capital Expenditures and Commitments

Capital Expenditures

Our total capital expenditures, including capital leases, were $8,755,000 and $5,347,000 for the nine months ended December 31, 2018 and 2017, respectively. These capital expenditures primarily include the purchase of equipment for our current operations and the expansion of our operations in Mexico. We expect to incur approximately $4,000,000 to $5,000,000 of capital expenditures in the remainder of fiscal 2019 to support our growth initiatives and continued expansion of our operations in Mexico. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures.

Litigation

There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2018, which was filed on June 14, 2018.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2018, which was filed on June 14, 2018, except as discussed below.

New Accounting Pronouncements Recently Adopted

Revenue Recognition

Effective April 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, (“ASC 606”) using the full retrospective transition method. Under this method, we adjusted our revised consolidated financial statements for the years ended March 31, 2018 and 2017 (see Note 2, Impact on Previously Issued Financial Statements for the Correction of an Error), and applicable interim periods within the fiscal year ended March 31, 2018, as if ASC 606 had been effective for those periods. Periods prior to the fiscal year ended March 31, 2017 were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605, Revenue Recognition. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are distinct performance obligations. See Note 4, Revenue Recognition, for additional discussion of the adoption of ASC 606 and the impact on our financial statements.

Financial Instruments

In January 2016, the FASB issued guidance that amends the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the update clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We applied the amendments in the new guidance by means of a cumulative-effect adjustment of $746,000, net of tax, to the opening balance of retained earnings on April 1, 2018. Short-term investments are recorded at fair value with $420,000 and $240,000 of unrealized loss now recorded as a component of general and administrative expense for the three and nine months ended December 31, 2018, respectively.

Modifications to Share-Based Payment Awards

In May 2017, the FASB issued guidance to provide clarity and reduce (i) the diversity in practice and (ii) the cost and complexity when applying the accounting guidance for equity-based compensation to a change to the terms or conditions of a share-based payment award. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. This guidance should be applied prospectively to an award modified on or after that adoption date. The adoption of this guidance on April 1, 2018 did not have any impact on our consolidated financial statements.

Business Combinations

In January 2017, the FASB issued guidance 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 new guidance was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. A reporting entity should apply the amendment prospectively. The adoption of this guidance on April 1, 2018 did not have any impact on our consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued new guidance that requires balance sheet recognition of a right-of-use asset and lease liability by lessees for all leases, other than leases with a term of 12 months or less if the short-term lease exclusion expedient is elected. There have been further amendments, including practical expedients, issued in January 2018 and July 2018. The new guidance also requires new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new guidance requires a modified retrospective approach with optional practical expedients. The FASB provided entities with an additional transition method, which allows an entity to apply this guidance as of the beginning of the period of adoption instead of the beginning of the earliest comparative period presented in the entity’s financial statements. We have elected to adopt this guidance under the additional transition method. We will adopt this guidance in the first quarter of fiscal 2020. We have developed and are executing on an implementation plan to adopt this new guidance. We have identified all of our material leases and are assessing those leases pursuant to ASC 842. We are currently developing our methodology for determining our incremental borrowing rate. The adoption is anticipated to have a significant increase to our long-term assets and liabilities on the consolidated balance sheets, as we will now be required to recognize the underlying right of use asset and corresponding lease liability, and an insignificant impact on the consolidated statements of operations.

Goodwill Impairment

In January 2017, the FASB issued guidance which simplifies the test for goodwill impairment. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. This guidance must be applied on a prospective basis. We are currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the guidance allows for early adoption in any interim period after issuance of the update. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

Reporting Comprehensive Income

In February 2018, the FASB issued guidance that permits, but does not require, companies to reclassify the stranded tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued guidance, which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

Subsequent Event

Acquisition

On January 9, 2019, we completed the acquisition of all the equity interests of Dixie Electric, Ltd (“Dixie”), a privately held manufacturer and remanufacturer of alternators and starters for automotive, medium and heavy truck, industrial, farm and marine applications, based in Ontario, Canada. The initial purchase price was $8,035,000, subject to certain working capital adjustments, including up to $1,134,000 we are contingently obligated to pay to the former owners of Dixie over the next two years. We incurred $421,000 in acquisition costs during the nine months ended December 31, 2018, which were recorded in general and administrative expenses. The assets and results of operations of Dixie, and in the aggregate with the E&M acquisition, were not significant to our consolidated financial position or results of operations, and thus pro forma information is not presented.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K as of March 31, 2018, which was filed with the SEC on June 14, 2018.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including our chief executive officer, chief financial officer, and chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of management, including our chief executive officer, chief financial officer, and chief accounting officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our chief executive officer, chief financial officer, and chief accounting officer concluded that MPA’s disclosure controls and procedures were effective as of December 31, 2018.

Inherent Limitations Over Internal Controls

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required.

Internal control over financial reporting includes those policies and procedures that:

1.
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
2.
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
3.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting

There were no changes in MPA’s internal control over financial reporting during the third quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, MPA’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.
Legal Proceedings

There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2018, which was filed on June 14, 2018.

Item 1A.
Risk Factors

There have been no material changes in the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended March 31, 2018, filed on June 14, 2018, except the addition of the risk factor below.

Possible New Tariffs That Might Be Imposed By The United States Government Could Have A Material Adverse Effect On Our Results Of Operations.

Recently, the United States government announced tariffs on certain steel and aluminum products imported into the United States from Canada, Mexico and the European Union, which has resulted in reciprocal tariffs from the European Union on goods imported from the United States. The United States government has also triggered $34 billion in tariffs on goods imported from China in connection with China’s intellectual property practices, with an additional $16 billion under public hearing, and has announced beginning the process for an additional $200 billion in tariffs on goods imported from China. China has already imposed tariffs on a wide range of American products in retaliation for new tariffs on steel and aluminum. Additional tariffs could be imposed by China in response to the proposal to increase tariffs on products imported from China. There is also a concern that the imposition of additional tariffs by the United States could result in the adoption of additional tariffs by other countries as well. Any resulting escalation of trade tensions could have a significant, adverse effect on world trade and the world economy. While it is too early to predict whether or how the recently enacted tariffs will impact our business, the imposition of tariffs on items imported by us from China could require us to increase prices to our customers or, if unable to do so, result in lowering our gross margin on products sold.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

Limitation on Payment of Dividends

The Amended Credit Facility permits the payment of up to $20,000,000 of dividends and share repurchases per fiscal year, subject to a minimum availability threshold and pro forma compliance with financial covenants.

Purchases of Equity Securities by the Issuer

Shares repurchased during the three months ended December 31, 2018 were as follows:

Periods
 
Total Number of
Shares Purchased
   
Average Price
Paid Per Share
   
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
or Programs (1)
 
                         
October 1 - October 31, 2018:
                       
Open market and privately negotiated purchases
   
-
   
$
-
     
-
   
$
21,308,000
 
November 1 - November 30, 2018:
                               
Open market and privately negotiated purchases
   
-
   
$
-
     
-
     
21,308,000
 
December 1 - December 31, 2018:
                               
Open market and privately negotiated purchases
   
-
   
$
-
     
-
     
21,308,000
 
                                 
Total
   
0
             
0
   
$
21,308,000
 
                                 


(1)
As of December 31, 2018, $15,692,000 of the $37,000,000 had been utilized and $21,308,000 remained available to repurchase shares under the authorized share repurchase program, subject to the limit in our Amended Credit Facility. We retired the 675,561 shares repurchased under this program through December 31, 2018. On August 6, 2018, our board of directors increased the share repurchase program authorization from $20,000,000 to $37,000,000 of our common stock. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.


Item 5.
Other Information

On February 5, 2019, the Company and Mr. Joffe entered into an Amendment No. 2 to Employment Agreement (the “Amendment”) which, among other things, (i) changes the last day of Mr. Joffe’s term of employment from July 1, 2019  to July 1, 2023, (ii) provides that Mr. Joffe shall receive long term incentive compensation in the amount of no less than 75,000 shares of restricted stock on an annual basis, with the vesting of such restricted stock based on the achievement of specified performance measures, (iii) extends the clawback provision required by Section 10D of the Securities Exchange Act of 1934, as amended, to his long term incentive compensation, (iv) makes certain changes to the compensation paid to Mr. Joffe in the event that he terminates his employment with the Company following a breach by the Company or other good reason or is terminated by the Company without cause, and (v) makes certain changes to the compensation paid to Mr. Joffe in the event of a change of control of the Company.

The foregoing description of the Amendment is not complete and is qualified in its entirety by the full text of the agreement, a copy of which is filed as Exhibit 10.3 to this report and incorporated herein by reference.

Item 6.
Exhibits

(a)
Exhibits:

Number          
 
Description of Exhibit
 
Method of Filing 
         
3.1
 
Certificate of Incorporation of the Company
 
Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2 declared effective on March 22, 1994 (the “1994 Registration Statement”).
         
3.2
 
Amendment to Certificate of Incorporation of the Company
 
Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (No. 33-97498) declared effective on November 14, 1995.
         
 
Amendment to Certificate of Incorporation of the Company
 
Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
         
 
Amendment to Certificate of Incorporation of the Company
 
Incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1998 (the “1998 Form 10-K”).
         
 
Amendment to Certificate of Incorporation of the Company
 
Incorporated by reference to Exhibit C to the Company’s proxy statement on Schedule 14A filed with the SEC on November 25, 2003.
         
 
Amended and Restated By-Laws of Motorcar Parts of America, Inc.
 
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on August 24, 2010.
         
 
Certificate of Amendment of the Certificate of Incorporation of the Company
 
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 17, 2014.
         
 
Amendment to the Amended and Restated By-Laws of Motorcar Parts of America, Inc., as adopted on June 9, 2016
 
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 14, 2016.
         
 
Amendment to the Amended and Restated By-Laws of the Company
 
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 22, 2017.
         
 
2003 Long Term Incentive Plan
 
Incorporated by reference to Exhibit 4.9 to the Company’s Registration Statement on Form S-8 filed with the SEC on April 2, 2004.
         
 
2004 Non-Employee Director Stock Option Plan
 
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A for the 2004 Annual Shareholders Meeting.
         
 
2010 Incentive Award Plan
 
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on December 15, 2010.
         
 
Amended and Restated 2010 Incentive Award Plan
 
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 5, 2013.


Number          
 
Description of Exhibit
 
Method of Filing 
         
 
Second Amended and Restated 2010 Incentive Award Plan
 
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 3, 2014.
         
 
2014 Non-Employee Director Incentive Award Plan
 
Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on March 3, 2014.
         
 
Third Amended and Restated 2010 Incentive Award Plan
 
Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on November 20, 2017.
         
 
Amended and Restated Credit Facility, dated as of June 5, 2018, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agent
 
Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on August 9, 2018.
         
 
First Amendment to Amended and Restated Loan Agreement, dated as of November 14, 2018, among Motorcar Parts of America, Inc., D & V Electronics Ltd., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent
 
Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on November 20, 2018.
         
 
Amendment No. 2 to Employment Agreement, dated as of February 5, 2019, between Motorcar Parts of America, Inc., and Selwyn Joffe
 
Filed herewith.
         
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
 
Filed herewith.
         
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
 
Filed herewith.
         
 
Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
 
Filed herewith.
         
 
Certifications of Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
 
Filed herewith.
         
101.INS
 
XBRL Instance Document
   
         
101.SCM
 
XBRL Taxonomy Extension Schema Document
   
         
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
   
         
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
   
         
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
   
         
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
   

*
Portions of this exhibit have been granted confidential treatment by the SEC.

SIGNATURES

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

 
MOTORCAR PARTS OF AMERICA, INC.
     
Dated: February 11, 2019
By:
/s/ David Lee
   
David Lee
   
Chief Financial Officer
     
Dated: February 11, 2019
By:
/s/ Kevin Daly
   
Kevin Daly
   
Chief Accounting Officer


54


EXHIBIT 10.3
 
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
 
THIS AMENDMENT NO. 2 dated as of February 5, 2019 (this “AMENDMENT”), to the Employment Agreement, dated as of May 18, 2012 and previously amended by Amendment No. 1 to Employment Agreement dated as of July 1, 2014 (as amended, the “EMPLOYMENT AGREEMENT”), by and between Motorcar Parts of America, Inc. (“COMPANY”) and Selwyn Joffe, an individual residing at (“EXECUTIVE”). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the EMPLOYMENT AGREEMENT.
 
RECITALS
 
WHEREAS, the parties wish to amend the EMPLOYMENT AGREEMENT to change the EMPLOYMENT TERM, add LONG-TERM INCENTIVE COMPENSATION, and make certain other changes as set forth herein;
 
NOW, THEREFORE, in consideration of the promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
 
1.          Paragraph 2 of the EMPLOYMENT AGREEMENT is hereby deleted in its entirety and is replaced with the following:
 
TERM.  EXECUTIVE’S term of employment under this AGREEMENT shall commence on February 5, 2019 and shall continue for a period through and including July 1, 2023 (the ‘EMPLOYMENT TERM’), unless extended in writing by both parties or earlier terminated pursuant to the terms and conditions set forth herein.”
 
2.          Paragraph 5(g) of the EMPLOYMENT AGREEMENT is hereby deleted in its entirety and is replaced with the following:
 

LONG TERM INCENTIVE COMPENSATION.  Commencing with the fiscal year ending March 31, 2019 and continuing through the fiscal year ending March 31, 2023, the COMPANY shall annually grant Restricted Stock to the EXECUTIVE pursuant to the 2010 PLAN (each grant an “ANNUAL RS AWARD”) on the terms and conditions set forth in this Paragraph 5(g).  The grant date for the PERFORMANCE CYCLE (as defined below) ending on March 31, 2019 shall be on or as soon as practicable after the adoption of the second AMENDMENT to this EMPLOYMENT AGREEMENT.  The grant date for each subsequent ANNUAL RS AWARD (the “GRANT DATE”) shall be on or after the first day of the fourth fiscal quarter of the fiscal year of the Company immediately preceding the PERFORMANCE CYCLE (as defined below) with respect to which such grant is made but not later than the last day of the fiscal year of the COMPANY immediately preceding the PERFORMANCE CYCLE with respect to which such grant is made.  The number of shares of Restricted Stock granted pursuant to each ANNUAL RS AWARD shall be not less than 75,000 shares.  The purchase price for the Restricted Stock granted pursuant to each ANNUAL RS AWARD shall be zero.  Each ANNUAL RS AWARD shall vest based on the achievement of threshold, target and maximum levels of performance based upon such performance measure or measures as EXECUTIVE and the Administrator shall mutually agree.  “PERFORMANCE CYCLE” shall mean, with respect to each ANNUAL RS AWARD, the COMPANY’S next fiscal year commencing after the applicable GRANT DATE.  The first PERFORMANCE CYCLE shall be the fiscal year of the COMPANY ending on March 31, 2019.  The “PERFORMANCE DETERMINATION DATE”, with respect to any PERFORMANCE CYCLE, shall be the date on which the Administrator and EXECUTIVE mutually determine that the applicable performance measure(s) have been achieved; provided, that, such date shall be not later than forty-five (45) days after the filing of the COMPANY’S Annual Report on Form 10-K for the applicable PERFORMANCE CYCLE with the U.S. Securities and Exchange Commission (the “FILING DATE”).  If the threshold performance level is achieved for a PERFORMANCE CYCLE, then one third of the shares of Restricted Stock granted pursuant to the applicable ANNUAL RS AWARD shall vest as of the applicable PERFORMANCE DETERMINATION DATE.  If the target performance level is achieved for a PERFORMANCE CYCLE, then two thirds of the shares of Restricted Stock granted pursuant to the applicable ANNUAL RS AWARD shall vest as of the applicable PERFORMANCE DETERMINATION DATE.  If the maximum performance level is achieved for a PERFORMANCE CYCLE, then all shares of Restricted Stock granted pursuant to the applicable ANNUAL RS AWARD shall vest as of the applicable PERFORMANCE DETERMINATION DATE.  If the threshold level of performance for a PERFORMANCE CYCLE is not achieved, the shares of Restricted Stock granted pursuant to the applicable ANNUAL RS AWARD shall be forfeited to the COMPANY, effective as of the applicable PERFORMANCE DETERMINATION DATE.  If the performance level achieved for a PERFORMANCE CYCLE is (i) greater than the applicable threshold performance level but less than the applicable target performance level or (ii) greater than the applicable target performance level but less than the applicable maximum performance level, then the number of shares that become vested shall be interpolated between the applicable threshold and target number of shares or the applicable target and maximum number of shares, as the case may be.  As an example (for illustration purposes only), if for a PERFORMANCE CYCLE the threshold level of performance is ADJUSTED EBITDA (as defined below) of $100, the target level of performance is ADJUSTED EBITDA of $150 and the maximum level of performance is ADJUSTED EBITDA of $200, then if the COMPANY is determined to have ADJUSTED EBITDA of $175 for such PERFORMANCE CYCLE, and if the number of shares granted was 75,000, then the number of shares that would vest would be 62,500 shares. Vested shares shall be distributed to EXECUTIVE as soon as practicable after the applicable PERFORMANCE DETERMINATION DATE, but in no event later than thirty (30) days after the applicable PERFORMANCE DETERMINATION DATE.  Except as otherwise provided in this Agreement, upon EXECUTIVE’s termination of employment, EXECUTIVE shall forfeit any unvested shares granted pursuant to this Paragraph 5(g).  “ADJUSTED EBITDA” shall mean, with respect to a PERFORMANCE CYCLE, Adjusted EBITDA as reported in the COMPANY’s earnings release for such PERFORMANCE CYCLE.
 

3.          The EMPLOYMENT AGREEMENT is further amended by adding Paragraph 5(h) to read as follows:
 
CLAWBACK PROVISIONS.  Each Award granted pursuant to Paragraphs 5(b), (d), (f), and (g), to the extent such Award constitutes “incentive-based compensation” within the meaning of Section 10D of the Securities Exchange Act of 1934, as amended (the “EXCHANGE ACT”), shall be subject to clawback by the COMPANY to the extent required by Section 10D(b)(2) of the EXCHANGE ACT, as determined by the applicable rules and regulations promulgated thereunder from time to time by the U.S. Securities and Exchange Commission.  Further, the COMPANY’s clawback rights shall be limited in accordance with California law to the extent California law applies.
 
4.          Paragraph 8(a) of the EMPLOYMENT AGREEMENT is hereby deleted in its entirety and is replaced with the following:
 
The EMPLOYMENT TERM shall terminate on the date of EXECUTIVE’s death, in which event EXECUTIVE’s accrued SALARY and BONUS, if any, reimbursable expenses and benefits, including accrued but unused vacation time and vested but undistributed shares of Restricted Stock granted pursuant to Paragraph 5(g), owing to EXECUTIVE through the date of EXECUTIVE’s death, shall be paid to EXECUTIVE’s estate, and EXECUTIVE’s estate shall assume EXECUTIVE’s rights under the 2010 Plan and the related rights under this AGREEMENT.  EXECUTIVE’s estate will not be entitled to any other compensation upon termination of this AGREEMENT pursuant to this Paragraph 8(a).
 
5.          Paragraph 8(b) of the EMPLOYMENT AGREEMENT is hereby deleted in its entirety and is replaced with the following:
 

If, during the EMPLOYMENT TERM, in the opinion of a duly licensed physician selected by COMPANY and reasonably acceptable to EXECUTIVE, EXECUTIVE, because of physical or mental illness or incapacity, shall become substantially unable to perform the duties and services required of him under this AGREEMENT for a period of 180 consecutive days, the COMPANY may, upon at least ten days’ prior written notice given at any time after the expiration of such 180-day period to EXECUTIVE of its intention to do so, terminate this AGREEMENT as of such date as may be set forth in the notice.  In case of such termination, EXECUTIVE shall be entitled to receive his accrued SALARY and BONUS, if any, reimbursable expenses and benefits and vested but undistributed shares of Restricted Stock granted pursuant to Paragraph 5(g), owing to EXECUTIVE through the date of termination.  In addition, EXECUTIVE shall be entitled to receive the benefits payable pursuant to the POLICY described in Paragraph 8(c) below.  EXECUTIVE will not be entitled to any other compensation upon termination of this AGREEMENT pursuant to this Paragraph 8(b).

6.          Paragraph 9(d) of the EMPLOYMENT AGREEMENT is hereby deleted in its entirety and is replaced with the following:
 
If EXECUTIVE shall voluntarily terminate this AGREEMENT pursuant to the provisions of Paragraph 9(c) or if the COMPANY shall terminate EXECUTIVE without Cause, then the COMPANY shall pay EXECUTIVE’s SALARY (at the annual rate in effect immediately prior to the Termination Date (as defined below)), EXECUTIVE’s average bonus earned for the two years immediately prior to the year in which this AGREEMENT is so terminated or, if such termination occurs within the first three months of the COMPANY’s fiscal year, for the second and third years preceding the year in which such termination occurs (in either case, payable by no later than January 31 of each year), and all benefits identified in Paragraph 7 and 8(c) (including without limitation EXECUTIVE’s automobile allowance) through the later of that date which is two years after the Termination Date or July 1, 2023.  The COMPANY shall also pay EXECUTIVE any reimbursable expenses and vested but undistributed shares of the COMPANY’s common stock owed to EXECUTIVE through the Termination Date.  In addition, if (i) EXECUTIVE shall terminate this AGREEMENT pursuant to the provisions of Paragraph 9(c) for Good Reason or (ii) the COMPANY shall terminate EXECUTIVE without Cause:  (A) EXECUTIVE shall immediately vest in the applicable target number of shares of Restricted Stock granted pursuant to Paragraph 5(g) for the PERFORMANCE CYCLE in which such Termination occurs; and (B) EXECUTIVE shall immediately vest in 50,000 shares of Restricted Stock for each PERFORMANCE CYCLE commencing during the remainder of the EMPLOYMENT TERM.  As an example (for illustration purposes only), if the applicable Termination Date is December 31, 2021, and if the number of shares granted was 75,000 for the then-current PERFORMANCE CYCLE, then EXECUTIVE would immediately vest in 50,000 shares of Restricted Stock for the PERFORMANCE CYCLES ending on March 31, 2022 and March 31, 2023, for a total of 100,000 shares.  For the purpose of the foregoing payments, the foregoing annual SALARY rate shall be the rate paid to EXECUTIVE without regard to any purported reduction or attempted reduction of such rate by the COMPANY.  EXECUTIVE shall not be required to mitigate the amount of any payment provided for in this Paragraph 9 by seeking employment or otherwise, nor shall the amount of any payment or benefit provided for in this Paragraph 9 be reduced by any compensation earned by EXECUTIVE as the result of consultancy with or employment by another entity, by retirement benefits, by offset against any amount claimed to be owed by EXECUTIVE to the COMPANY, or otherwise.
 

7.          Paragraph 9(f) of the EMPLOYMENT AGREEMENT is hereby deleted in its entirety and is replaced with the following:
 
If a Change in Control of the COMPANY occurs, then, effective as of immediately prior to such Change in Control, EXECUTIVE shall vest in the target number of shares of Restricted Stock granted pursuant to Paragraph 5(g) with respect to the PERFORMANCE CYCLE during which such Change in Control of the COMPANY occurred.  If a Change in Control of the COMPANY shall occur and EXECUTIVE shall voluntarily terminate this AGREEMENT pursuant to the provisions of Paragraph 9(c) or if the COMPANY shall terminate EXECUTIVE without Cause with effect on or prior to the two-year anniversary of the Change in Control, then EXECUTIVE shall be entitled to receive either (i) the severance benefit (the “SEVERANCE BENEFIT”) described in this Paragraph 9(f) or (ii) the benefits provided under Paragraph 9(d), whichever is more favorable to EXECUTIVE.  The SEVERANCE BENEFIT shall be equal to the sum of (i) two times EXECUTIVE’s SALARY (at the annual rate in effect immediately prior to the date of the Change in Control) plus (ii) two times EXECUTIVE’s average bonus earned for the two years immediately prior to the year in which the Change in Control occurs (payable by no later than January 31 of each year).  The COMPANY shall also pay EXECUTIVE any reimbursable expenses and vested but undistributed shares of Restricted Stock granted pursuant to Paragraph 5(g) owed to EXECUTIVE through the Termination Date.  The SEVERANCE BENEFIT shall be paid to EXECUTIVE in a lump sum as soon as practicable, but no later than 30 days, following the Termination Date.  EXECUTIVE shall not be required to mitigate the amount of any payment provided for in any of the provisions of this Paragraph 9 by seeking employment or otherwise, nor shall the amount of any payment or benefit provided for in this Paragraph 9 be reduced by any compensation earned by EXECUTIVE as the result of consultancy with or employment by another entity, by retirement benefits, by offset against any amount claimed to be owed by EXECUTIVE  to the COMPANY, or otherwise.
 

8.          Except as amended by this AMENDMENT, the EMPLOYMENT AGREEMENT shall remain in full force and effect.
 
9.          This AMENDMENT may be executed by facsimile signature or PDF, in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


IN WITNESS WHEREOF, the undersigned have executed this AMENDMENT as of date first above written.
 
 
THE COMPANY:
   
 
MOTORCAR PARTS OF AMERICA, INC.
     
 
By:
 
   
Name:
   
Title:
 
 
EXECUTIVE:
 

 

   
SELWYN JOFFE




Exhibit 31.1

CERTIFICATIONS

I, Selwyn Joffe, certify that:

1. I have reviewed this report on Form 10-Q of Motorcar Parts of America, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused, such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 11, 2019
/s/ Selwyn Joffe
 
Selwyn Joffe
 
Chief Executive Officer




Exhibit 31.2

CERTIFICATIONS

I, David Lee, certify that:

1. I have reviewed this report on Form 10-Q of Motorcar Parts of America, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused, such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 11, 2019
/s/ David Lee
 
David Lee
 
Chief Financial Officer




Exhibit 31.3

CERTIFICATIONS

I, Kevin Daly, certify that:

1. I have reviewed this report on Form 10-Q of Motorcar Parts of America, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused, such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 11, 2019
/s/ Kevin Daly
 
Kevin Daly
 
Chief Accounting Officer




Exhibit 32.1

CERTIFICATE OF CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND CHIEF
ACCOUNTING OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Motorcar Parts of America, Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), I, Selwyn Joffe, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

1.
The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

2.
The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
/s/ Selwyn Joffe
 
Selwyn Joffe
 
Chief Executive Officer
 
February 11, 2019

In connection with the Quarterly Report of Motorcar Parts of America, Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), I, David Lee, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

1.
The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

2.
The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
/s/ David Lee
 
David Lee
 
Chief Financial Officer
 
February 11, 2019

In connection with the Quarterly Report of Motorcar Parts of America, Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), I, Kevin Daly, Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

1.
The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

2.
The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
/s/ Kevin Daly
 
Kevin Daly
 
Chief Accounting Officer
 
February 11, 2019

The foregoing certifications are being furnished to the Securities and Exchange Commission as part of the accompanying report on Form 10-Q. A signed original of each of these statements has been provided to Motorcar Parts of America, Inc. and will be retained by Motorcar Parts of America, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.



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