Motorcar Parts Of America Inc 10-Q for FY2024 Q3
Motorcar Parts Of America Inc (MPAA)
10-Q
2024-02-09
For: 2023-12-31
View Original
Added on
April 05, 2026
About this 10-Q
Motorcar Parts Of America Inc filed this 10-Q on February 9, 2024, covering the quarter ended December 31, 2023 (FY2024 Q3).
Headline figures
Quarter ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $171.86M
- up 13.2% from $151.82M a year earlier
- Net loss
- $47.21M
- compared with net income of $1.03M a year earlier
- Diluted EPS
- -$2.40
- compared with $0.05 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2023
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM TO
Commission File No. 001-33861
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (310 )
212-7910
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading symbol(s)
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Name of each exchange on which registered
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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.
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):
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Large accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting company
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Emerging growth company
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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 19,662,380 shares of Common Stock
outstanding at February 2, 2024.
MOTORCAR
PARTS OF AMERICA, INC.
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PART I — FINANCIAL INFORMATION
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4
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4
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5
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6
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7
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8
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9
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26
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37
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37
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PART II — OTHER INFORMATION
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39
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39
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39
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39
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40
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41 |
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44
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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 previously 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 programs. 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 are not available from our customers, we 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 programs, 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. Remanufactured Cores held for sale at our customer locations are included in long-term contract assets. 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
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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
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December 31, 2023
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March 31, 2023
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|||||||
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ASSETS
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(Unaudited)
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|||||||
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Current assets:
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||||||||
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Cash and cash equivalents
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$
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$
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||||
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Short-term investments
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|
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||||||
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Accounts receivable — net
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||||||
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Inventory
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||||||
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Contract assets
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||||||
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Prepaid expenses and other current assets
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||||||
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Total current assets
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||||||
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Plant and equipment — net
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||||||
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Operating lease assets
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||||||
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Long-term deferred income taxes
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||||||
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Long-term contract assets
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||||||
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Goodwill and intangible assets — net
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||||||
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Other assets
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||||||
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TOTAL ASSETS
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$
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|
$
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||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
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Current liabilities:
|
||||||||
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Accounts payable and accrued liabilities
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$
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|
$
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||||
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Customer finished goods returns accrual
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||||||
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Contract liabilities
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||||||
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Revolving loan
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||||||
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Other current liabilities
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||||||
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Operating lease liabilities
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||||||
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Current portion of term loan
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||||||
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Total current liabilities
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||||||
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Term loan, less current portion
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||||||
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||||||||
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Long-term contract liabilities
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||||||
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Long-term deferred income taxes
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||||||
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Long-term operating lease liabilities
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||||||
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Other liabilities
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||||||
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Total liabilities
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||||||
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Commitments and contingencies
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||||||||
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Shareholders’ equity:
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||||||||
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Preferred stock; par value $
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||||||
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Series A junior participating preferred stock; par value $
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||||||
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Common stock; par value $
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||||||
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Additional paid-in capital
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||||||
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Retained earnings
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||||||
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Accumulated other comprehensive income (loss)
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(
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)
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|||||
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Total shareholders’ equity
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||||||
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
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$
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|
||||
The accompanying notes to condensed consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
|
December 31,
|
December 31,
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|||||||||||||||
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2023
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2022
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2023
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2022
|
|||||||||||||
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Net sales
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$
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$
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$ | $ | ||||||||||
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Cost of goods sold
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||||||||||||||
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Gross profit
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||||||||||||||||
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Operating expenses:
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||||||||||||||||
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General and administrative
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||||||||||||||
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Sales and marketing
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||||||||||||||
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Research and development
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||||||||||||||
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Foreign exchange impact of lease liabilities and forward contracts
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(
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)
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(
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)
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( |
) | ( |
) | ||||||||
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Total operating expenses
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||||||||||||||
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Operating income
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||||||||||||||
| Other expenses: |
||||||||||||||||
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Interest expense, net
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||||||||||||||
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Change in fair value of compound net derivative liability
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||||||||||||||||
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Loss on extinguishment of debt
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||||||||||||||||
| Total other expenses |
||||||||||||||||
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Loss before income tax expense (benefit)
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(
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)
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(
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)
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( |
) | ( |
) | ||||||||
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Income tax expense (benefit)
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(
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)
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( |
) | |||||||||||
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Net (loss) income
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$
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(
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)
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$
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$ | ( |
) | $ | ( |
) | |||||
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Basic net (loss) income per share
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$
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(
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)
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$
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$ | ( |
) | $ | ( |
) | |||||
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Diluted net (loss) income per share
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$
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(
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)
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$
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$ | ( |
) | $ | ( |
) | |||||
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Weighted average number of shares outstanding:
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||||||||||||||||
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Basic
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||||||||||||||
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Diluted
|
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||||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
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2023
|
2022
|
2023
|
2022
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|||||||||||||
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Net (loss) income
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$
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(
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)
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$
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$ | ( |
) | $ | ( |
) | |||||
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Other comprehensive income, net of tax:
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||||||||||||||||
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Foreign currency translation gain
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||||||||||||||
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Total other comprehensive income, net of tax
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||||||||||||||
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Comprehensive (loss) income
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$
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(
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)
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$
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$ | ( |
) | $ | ( |
) | |||||
The accompanying notes to condensed consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
(Unaudited)
|
Common Stock
|
||||||||||||||||||||||||
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Shares
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Amount
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
|
|||||||||||||||||||
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Balance at March 31, 2023
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||||||
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Compensation recognized under employee stock plans
|
-
|
|
|
|
|
|
||||||||||||||||||
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Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
|
|
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||
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Foreign currency translation
|
-
|
|
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|
|
|
||||||||||||||||||
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Net loss
|
-
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||
|
Balance at June 30, 2023
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||
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Compensation recognized under employee stock plans
|
-
|
|||||||||||||||||||||||
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Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
|
||||||||||||||||||||||||
|
Foreign currency translation
|
- | |||||||||||||||||||||||
|
Net loss
|
- | ( |
) | ( |
) | |||||||||||||||||||
|
Balance at September 30, 2023
|
$ | $ | $ | $ | $ | |||||||||||||||||||
|
Compensation recognized under employee stock plans
|
-
|
|||||||||||||||||||||||
|
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
|
( |
) | ||||||||||||||||||||||
|
Foreign currency translation
|
-
|
|||||||||||||||||||||||
|
Net loss
|
-
|
( |
) | ( |
) | |||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||||||
|
Common Stock
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
|
|||||||||||||||||||
|
Balance at March 31,2022
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||||||
|
Compensation recognized under employee stock plans
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Exercise of stock options, net of shares withheld for employee taxes
|
||||||||||||||||||||||||
|
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
|
|
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||
|
Foreign currency translation
|
-
|
|
|
|
(
|
)
|
(
|
)
|
||||||||||||||||
|
Net loss
|
-
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||
|
Balance at June 30, 2022
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||||||
|
Compensation recognized under employee stock plans
|
- | |||||||||||||||||||||||
|
Exercise of stock options, net of shares withheld for employee taxes
|
||||||||||||||||||||||||
|
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
|
( |
) | ( |
) | ||||||||||||||||||||
|
Foreign currency translation
|
-
|
|||||||||||||||||||||||
|
Net loss
|
- | ( |
) | ( |
) | |||||||||||||||||||
|
Balance at September 30, 2022
|
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
|
Compensation recognized under employee stock plans
|
-
|
|||||||||||||||||||||||
|
Exercise of stock options, net of shares withheld for employee taxes
|
||||||||||||||||||||||||
|
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
|
( |
) | ||||||||||||||||||||||
|
Foreign currency translation
|
-
|
|||||||||||||||||||||||
|
Net income
|
-
|
|||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
(Unaudited)
| Nine Months Ended | ||||||||
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
||||||||
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Depreciation and amortization
|
|
|
||||||
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Amortization of interest and loss on extinguishment of debt
|
||||||||
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Accrued interest on convertible notes, related party
|
||||||||
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Amortization of core premiums paid to customers
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||||||
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Amortization of finished goods premiums paid to customers
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||||||
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Noncash lease expense
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|
|
||||||
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Foreign exchange impact of lease liabilities and forward contracts
|
(
|
)
|
(
|
)
|
||||
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Change in fair value of compound net derivative liability
|
||||||||
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(Gain) loss on short-term investments
|
(
|
)
|
|
|||||
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Net provision for inventory reserves
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|
|
||||||
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Net provision for customer payment discrepancies and credit losses
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|
|
||||||
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Deferred income taxes
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|
|
||||||
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Share-based compensation expense
|
|
|
||||||
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Loss on disposal of plant and equipment
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|
|
||||||
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Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
|
|
||||||
|
Inventory
|
(
|
)
|
(
|
)
|
||||
|
Prepaid expenses and other current assets
|
|
(
|
)
|
|||||
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Other assets
|
(
|
)
|
|
|||||
|
Accounts payable and accrued liabilities
|
|
(
|
)
|
|||||
|
Customer finished goods returns accrual
|
(
|
)
|
(
|
)
|
||||
|
Contract assets
|
(
|
)
|
(
|
)
|
||||
|
Contract liabilities
|
|
|
||||||
|
Operating lease liabilities
|
(
|
)
|
(
|
)
|
||||
|
Other liabilities
|
|
(
|
)
|
|||||
|
Net cash provided by (used in) operating activities
|
|
(
|
)
|
|||||
|
Cash flows from investing activities:
|
||||||||
|
Purchase of plant and equipment
|
(
|
)
|
(
|
)
|
||||
|
Purchase of short-term investments
|
|
(
|
)
|
|||||
|
Net cash used in investing activities
|
(
|
)
|
(
|
)
|
||||
|
Cash flows from financing activities:
|
||||||||
|
Borrowings under revolving loan
|
|
|
||||||
|
Repayments of revolving loan
|
(
|
)
|
(
|
)
|
||||
|
Repayments of term loan
|
(
|
)
|
(
|
)
|
||||
|
Payments for debt issuance costs
|
(
|
)
|
(
|
)
|
||||
|
Payments on finance lease obligations
|
(
|
)
|
(
|
)
|
||||
|
Exercise of stock options, net of cash used to pay employee taxes
|
|
|
||||||
|
Cash used to net share settle equity awards
|
(
|
)
|
(
|
)
|
||||
|
Net cash (used in) provided by financing activities
|
(
|
)
|
|
|||||
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(
|
)
|
|||||
|
Net increase (decrease) in cash and cash equivalents
|
|
(
|
)
|
|||||
|
Cash and cash equivalents — Beginning of period
|
|
|
||||||
|
Cash and cash equivalents — End of period
|
$
|
|
$
|
|
||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Cash paid for interest, net
|
$
|
|
$
|
|
||||
|
Cash paid for income taxes, net of refunds
|
|
|
||||||
|
Cash paid for operating leases
|
|
|
||||||
|
Cash paid for finance leases
|
|
|
||||||
|
Plant and equipment acquired under finance leases
|
|
|
||||||
|
Assets acquired under operating leases
|
|
|
||||||
|
Non-cash capital expenditures
|
|
|
||||||
|
Debt issuance costs included in accounts payable and accrued liabilities
|
||||||||
The accompanying notes to condensed consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
December 31, 2023
(Unaudited)
1. Company Background and Organization
Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading supplier of
automotive aftermarket non-discretionary replacement parts, and test solutions and diagnostic equipment. These replacement parts are primarily 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 test solutions and diagnostic equipment primarily serves the global automotive component and powertrain testing market. The
Company’s products include (i) light duty and heavy duty rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, brake
rotors, brake pads, brake shoes, and brake master cylinders, and (iv) other products, which include (a) turbochargers and (b) test solutions and diagnostic equipment including: (i) applications for combustion engine vehicles, including bench top
testers for alternators and starters, (ii) equipment for the pre- and post-production of electric vehicles, and (iii) software emulation of power system applications for the electrification of all forms of transportation (including automobiles,
trucks, the emerging electrification of systems within the aerospace industry, and electric vehicle charging stations).
2. Basis of Presentation and New Accounting Pronouncements
Basis of Presentation
The accompanying unaudited condensed 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, 2023 are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 2024. 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, 2023, which are included in the Company’s Annual Report
on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 14, 2023.
The accompanying condensed 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, 2023.
Recently Adopted Accounting Pronouncements
Supplier Finance Programs
In September 2022, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50) Disclosure of Supplier Finance Program Obligations. This standard requires qualitative and quantitative disclosures to enable users of the financial statements to understand the nature, activity during the period, changes from period to period and potential magnitude of supplier finance programs. The guidance is effective for fiscal years beginning after December 15, 2022.
Supplier Finance Programs
In September 2022, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50) Disclosure of Supplier Finance Program Obligations. This standard requires qualitative and quantitative disclosures to enable users of the financial statements to understand the nature, activity during the period, changes from period to period and potential magnitude of supplier finance programs. The guidance is effective for fiscal years beginning after December 15, 2022.
During the three months ended December 31, 2023, the Company launched a supplier finance program as part of its ongoing efforts to improve cash flow and liquidity. This program allows
certain of the Company’s suppliers to sell their receivables due from the Company to a participating financial institution at the sole discretion of both the supplier and the financial institution. The program is administered by a third party.
The Company has no economic interest in the sale of these receivables and no direct relationship with the financial institution. Payments to the third-party administrator are based on services rendered and are not related to the volume or number
of financing agreements between suppliers, financial institution, and the third-party administrator. The Company is not a party to agreements negotiated between participating suppliers and the financial institution. The Company’s obligations to
its suppliers, including amounts due and payment terms, are not affected by a supplier’s decision to participate in this program. The Company does not provide guarantees and there are no assets pledged to the financial institution or the
third-party administrator for the committed payment in connection with this program. Any amounts confirmed as outstanding supplier invoices are included within accounts payable on the condensed consolidated balance sheets. As of December 31,
2023, the Company had no outstanding supplier obligations confirmed under this program.
Accounting Pronouncements Not Yet Adopted
Disclosure Improvements
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This standard was issued in response to the SEC’s disclosure update and simplification initiative, which affects a variety of topics within the Accounting Standards Codification. The amendments apply to all reporting entities within the scope of the affected topics unless otherwise indicated. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company is currently evaluating the impact this guidance will have on its financial statement disclosures.
Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This standard requires the Company to disclose significant segment expenses that are regularly provided to the CODM and are included within each reported measure of segment operating results. The standard also requires the Company to disclose the total amount of any other items included in segment operating results, which were not deemed to be significant expenses for separate disclosure, along with a qualitative description of the composition of these other items. In addition, the standard also requires disclosure of the CODM’s title and position, as well as detail on how the CODM uses the reported measure of segment operating results to evaluate segment performance and allocate resources. The standard also aligns interim segment reporting disclosure requirements with annual segment reporting disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its financial statement disclosures.
Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740). This standard requires the Company to provide further disaggregated income tax disclosures for specific categories on the effective tax rate reconciliation, as well as additional information about federal, state/local and foreign income taxes. The standard also requires the Company to annually disclose its income taxes paid (net of refunds received), disaggregated by jurisdiction. This guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The standard is to be applied prospective basis, although optional retrospective application is permitted. The Company is currently evaluating the impact this guidance will have on its financial statement disclosures.
Accounting Pronouncements Not Yet Adopted
Disclosure Improvements
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This standard was issued in response to the SEC’s disclosure update and simplification initiative, which affects a variety of topics within the Accounting Standards Codification. The amendments apply to all reporting entities within the scope of the affected topics unless otherwise indicated. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company is currently evaluating the impact this guidance will have on its financial statement disclosures.
Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This standard requires the Company to disclose significant segment expenses that are regularly provided to the CODM and are included within each reported measure of segment operating results. The standard also requires the Company to disclose the total amount of any other items included in segment operating results, which were not deemed to be significant expenses for separate disclosure, along with a qualitative description of the composition of these other items. In addition, the standard also requires disclosure of the CODM’s title and position, as well as detail on how the CODM uses the reported measure of segment operating results to evaluate segment performance and allocate resources. The standard also aligns interim segment reporting disclosure requirements with annual segment reporting disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its financial statement disclosures.
Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740). This standard requires the Company to provide further disaggregated income tax disclosures for specific categories on the effective tax rate reconciliation, as well as additional information about federal, state/local and foreign income taxes. The standard also requires the Company to annually disclose its income taxes paid (net of refunds received), disaggregated by jurisdiction. This guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The standard is to be applied prospective basis, although optional retrospective application is permitted. The Company is currently evaluating the impact this guidance will have on its financial statement disclosures.
3. Accounts Receivable — Net
The Company has trade accounts receivable that result from the sale of goods and services. Accounts receivable — net includes offset accounts related to allowances for
credit losses, customer payment discrepancies, and returned goods authorizations (“RGAs”) issued for in-transit unit returns. The Company uses accounts receivable discount programs with certain customers and their respective banks (see Note 10).
Accounts receivable — net is comprised of the following:
|
|
December 31, 2023
|
March 31, 2023
|
||||||
|
Accounts receivable — trade
|
$
|
|
$
|
|
||||
|
Allowance for credit losses
|
(
|
)
|
(
|
)
|
||||
|
Customer payment discrepancies
|
(
|
)
|
(
|
)
|
||||
|
Customer returns RGA issued
|
(
|
)
|
(
|
)
|
||||
|
Total accounts receivable — net
|
$
|
|
$
|
|
||||
4. Inventory
Inventory is comprised of the following:
|
|
December 31, 2023
|
March 31, 2023
|
||||||
|
Inventory
|
||||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work-in-process
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
|
|
|
||||||
|
Less allowance for excess and obsolete inventory
|
(
|
)
|
(
|
)
|
||||
|
Inventory — net
|
|
|
||||||
|
Inventory unreturned
|
|
|
||||||
|
Total inventory
|
$
|
|
$
|
|
||||
5. Contract Assets
During the three months ended December 31, 2023 and 2022, the Company reduced the carrying
value of Remanufactured Cores held at customers’ locations by $1,607,000 and $863,000 , respectively. During the nine months ended December 31, 2023 and 2022, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $4,380,000 and $2,704,000 , respectively.
Contract assets are comprised of the following:
|
|
December 31, 2023
|
March 31, 2023
|
||||||
|
Short-term contract assets
|
||||||||
|
Cores expected to be returned by customers
|
$
|
|
$
|
|
||||
| Core premiums paid to customers | ||||||||
|
Upfront payments to customers
|
|
|
||||||
|
Finished goods premiums paid to customers
|
|
|
||||||
|
Total short-term contract assets
|
$
|
|
$
|
|
||||
| Long-term contract assets |
||||||||
|
Remanufactured cores held at customers’ locations
|
$
|
|
$
|
|
||||
| Core premiums paid to customers | ||||||||
| Long-term core inventory deposits | ||||||||
| Finished goods premiums paid to customers | ||||||||
|
Upfront payments to customers
|
|
|
||||||
|
Total long-term contract assets
|
$
|
|
$
|
|
||||
6. Significant Customer and Other Information
Significant Customer Concentrations
The largest customers accounted for the following percentage of consolidated net sales:
|
|
Three Months Ended
December 31,
|
Nine Months
Ended
December 31,
|
||||||||||||||
|
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
|
Net sales
|
||||||||||||||||
|
Customer A
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||
|
Customer C
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||
|
Customer B
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||
| Customer D |
% | % | % | % | ||||||||||||
Revenues for Customers A through C were derived from the Hard Parts segment and Test Solutions and Diagnostic Equipment segment. Revenues for Customer D were
derived from the Hard Parts segment. See Note 17 for a discussion of the Company’s segments.
The largest customers accounted for the following percentage of accounts receivable – trade:
|
|
December 31, 2023
|
March 31, 2023
|
||||||
|
Accounts receivable - trade
|
||||||||
|
Customer A
|
|
%
|
|
%
|
||||
|
Customer B
|
|
%
|
|
%
|
||||
| Customer C |
% | % | ||||||
| Customer D |
% | % | ||||||
Geographic and Product Information
The Company’s products are sold predominantly in North America and accounted for the following percentages of consolidated net sales:
|
|
Three Months Ended
December 31,
|
Nine Months
Ended
December 31,
|
||||||||||||||
|
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
| Product line |
||||||||||||||||
|
Rotating electrical products
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||
|
Brake-related products
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||
|
Wheel hub products
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||
|
Other products
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||
|
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||
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, 2023 and 2022.
7. Debt
The Company is party to a $268,620,000
senior secured financing, (as amended from time to time, the “Credit Facility”), consisting of a $238,620,000 revolving loan facility
(the “Revolving Facility”), subject to certain restrictions, and a $30,000,000 term loan facility (the “Term Loans”). Prior to the
eighth amendment discussed below, the loans under the Credit Facility were scheduled to mature on May 28, 2026 . The lenders have a
security interest in substantially all of the assets of the Company.
On August 3, 2023, the Company entered into a seventh amendment to the Credit Facility, which among other things, (i)
permitted the Company to repay its outstanding balance of Term Loans, (ii) permitted the exclusion of quarterly principal payments of Term Loans from the fixed charge coverage ratio (including retrospectively for the prior periods) for all
quarters beginning June 30, 2023, (iii) reset the fixed charge coverage ratio financial covenant level for the quarters ending September 30, 2023 and December 31, 2023, (iv) eliminated the senior leverage ratio financial covenant effective with
the quarter ended June 30, 2023, (v) extended the minimum undrawn availability financial covenant through the delivery of the June 30, 2024 compliance certificate, and (vi) excluded the amount of all amendment fees and expenses incurred in
connection with this amendment as well as prior unamortized fees associated with the Term Loans from bank EBITDA and the fixed charge coverage ratio financial covenant.
On August 3, 2023, the Company repaid the remaining outstanding balance of its Term Loans and recorded a loss on extinguishment of debt for the
remaining unamortized debt issuance costs of $168,000 in the condensed consolidated statement of operations.
On December 12, 2023, the Company entered into an eighth amendment to the Credit Facility, which among other things, (i) extended the maturity date to December 12, 2028 from May 28, 2026 ,
(ii) amended the definition of “Applicable Margin” to provide for a pricing grid, with the Applicable Margin for Term SOFR loans ranging from 2.75 %
to 3.25 % and the Applicable Margin for base rate loans ranging from 1.75 % to 2.25 %, in each case based on average daily
undrawn availability for the most recently completed calendar quarter, (iii) amended the existing fixed charge coverage ratio financial covenant that is only tested if undrawn availability (which may include up to $8,000,000 of suppressed availability) is less than 22.5 %
of the aggregate revolving commitments, and (iv) amended the definitions of Consolidated EBITDA and fixed charge coverage ratio and certain component definitions used therein.
The Company had $115,000,000
and $145,200,000 outstanding under the Revolving Facility at December 31, 2023 and March 31, 2023, respectively. In addition, $6,370,000 was outstanding for letters of credit at December 31, 2023. At December 31, 2023, after certain contractual adjustments, $114,168,000 was available under the Revolving Facility. The interest rate on the Company’s Revolving Facility was 8.71 % and 8.13 % respectively, at
December 31, 2023 and March 31, 2023, respectively.
The Credit
Facility, as amended, requires the Company to maintain a minimum fixed charge coverage ratio if undrawn availability is less than 22.5 % of
aggregate revolving commitments and a specified minimum undrawn availability. At December 31, 2023, undrawn availability was greater than the 22.5 %
threshold, therefore, the fixed charge coverage ratio financial covenant was not required to be tested. The Company was in compliance with these covenants as of December 31, 2023.
Convertible Notes
On March 31, 2023, the Company entered into a note purchase agreement, as amended, (the “Note Purchase Agreement”) with
Bison Capital Partners VI, L.P. and Bison Capital Partners VI-A, L.P. (collectively, the “Purchasers”) and Bison Capital Partners VI, L.P., as the purchaser representative (the “Purchaser Representative”) for the issuance and sale of $32,000,000 in aggregate principal amount of convertible notes due in 2029 (the “Convertible Notes”), which was used for general corporate purposes. The
Convertible Notes bear interest at a rate of 10.0 % per annum, compounded annually, and payable (i) in kind or (ii) in cash, annually in
arrears on April 1 of each year, commencing on April 1, 2024. The Convertible Notes have an initial conversion price of approximately $15.00
per share of common stock (“Conversion Option”). Unless and until the Company delivers a redemption notice, the Purchasers of the Convertible Notes may convert their Convertible Notes at any time at their option. Upon conversion, the Convertible
Notes will be settled in shares of the Company’s common stock. Except in the case of the occurrence of a fundamental transaction, as defined in the form of convertible promissory note, the Company may not redeem the Convertible Notes prior to March
31, 2026. After March 31, 2026, the Company may redeem all or part of the Convertible Notes for a cash purchase (the “Company Redemption”) price.
On June 8, 2023, the Company entered into the first amendment to the Note Purchase Agreement, which among other things,
removed a provision that specified the Purchasers would be entitled to receive a dividend or distribution payable in certain circumstances. This amendment was effective as of March 31, 2023.
On August 1, 2023, the Company entered into the second amendment to the Note Purchase Agreement, which amended the
definition of “Permitted Restricted Payments” to permit the prepayment of the Company’s Term Loans.
The Company’s Convertible Notes are comprised of the following:
|
December 31, 2023
|
March 31, 2023
|
|||||||
|
Principal amount of Convertible Notes
|
$
|
|
$
|
|
||||
|
Less: unamortized debt discount attributed to Compound Net Derivative
Liability
|
(
|
)
|
(
|
)
|
||||
|
Less: unamortized debt discount attributed to debt issuance costs
|
(
|
)
|
(
|
)
|
||||
|
Carrying amount of the Convertible Notes
|
|
|
||||||
|
Plus: Compound Net Derivative Liability
|
|
|
||||||
|
Net carrying amount of Convertible Notes, related
party
|
$
|
|
$
|
|
||||
In connection with the Note Purchase
Agreement, the Company entered into common stock warrants (the “Warrants”) with the Purchasers, which mature on March 30, 2029 . The
fair value of the Warrants, using Level 3 inputs and the Monte Carlo simulation model, was zero
The Company Redemption option has been combined with the Conversion Option as a compound net derivative liability (the
“Compound Net Derivative Liability”). The Compound Net Derivative Liability has been recorded within
in the condensed consolidated balance sheets at December 31, 2023 and March 31, 2023. The fair value of the Conversion Option and the Company Redemption option using Level 3
inputs and the Monte Carlo simulation model was a liability of $13,500,000 and $10,400,000 , and an asset of $3,380,000 and $1,970,000 at December 31, 2023 and March 31, 2023, respectively. During the three
and nine months ended December 31, 2023, the Company recorded $1,160,000
and $1,690,000 , respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated
statement of operations and condensed consolidated statement of cash flows.
The Convertible Notes also contain additional
features, such as, default interest and options related to a fundamental transaction, which were not separately accounted for as the value of such features were not material at December
31, 2023 and March 31, 2023.
Interest expense related to the Convertible Notes is as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||
|
December 31,
|
December 31,
|
|||||||
|
2023
|
2023
|
|||||||
|
Contractual interest expense
|
$
|
|
$
|
|
||||
|
Accretion of debt discount
|
|
|
||||||
|
Amortization of debt issuance costs
|
|
|
||||||
|
Total interest expense
|
$
|
|
$
|
|
||||
There are no future payments required under the Convertible Notes prior to their maturity, therefore, the principal amount
of the Convertible Notes plus interest payable in kind, assuming no early redemption or conversion has occurred, of $56,704,000 would be
paid on March 30, 2029.
8. Contract Liabilities
Contract liabilities are comprised of the following:
|
|
December 31, 2023
|
March 31, 2023
|
||||||
|
Short-term contract liabilities
|
||||||||
|
Customer allowances earned
|
$
|
|
$
|
|
||||
|
Customer core returns accruals
|
|
|
||||||
|
Accrued core payment
|
|
|
||||||
|
Customer deposits
|
|
|
||||||
|
Core bank liability
|
|
|
||||||
|
Finished goods liabilities
|
|
|
||||||
|
Total short-term contract liabilities
|
$
|
|
$
|
|
||||
|
Long-term contract liabilities
|
||||||||
|
Customer core returns accruals
|
$
|
|
$
|
|
||||
|
Core bank liability
|
|
|
||||||
|
Accrued core payment
|
|
|
||||||
|
Finished goods liabilities
|
|
|
||||||
|
Total long-term contract liabilities
|
$
|
|
$
|
|
||||
9. Leases
The Company leases various facilities in North America and Asia under operating leases expiring through August 2033. The Company has material nonfunctional currency leases that could have a material impact on the Company’s
condensed consolidated statements of operations. As required for other monetary liabilities, lessees remeasure foreign currency-denominated lease liabilities using the exchange rate at each reporting date, but the lease assets are nonmonetary
assets measured at historical rates and are not affected by subsequent changes in the exchange rates. In connection with the remeasurement of these leases, the Company recorded gains of $2,608,000 and $3,129,000 during the three months ended December 31, 2023 and 2022, respectively. During the nine months ended December 31, 2023 and 2022, the Company
recorded gains of $4,430,000 and $2,108,000 ,
respectively, in connection with the remeasurement of these leases. These amounts are included in foreign exchange impact of lease liabilities and forward contracts in the condensed consolidated statements of operations and condensed consolidated
statements of cash flows.
Balance sheet information for leases is as follows:
|
Leases
|
Classification
|
December 31, 2023
|
March 31, 2023
|
|||||||
|
Assets:
|
|
|||||||||
|
Operating
|
|
$
|
|
$
|
|
|||||
|
Finance
|
|
|
|
|||||||
|
Total leased assets
|
|
$
|
|
$
|
|
|||||
|
|
|
|||||||||
|
Liabilities:
|
|
|||||||||
|
Current
|
|
|||||||||
|
Operating
|
|
$
|
|
$
|
|
|||||
|
Finance
|
|
|
|
|||||||
|
Long-term
|
|
|||||||||
|
Operating
|
|
|
|
|||||||
|
Finance
|
|
|
|
|||||||
|
Total lease liabilities
|
|
$
|
|
$
|
|
|||||
Lease cost recognized in the condensed consolidated statements of operations is as follows:
|
Three Months Ended
|
Nine Months Ended |
|||||||||||||||
|
|
December 31,
|
December 31, |
||||||||||||||
|
|
2023
|
2022
|
2023 |
2022 |
||||||||||||
|
Lease cost
|
||||||||||||||||
|
Operating lease cost
|
$
|
|
$
|
|
$ |
$ |
||||||||||
|
Short-term lease cost
|
|
|
||||||||||||||
|
Variable lease cost
|
|
|
||||||||||||||
|
Finance lease cost:
|
||||||||||||||||
|
Amortization of finance lease assets
|
|
|
||||||||||||||
|
Interest on finance lease liabilities
|
|
|
||||||||||||||
|
Total lease cost
|
$
|
|
$
|
|
$ |
$ |
||||||||||
Maturities of lease commitments at December 31, 2023 by
fiscal year were as follows:
|
Maturity of lease liabilities
|
Operating Leases
|
Finance Leases
|
Total
|
|||||||||
|
2024 -
remaining three months
|
$
|
|
$
|
|
$
|
|
||||||
|
2025
|
|
|
|
|||||||||
|
2026
|
|
|
|
|||||||||
|
2027
|
|
|
|
|||||||||
|
2028
|
|
|
|
|||||||||
|
Thereafter
|
|
|
|
|||||||||
|
Total lease payments
|
|
|
|
|||||||||
|
Less amount representing interest
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Present value of lease liabilities
|
$
|
|
$
|
|
$
|
|
||||||
Other information about leases is as follows:
|
|
December 31, 2023
|
March 31, 2023
|
||||||
|
Lease term and discount rate
|
||||||||
|
Weighted-average remaining lease term (years):
|
||||||||
|
Finance leases
|
|
|
||||||
|
Operating leases
|
|
|
||||||
|
Weighted-average discount rate:
|
||||||||
|
Finance leases
|
|
%
|
|
%
|
||||
|
Operating leases
|
|
%
|
|
%
|
||||
10. Accounts Receivable Discount Programs
The Company uses accounts receivable discount programs offered by 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 accounts receivable discount programs:
|
Nine Months Ended
|
||||||||
|
|
December 31,
|
|||||||
|
|
2023
|
2022
|
||||||
|
Receivables discounted
|
$
|
|
$
|
|
||||
|
Weighted average number of days collection was accelerated
|
|
|
||||||
|
Annualized weighted average discount rate
|
|
%
|
|
%
|
||||
|
Amount of discount recognized as interest expense
|
$
|
|
$
|
|
||||
11. Net (Loss) Income per Share
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding
during the period. Diluted net (loss) income per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options,
Warrants, and Convertible Notes (as defined in Note 7), which would result in the issuance of incremental shares of common stock to the extent such impact is not anti-dilutive.
The following presents a reconciliation of basic and diluted net (loss) income per share:
| Three Months Ended | Nine
Months Ended |
|||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
|
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
|
Net (loss) income
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||
|
Basic shares
|
|
|
|
|
||||||||||||
|
Effect of potentially dilutive securities
|
|
|
|
|
||||||||||||
|
Diluted shares
|
|
|
|
|
||||||||||||
|
Net (loss) income per share:
|
||||||||||||||||
|
Basic net (loss) income per share
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||
|
Diluted net (loss) income per share
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||
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 and nine months ended December 31, 2023 there were 2,130,615 1,201,984 and 1,897,876 , respectively, of potential common shares not included in the calculation of diluted net (loss) income per share because their effect was anti-dilutive.
For the three and nine months ended December 31, 2023 there were 2,293,926
12. Income Taxes
The Company recorded an income tax expense of $37,281,000 , or an effective tax rate of (375.3 %), and an income tax benefit of
$8,971,000 , or an effective tax rate of 112.9 %,
for the three months ended December 31, 2023 and 2022, respectively. The Company recorded an income tax expense of $37,226,000 , or an
effective tax rate of (278.7 %), and an income tax benefit of $9,296,000 , or an effective tax rate of 62.1 %, for the nine months ended
December 31, 2023 and 2022, respectively. The effective tax rate for the three and nine months ended December 31, 2023, was primarily impacted by (i) the establishment of a valuation allowance on deferred tax assets that the Company does not expect
to be realized, (ii) foreign income taxed at rates that are different from the federal statutory rate, (iii) the portion of book expense related to convertible notes and derivatives that is not expected to be deductible for tax, and (iv)
non-deductible executive compensation under Internal Revenue Code Section 162(m).
Management assesses the need for the valuation allowance on a quarterly basis by jurisdiction. In assessing the need for a valuation allowance,
the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, past financial performance, and tax planning strategies. During the three months ended December
31, 2023, the Company recorded a discrete non-cash valuation allowance of $37,461,000 on U.S. federal and various state deferred tax
assets that is considered not more likely than not to be realized under U.S. GAAP. This change in realizability assessment is primarily due to recent losses and an updated forecast during the three months ended December 31, 2023.
The Company and its subsidiaries file income tax returns for the U.S. federal, various state, and foreign jurisdictions with varying
statutes of limitations. At December 31, 2023, the Company is only under examination by the State of California for fiscal years
and remains subject to examination from the years ended March 31, 2019 and forward. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.
13. 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 overseas facilities, 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 Company designates forward foreign currency exchange contracts 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 $53,301,000 and $48,486,000 at December 31, 2023 and March 31, 2023, respectively. These contracts generally have a term of one year or less, at rates agreed at the inception of the contracts. The counterparty to these derivative transactions 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 included in foreign exchange impact of lease liabilities and forward contracts in the condensed consolidated statements of operations.
The following shows the effect of derivative instruments on the condensed consolidated statements of operations:
|
Gain (Loss) Recognized as Foreign Exchange Impact of Lease Liabilities and Forward
Contracts
|
||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
|
Derivatives Not Designated as
|
December 31,
|
December 31,
|
||||||||||||||
|
Hedging Instruments
|
2023
|
2022
|
2023 |
2022
|
||||||||||||
|
Forward foreign currency exchange contracts
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
The fair value of the forward foreign currency exchange contracts of $2,118,000 and $3,889,000 is included in prepaid expenses and other current assets in the condensed consolidated balance sheets at December 31, 2023 and March 31, 2023, respectively. The changes in the
fair values of forward foreign currency exchange contracts are included in foreign exchange impact of lease liabilities and forward contracts in the condensed consolidated statements of cash flows for the nine months ended December 31, 2023 and
2022.
14. Fair Value Measurements
The following summarizes financial assets and liabilities measured at fair value, by level within the fair value hierarchy:
|
December 31, 2023
|
March 31, 2023
|
|||||||||||||||||||||||||||||||
|
Fair Value Measurements
|
Fair Value Measurements
|
|||||||||||||||||||||||||||||||
|
Using Inputs Considered as
|
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
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
| Prepaid expenses and other current assets |
||||||||||||||||||||||||||||||||
|
Forward foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Other current liabilities
|
||||||||||||||||||||||||||||||||
|
Deferred compensation
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
| Convertible notes, related party |
||||||||||||||||||||||||||||||||
|
Compound Net Derivative Liability
|
||||||||||||||||||||||||||||||||
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 (See Note 13).
Compound Net Derivative Liability
The Company estimates the fair value of the Compound Net Derivative Liability (see Note 7) using Level 3 inputs and the
Monte Carlo simulation model at the balance sheet date. The Monte Carlo simulation model requires the input of subjective assumptions including the expected volatility of the underlying stock. 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. This amount is recorded within convertible notes, related party in the condensed consolidated balance sheets
at December 31, 2023 and March 31, 2023. Any changes in the fair value of the Compound Net Derivative Liability are recorded in change in fair value of compound net derivative liability in the condensed consolidated statements of operations.
The following assumptions were used to determine the fair value of the Compound Net Derivative Liability:
|
December 31, 2023
|
March 31, 2023
|
|||||||
|
Risk free interest rate
|
|
%
|
|
%
|
||||
|
Cost of equity
|
|
%
|
|
%
|
||||
| Weighted average cost of capital | % | % | ||||||
| Expected volatility of MPA common stock | % | % | ||||||
| EBITDA volatility | % | % | ||||||
The following summarizes the activity for Level 3 fair value measurements:
|
Three Months Ended
|
Nine Months Ended
|
|||||||
| December 31, | December 31, | |||||||
|
2023
|
2023
|
|||||||
|
Beginning balance
|
$
|
|
$
|
|
||||
|
Changes in fair value of Compound Net Derivative Liability included in earnings
|
|
|
||||||
|
Ending balance
|
$
|
|
$ | |||||
During the three and nine months ended December 31, 2023, 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 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. At December 31, 2023 and March 31, 2023, the net carrying amount of the Convertible Notes was $33,226,000
and $30,994,000 , respectively, with unamortized debt discounts and debt issuance costs of $8,894,000 and $9,436,000 , respectively, and Compound Net
Derivative Liability of $10,120,000 and $8,430,000 ,
respectively. The estimated fair value of the Company’s Convertible Notes was $39,226,000 using Level 3 inputs at December 31, 2023.
The net carrying amount of the Convertible Notes approximated their fair value at March 31, 2023, as they were issued on March 31, 2023.
15. Share-based Payments
Stock Options
The Company granted options to purchase 132,133 shares of
common stock during the nine months ended December 31, 2023. No options to purchase shares of the Company’s common stock were granted
during the nine months ended December 31, 2022. 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,
|
|||
|
|
2023
|
|||
|
Weighted average risk free interest rate
|
|
%
|
||
|
Weighted average expected holding period (years)
|
|
|||
|
Weighted average expected volatility
|
|
%
|
||
|
Weighted average expected dividend yield
|
|
|||
|
Weighted average fair value of options granted
|
$
|
|
||
The following is a summary of stock option transactions:
|
|
Number of
Shares
|
Weighted Average
Exercise Price
|
||||||
|
Outstanding at March 31, 2023
|
|
$
|
|
|||||
|
Granted
|
|
$
|
|
|||||
|
Exercised
|
|
$
|
|
|||||
|
Forfeited/Cancelled
|
(
|
)
|
$
|
|
||||
|
Expired
|
( |
) | $ | |||||
|
Outstanding at December 31, 2023
|
|
$
|
|
|||||
At December 31, 2023, options to purchase 132,133 shares of common stock were unvested at a weighted average exercise
price of $9.32 .
At December 31, 2023, there was $450,000 of total unrecognized compensation expense related to unvested stock option
awards, which will be recognized over the weighted average remaining vesting period of approximately 2.7 years.
Restricted Stock Units and Restricted Stock Awards (collectively “RSUs”)
During the nine months ended December 31, 2023, the Company granted 100,624 of time-based vesting restricted stock units, based on the closing market price on the grant date. During the nine months ended December 31, 2022, the Company granted
(i) performance-based restricted stock awards which had a threshold performance level of 33,333 shares, a target performance level of 66,667 shares, and a maximum performance level of 100,000
shares at the grant date and (ii) 229,121 of time-based vesting restricted stock units, respectively, 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, 2023
|
|
$
|
|
|||||
|
Granted
|
|
$
|
|
|||||
|
Vested
|
(
|
)
|
$
|
|
||||
|
Forfeited/Cancelled
|
(
|
)
|
$
|
|
||||
|
Outstanding at December 31, 2023
|
|
$
|
|
|||||
At December 31, 2023, there was $2,002,000 of unrecognized
compensation expense related to RSUs, which will be recognized over the weighted average remaining vesting period of approximately 1.1
years.
Performance Stock Units (“PSUs”)
During the nine months ended December 31, 2023,
the Company granted 585,583 PSUs, which vest, subject to continued employment, as follows: (i) if the stock price is greater than or
equal to $10.00 per share, then
of the grant will vest, (ii) if the stock price is greater than or equal to $15.00 per share then the next of the grant will vest, and (iii) if the stock price is greater than or equal to $20.00 per share then the final of the grant will vest. Recipients are
eligible to vest in between 50 % and 150 %
of the third tranche by achieving a stock price between $17.50 and $25.00 per share (each stock price target must be met for thirty consecutive
trading days). The Company calculated the fair value of these PSUs individually for each tranche using the Monte Carlo Simulation Model at the grant date. Compensation cost is recognized over the estimated derived service period. Compensation cost
related to these awards will not be adjusted even if the market condition is not met.
During the nine months ended December 31, 2022 , the Company granted 126,028 PSUs (at
target performance levels), which cliff vest after three-years , subject to
continued employment. These awards are contingent and granted separately for each of the following metrics: adjusted EBITDA, net sales, and relative total shareholder return (“TSR”). Compensation cost at the grant date is recognized on a
straight-line basis over the requisite service period to the extent the conditions are deemed probable. The number of shares earned at the end of the three-year period will vary, based only on actual performance, from 0 % to 150 % of the target number of
PSUs granted. Adjusted EBITDA and net sales are considered performance conditions. The Company will reassess the probability of achieving each performance condition separately each reporting period. TSR is considered a market condition because
it measures the Company’s return against the performance of the Russell 3000, excluding companies classified as financials and real estate, over a given period of time. Compensation cost related to the TSR award will not be adjusted even if the
market condition is not met. The Company calculated the fair value of the PSUs for each component individually.
The fair value of PSUs subject to performance conditions is equal to the closing stock price on the grant date. The fair value of PSUs subject to a
market condition is determined using the Monte Carlo simulation model.The following table summarizes the assumptions used in determining the fair value of the awards subject to market conditions:
|
Nine Months Ended
December 31,
|
||||||||
|
|
2023
|
2022 |
||||||
|
Risk free interest rate
|
|
%
|
% | |||||
|
Expected life in years
|
|
|||||||
|
Expected volatility of MPA common stock
|
|
%
|
% | |||||
|
Expected average volatility of peer companies
|
|
% |
% | |||||
|
Average correlation coefficient of peer companies
|
|
% |
% | |||||
|
Expected dividend yield
|
|
|||||||
|
Grant date fair value
|
$
|
|
$ | |||||
The following is a summary of non-vested PSUs:
|
|
Number of
Shares
|
Weighted Average
Grant Date Fair
Value
|
||||||
|
Outstanding at March 31, 2023
|
|
$
|
|
|||||
|
Granted
|
|
$
|
|
|||||
|
Vested
|
$
|
|
||||||
|
Forfeited
|
(
|
)
|
$
|
|
||||
|
Outstanding at December 31, 2023
|
|
$
|
|
|||||
At December 31, 2023, there was $2,488,000 of unrecognized compensation expense related to these awards, which will be recognized over the weighted average remaining vesting
period of approximately 1.2 years.
16. Commitments and Contingencies
Warranty Returns
The Company allows its customers to return goods that their consumers 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 unit sales. Amounts charged to expense for these warranty returns are considered in
arriving at the Company’s net sales.
The following summarizes the changes in the warranty returns:
|
|
Three Months Ended
December 31,
|
Nine Months
Ended
December 31,
|
||||||||||||||
|
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
|
Balance at beginning of period
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Charged to expense
|
|
|
|
|
||||||||||||
|
Amounts processed
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Balance at end of period
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Contingencies
The Company is subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct
periodic examinations of and administrative proceedings regarding the Company’s business, and its compliance with law, code, and regulations related to matters including, but not limited to, environmental, information security, taxes, levies,
tariffs and such.
17. Segment Information
Effective as of the fourth quarter of fiscal 2023, the Company revised its segment
reporting as it determined that its three operating segments no longer met the criteria to be aggregated. The Company recast its prior year segment disclosures to conform to the current year’s presentation.
The Company’s three operating segments are:
| • |
Hard Parts, including (i) light duty rotating electric products such as alternators
and starters, (ii) wheel hub products, (iii) brake-related products, including brake calipers, brake boosters, brake rotors, brake pads and brake master cylinders, and (iv) turbochargers,
|
| • |
Test Solutions and Diagnostic Equipment, including (i) applications for combustion
engine vehicles, including bench top testers for alternators and starters, (ii) equipment for the pre- and post-production of electric vehicles, and (iii) software
emulation of power system applications for the electrification of all forms of transportation (including automobiles, trucks, the emerging electrification of systems within the aerospace industry, and electric vehicle charging stations),
and
|
| • |
Heavy Duty, including non-discretionary automotive aftermarket replacement hard parts
for heavy-duty truck, industrial, marine, and agricultural applications.
|
The Company’s Hard Parts operating segment meets the criteria of a reportable
segment while Test Solutions and Diagnostic Equipment and Heavy Duty are not material, are not required to be separately reported, and are included within the “all other” category.
Financial information relating to the Company’s segments is as follows:
|
Three Months Ended December 31, 2023
|
||||||||||||
|
Hard Parts
|
All Other
|
Total
|
||||||||||
|
Net sales to external customers
|
$
|
|
$
|
|
$
|
|
||||||
|
Intersegment sales
|
|
|
|
|||||||||
|
Operating income (loss)
|
|
(
|
)
|
|
||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Segment assets
|
|
|
|
|||||||||
|
Capital expenditures
|
|
|
|
|||||||||
|
Three Months Ended December 31, 2022
|
||||||||||||
|
Hard Parts
|
All Other
|
Total
|
||||||||||
|
Net sales to external customers
|
$
|
|
$
|
|
$
|
|
||||||
|
Intersegment sales
|
|
|
|
|||||||||
|
Operating income (loss)
|
|
(
|
)
|
|
||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Segment assets
|
|
|
|
|||||||||
|
Capital expenditures
|
|
|
|
|||||||||
|
Nine Months Ended December 31, 2023
|
||||||||||||
|
Hard Parts
|
All Other
|
Total
|
||||||||||
|
Net sales to external customers
|
$
|
|
$
|
|
$
|
|
||||||
|
Intersegment sales
|
|
|
|
|||||||||
|
Operating income (loss)
|
|
(
|
)
|
|
||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Capital expenditures
|
|
|
|
|||||||||
|
Nine Months Ended December 31, 2022
|
||||||||||||
|
Hard Parts
|
All Other
|
Total
|
||||||||||
|
Net sales to external customers
|
$
|
|
$
|
|
$
|
|
||||||
|
Intersegment sales
|
|
|
|
|||||||||
|
Operating income (loss)
|
|
(
|
)
|
|
||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Capital expenditures
|
|
|
|
|||||||||
|
Three Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
|
December 31,
|
December 31,
|
||||||||||||||
|
Net sales
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
|
Total net sales for reportable segment
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Other net sales
|
||||||||||||||||
|
Elimination of intersegment net sales
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Total consolidated net sales
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Three Months Ended
|
Nine Months
Ended
|
|||||||||||||||
|
|
December 31,
|
December 31,
|
||||||||||||||
|
Profit or loss
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
|
Total operating income for reportable segment
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Other operating loss
|
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Elimination of intersegment operating income (loss)
|
|
|
|
(
|
)
|
|||||||||||
|
Interest expense, net
|
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Change in fair value of compound net derivative liability
|
(
|
)
|
|
(
|
)
|
|
||||||||||
| Loss on extinguishment of debt | ( |
) | ||||||||||||||
|
Total consolidated loss before income tax expense (benefit)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Assets
|
December 31, 2023
|
March 31, 2023
|
||||||
|
Total assets for reportable segment
|
$
|
|
$
|
|
||||
|
Other assets
|
|
|
||||||
|
Elimination of intersegment assets
|
(
|
)
|
(
|
)
|
||||
|
Total consolidated assets
|
$
|
|
$
|
|
||||
18. Share Repurchases
In August 2018, the Company’s board of directors approved an increase in its share repurchase program from $20,000,000 to $37,000,000 of its common
stock. During the three and nine months ended December 31, 2023,
the Company did no 18,745,000 has been utilized and $18,255,000 remains available to
repurchase shares under the authorized share repurchase program, subject to the limit in the Company’s Credit Facility. The Company retired the 837,007
shares repurchased under this program through December 31, 2023. 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.
19. Related Party
Transactions
Lease
In December 2022, the Company entered into an operating lease for its
Convertible Note and Election of Director
In connection with the issuance and sale of the Company’s Convertible Notes on March 31, 2023 (see Note 7), the Board appointed Douglas Trussler, a co-founder of Bison Capital in 2001, to the Board. Mr. Trussler’s compensation will be consistent with the Company’s previously disclosed standard compensation practices for non-employee directors, which are described in the Company’s Definitive Proxy Statement, filed with the SEC on July 28, 2023.
| 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, 2023 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on
June 14, 2023.
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. All statements other than statements of
historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial
performance, as well as statements regarding underlying assumptions related thereto. They include, among others, factors related to the timing and implementation of strategic initiatives, the highly competitive nature of our industry, demand for
our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for
any reason. Therefore, you should not place undue reliance on those statements. Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the SEC on June 14, 2023, as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties
that could cause actual results to differ materially from those projected or implied by the forward-looking statements.
Management Overview
With a scalable infrastructure and abundant growth opportunities, we are focused on growing our aftermarket business in the North American marketplace and growing our leadership position in the test solutions and diagnostic equipment market by
providing innovative and intuitive solutions to our customers. Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines. These
investments included (i) a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our original 312,000 square foot
facility in Mexico.
Segment Reporting
Effective as of the fourth quarter of fiscal 2023, we revised our segment reporting as we determined that our three operating segments no longer met the criteria to be aggregated. We recast our prior year segment disclosures to conform to the
current year’s presentation.
Our three operating segments are as follows:
| • |
Hard Parts, including (i) light duty rotating electric products such as alternators and starters, (ii) wheel hub products, (iii) brake-related products, including brake calipers, brake boosters,
brake rotors, brake pads and brake master cylinders, and (iv) turbochargers,
|
| • |
Test Solutions and Diagnostic Equipment, including (i) applications for combustion engine vehicles, including bench top testers for alternators and starters, (ii) equipment for the pre- and
post-production of electric vehicles, and (iii) software emulation of power system applications for the electrification of all forms of transportation (including automobiles, trucks, the emerging electrification of systems within the
aerospace industry, and electric vehicle charging stations), and
|
| • |
Heavy Duty, including non-discretionary automotive aftermarket replacement hard parts for heavy-duty truck, industrial, marine, and agricultural applications.
|
Our Hard Parts operating segment meets the criteria of a reportable segment. The Test Solutions and Diagnostic Equipment and Heavy Duty segments are not material, are not required to be separately reported, and are
included within the “all other” category. See Note 17 of the notes to condensed consolidated financial statements for more information.
Results of Operations for the Three Months Ended December 31, 2023 and 2022
The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key consolidated operating data:
|
Three Months Ended
|
||||||||
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Cash flow provided by (used in) operations
|
$
|
53,615,000
|
$
|
(4,474,000
|
)
|
|||
|
Finished goods turnover (annualized) (1)
|
3.6
|
3.1
|
||||||
| (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 non-core finished goods inventory values
for the fiscal quarter. 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,
|
||||||||
|
2023
|
2022
|
|||||||
|
Net sales
|
$
|
171,862,000
|
$
|
151,819,000
|
||||
|
Cost of goods sold
|
141,819,000
|
130,826,000
|
||||||
|
Gross profit
|
30,043,000
|
20,993,000
|
||||||
|
Gross profit percentage
|
17.5
|
%
|
13.8
|
%
|
||||
Net Sales. Our consolidated net sales for the three months ended December 31, 2023 were $171,862,000, which represents an increase of $20,043,000, or 13.2%, from the three months ended December 31, 2022
of $151,819,000. Our sales for the three months ended December 31, 2023 compared with the three months ended December 31, 2022 reflect strong demand across all product lines.
Gross Profit. Our consolidated gross profit was $30,043,000, or 17.5% of consolidated net sales, for the three months ended December 31, 2023 compared with $20,993,000, or 13.8%
of consolidated net sales, for the three months ended December 31, 2022. The increase in our gross margin for the three months ended December 31, 2023 reflects increased utilization of our facilities and the benefit of price increases that went
into effect during prior periods.
In addition, our gross margin for the three months ended December 31, 2023 compared with the three months ended December 31, 2022 was impacted by (i) additional expenses of $1,555,000 and $2,370,000, respectively,
primarily due to certain costs for disruptions in the supply chain, (ii) amortization of core and finished goods premiums paid to customers related to new business of $2,838,000 and $3,075,000,
respectively, and (iii) the non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down
of $1,607,000 and $863,000, respectively.
Operating Expenses
The following summarizes our consolidated operating expenses:
|
Three Months Ended
|
||||||||
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
General and administrative
|
$
|
15,198,000
|
$
|
13,599,000
|
||||
|
Sales and marketing
|
5,931,000
|
5,634,000
|
||||||
|
Research and development
|
2,539,000
|
2,547,000
|
||||||
|
Foreign exchange impact of lease liabilities and forward contracts
|
(3,149,000
|
)
|
(4,313,000
|
)
|
||||
|
Percent of net sales
|
||||||||
|
General and administrative
|
8.8
|
%
|
9.0
|
%
|
||||
|
Sales and marketing
|
3.5
|
%
|
3.7
|
%
|
||||
|
Research and development
|
1.5
|
%
|
1.7
|
%
|
||||
|
Foreign exchange impact of lease liabilities and forward contracts
|
(1.8
|
)%
|
(2.8
|
)%
|
||||
General and Administrative. Our general and administrative expenses for the three months ended December 31, 2023 were $15,198,000, which represents an increase of $1,599,000, or 11.8%, from the three
months ended December 31, 2022 of $13,599,000. This increase was primarily for employee-related expenses, which included (i) $1,777,000 of increased employee incentives and (ii) $405,000 of increased share-based compensation expense in connection
with equity grants made to employees. These increases were partially offset by $596,000 of decreased severance expense due to headcount reductions during the three months ended December 31, 2022.
Sales and Marketing. Our sales and marketing expenses for the three months ended December 31, 2023 were $5,931,000, which represents an increase of $297,000, or 5.3%, from the three months ended December
31, 2022 of $5,634,000. This increase was primarily due to increased employee-related expenses and higher commissions, which resulted from higher sales, partially offset by reduced expenses for trade shows during the three months ended December 31,
2023 compared with the three months ended December 31, 2022.
Research and Development. Our research and development expenses were consistent at $2,539,000 for the three months ended December 31, 2023 compared with $2,547,000 for the three months ended December 31,
2022.
Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts were non-cash gains of $3,149,000 and $4,313,000 for the three
months ended December 31, 2023 and 2022, respectively. This change during the three months ended December 31, 2023 compared with the three months ended December 31, 2022 was primarily due to (i) the remeasurement of our foreign currency-denominated
lease liabilities, which resulted in non-cash gains of $2,608,000 and $3,129,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in non-cash gains of
$541,000 and $1,184,000, respectively, due to the changes in their fair values.
Operating Income
Consolidated Operating Income. Our consolidated operating income for the three months ended December 31, 2023 was $9,524,000, which represents an increase of $5,998,000, or 170.1%, from the three months
ended December 31, 2022 of $3,526,000. This increase was primarily due to higher sales and gross profit as discussed above.
Interest Expense
Interest Expense, net. Our interest expense for the three months ended December 31, 2023 was $18,297,000, which represents an increase of $6,826,000, or 59.5%, from interest
expense for the three months ended December 31, 2022 of $11,471,000. This increase was primarily due to (i) increased utilization of and higher interest rates on our accounts receivable discount programs, which have variable interest rates and (ii)
non-cash interest expense incurred on the Convertible Notes issued on March 31, 2023.
Change in Fair Value of Compound Net Derivative Liability
Change in Fair Value of Compound Net Derivative Liability. Our change in fair value of compound net derivative liability for the three months ended December 31, 2023 was a
non-cash loss of $1,160,000 associated with the convertible notes issued on March 31, 2023.
Loss on Extinguishment of Debt
Loss on Extinguishment of Debt. We did not incur any loss on extinguishment of debt during the three months ended
December 31, 2023.
Provision for Income Taxes
Income Tax. We recorded an income tax expense of $37,281,000, or an effective tax rate of (375.3%), and an income tax benefit of $8,971,000, or an effective tax rate of 112.9%, for
the three months ended December 31, 2023 and 2022, respectively. During the three months ended December 31, 2023, we recorded a discrete non-cash valuation allowance of $37,461,000 on our U.S. federal and various state deferred tax assets primarily
due to recent losses. The change in the valuation allowance resulted from an updated forecast during the three months ended December 31, 2023. The effective tax rate for the three months ended December 31, 2023, was primarily impacted by (i) the
establishment of a valuation allowance on deferred tax assets that we do not expect to be realized, (ii) foreign income taxed at rates that are different from the federal statutory rate, (iii) the portion of book expense related to convertible
notes and derivatives that is not expected to be deductible for tax, and (iv) non-deductible executive compensation under Internal Revenue Code Section 162(m).
Results of Operations for the Nine Months Ended December 31, 2023 and 2022
The following discussion and analysis should be read together with the financial statements and notes thereto appearing elsewhere herein.
The following summarizes certain key consolidated operating data:
|
Nine Months Ended
|
||||||||
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Cash flow provided by (used in) operations
|
$
|
48,445,000
|
$
|
(21,428,000
|
)
|
|||
|
Finished goods turnover (annualized) (1)
|
3.7
|
3.3
|
||||||
| (1) |
Annualized finished goods turnover for the fiscal period is calculated by multiplying cost of goods sold for the period by 1.33 and dividing the result by the average between beginning and ending non-core finished goods inventory values
for the fiscal period. 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,
|
||||||||
|
2023
|
2022
|
|||||||
|
Net sales
|
$
|
528,206,000
|
$
|
488,347,000
|
||||
|
Cost of goods sold
|
430,448,000
|
410,536,000
|
||||||
|
Gross profit
|
97,758,000
|
77,811,000
|
||||||
|
Gross profit percentage
|
18.5
|
%
|
15.9
|
%
|
||||
Net Sales. Our consolidated net sales for the nine months ended December 31, 2023 were $528,206,000, which represents an increase of $39,859,000, or 8.2%, from the nine months ended December 31, 2022 of
$488,347,000. Our sales for the nine months ended December 31, 2023 compared with the nine months ended December 31, 2022 increased due to strong demand across all product lines.
Gross Profit. Our consolidated gross profit was $97,758,000, or 18.5% of consolidated net sales, for the nine months ended December 31, 2023 compared with $77,811,000, or 15.9%
of consolidated net sales, for the nine months ended December 31, 2022. The increase in our gross margin for the nine months ended December 31, 2023 reflects increased utilization of our facilities and the benefit of price increases that went
into effect during prior periods.
In addition, our gross margin for the nine months ended December 31, 2023 compared with the nine months ended December 31, 2022 was impacted by (i) additional expenses of $6,738,000 and $5,282,000, respectively,
primarily due to certain costs for disruptions in the supply chain, (ii) amortization of core and finished goods premiums paid to customers related to new business of $8,202,000 and $9,183,000,
respectively, and (iii) the non-cash quarterly revaluation of cores that are part of the finished goods on the customers’ shelves (which are included in contract assets) to the lower of cost or net realizable value, which resulted in a write-down
of $4,380,000 and $2,704,000, respectively.
Operating Expenses
The following summarizes consolidated operating expenses:
|
Nine Months Ended
|
||||||||
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
General and administrative
|
$
|
42,125,000
|
$
|
42,079,000
|
||||
|
Sales and marketing
|
17,038,000
|
17,242,000
|
||||||
|
Research and development
|
7,352,000
|
8,330,000
|
||||||
|
Foreign exchange impact of lease liabilities and forward contracts
|
(2,659,000
|
)
|
(2,553,000
|
)
|
||||
|
Percent of net sales
|
||||||||
|
General and administrative
|
8.0
|
%
|
8.6
|
%
|
||||
|
Sales and marketing
|
3.2
|
%
|
3.5
|
%
|
||||
|
Research and development
|
1.4
|
%
|
1.7
|
%
|
||||
|
Foreign exchange impact of lease liabilities and forward contracts
|
(0.5
|
)%
|
(0.5
|
)%
|
||||
General and Administrative. Our general and administrative expenses for the nine months ended December 31, 2023 were $42,125,000, which represents an increase of $46,000, or 0.1%, from the nine months
ended December 31, 2022 of $42,079,000. This increase was primarily due to (i) $1,802,000 of increased employee incentives, (ii) $857,000 of increased professional services, and (iii) $747,000 of increased share-based compensation expense in
connection with equity grants made to employees. These increases were partially offset by $901,000 of decreased severance and $672,000 of decreased employee-related expenses due to headcount reductions in the prior year. In addition, our general
and administrative expenses for the nine months ended December 31, 2023 decreased due to fluctuations in foreign currency exchange rates compared with the prior year.
Sales and Marketing. Our sales and marketing expenses for the nine months ended December 31, 2023 were $17,038,000, which represents a decrease of $204,000, or 1.2%, from the nine months ended December
31, 2022 of $17,242,000. This decrease was primarily due to our cost-cutting measures, which included decreased marketing and advertising expenses, decreased trade show expenses, and decreased employee-related expenses. These decreases were
partially offset by increased commissions due to higher sales.
Research and Development. Our research and development expenses for the nine months ended December 31, 2023 were $7,352,000, which represents a decrease of $978,000, or 11.7%, from the nine months ended
December 31, 2022 of $8,330,000. This decrease was primarily due to our cost-cutting measures, which included headcount reduction and a reduction in research and development expenses.
Foreign Exchange Impact of Lease Liabilities and Forward Contracts. Our foreign exchange impact of lease liabilities and forward contracts for the nine months ended December 31, 2023 and 2022 were
non-cash gains of $2,659,000 and $2,553,000, respectively. This change during the nine months ended December 31, 2023 compared with the nine months ended December 31, 2022 was primarily due to (i) the remeasurement of our foreign
currency-denominated lease liabilities, which resulted in non-cash gains of $4,430,000 and $2,108,000, respectively, due to foreign currency exchange rate fluctuations and (ii) the forward foreign currency exchange contracts, which resulted in a
non-cash loss of $1,771,000 compared with a non-cash gain of $445,000, respectively, due to the changes in their fair values.
Operating Income
Consolidated Operating Income. Our consolidated operating income for the nine months ended December 31, 2023 was $33,902,000, which represents an increase of $21,189,000, or 166.7%, from the nine months
ended December 31, 2022 of $12,713,000. This increase was primarily due to higher sales and higher gross profit as discussed above.
Interest Expense
Interest Expense, net. Our interest expense for the nine months ended December 31, 2023 was $45,400,000, which represents an increase of $17,725,000, or 64.0%, from interest
expense for the nine months ended December 31, 2022 of $27,675,000. This increase was primarily due to (i) higher interest rates and increased utilization of our accounts receivable discount programs, which have variable interest rates, (ii) higher
interest rates on lower average outstanding balances under our credit facility, which also has variable interest rates, and (iii) non-cash interest expense incurred on the Convertible Notes issued on March 31, 2023.
Change in Fair Value of Compound Net Derivative Liability
Change in Fair Value of Compound Net Derivative Liability. Our change in fair value of compound net derivative liability for the nine months ended December 31, 2023 was a non-cash
loss of $1,690,000 associated with the convertible notes issued on March 31, 2023.
Loss on Extinguishment of Debt
Loss on Extinguishment of Debt. Our loss on extinguishment of debt was $168,000 in connection with the repayment of the remaining outstanding balance of our term loans during the
nine months ended December 31, 2023.
Provision for Income Taxes
Income Tax. We recorded an income tax expense of $37,226,000, or an effective tax rate of (278.7%), and an income tax benefit of $9,296,000, or an effective tax rate of 62.1%, for
the nine months ended December 31, 2023 and 2022, respectively. During the nine months ended December 31, 2023, we recorded a discrete non-cash valuation allowance of $37,461,000 on our U.S. federal and various state deferred tax assets primarily
due to recent losses. The change in the valuation allowance resulted from an updated forecast during the nine months ended December 31, 2023. The effective tax rate for the nine months ended December 31, 2023, was primarily impacted by (i) the
establishment of a valuation allowance on deferred tax assets that we do not expect to be realized, (ii) foreign income taxed at rates that are different from the federal statutory rate, (iii) the portion of book expense related to convertible
notes and derivatives that is not expected to be deductible for tax, and (iv) non-deductible executive compensation under Internal Revenue Code Section 162(m).
Liquidity and Capital Resources
Overview
We had working capital (current assets minus current liabilities) of $154,815,000 and $154,886,000, a ratio of current assets to current liabilities of 1.4:1.0, at December 31, 2023 and March 31, 2023, respectively.
Our primary source of liquidity was from cash generated from operations during the nine months ended December 31, 2023. We believe cash generated from operations, our cash and cash equivalents, use of accounts receivable discount programs,
amounts available under our credit facility, and other sources are sufficient to satisfy our working capital needs, and lease and capital expenditure obligations over the next 12 months.
Share Repurchase Program
In August 2018, our board of directors approved an increase in our share repurchase program from $20,000,000 to $37,000,000 of our common stock. As of December 31, 2023, $18,745,000 had been utilized and $18,255,000 remains available to
repurchase shares under the authorized share repurchase program, subject to the limit in our credit facility. We retired the 837,007 shares repurchased under this program through December 31, 2023. 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 condensed consolidated statements of cash flows:
|
Nine Months Ended
December 31, |
||||||||
|
2023
|
2022
|
|||||||
|
Cash flows provided by (used in):
|
||||||||
|
Operating activities
|
$
|
48,445,000
|
$
|
(21,428,000
|
)
|
|||
|
Investing activities
|
(420,000
|
)
|
(3,855,000
|
)
|
||||
|
Financing activities
|
(47,646,000
|
)
|
14,898,000
|
|||||
|
Effect of exchange rates on cash and cash equivalents
|
180,000
|
(52,000
|
)
|
|||||
|
Net increase (decrease) in cash and cash equivalents
|
$
|
559,000
|
$
|
(10,437,000
|
)
|
|||
|
Additional Selected Cash flow data:
|
||||||||
|
Depreciation and amortization
|
$
|
8,844,000
|
$
|
9,322,000
|
||||
|
Capital expenditures
|
462,000
|
3,607,000
|
||||||
Net cash provided by operating activities was $48,445,000 during the nine months ended December 31, 2023 compared with net cash used in operations of $21,428,000 during the nine months ended December 31, 2022. The significant changes in our
operating activities reflect (i) the timing of supplier payments compared with the prior year, (ii) continued investments in inventory to support anticipated future demand for our products compared with inventory reduction initiatives in the prior
year, and (iii) increased collections of our accounts receivable balances resulting from higher sales during the current year. We continue to manage our working capital to maximize our operating cash flow.
Net cash used in investing activities was $420,000 and $3,855,000 during the nine months ended December 31, 2023 and 2022, respectively. The change in our investing activities primarily resulted from decreased capital expenditures.
Net cash used in financing activities was $47,646,000 during the nine months ended December 31, 2023 compared with net cash provided by financing activities of $14,898,000 during the nine months ended December 31, 2022. The change in our
financing activities primarily resulted from (i) the repayment of amounts outstanding under our credit facility of $43,325,000 and (ii) the payment of debt issuance costs incurred in connection with the amendments to our credit facility and
convertible notes during the nine months ended December 31, 2023.
Capital Resources
Credit Facility
We are party to a $268,620,000 senior secured financing (as amended from time to time, the “Credit Facility”) consisting of a $238,620,000 revolving loan facility (the “Revolving Facility”), subject to certain restrictions, and a $30,000,000
term loan facility (the “Term Loans”). Prior to the eighth amendment discussed below, the loans under the Credit Facility were scheduled to mature on May 28, 2026. The lenders have a security interest in substantially all of our assets.
On August 3, 2023, we entered into a seventh amendment to the Credit Facility, which among other things, (i) permitted us to repay our outstanding balance of Term Loans, (ii) permitted the exclusion of quarterly principal
payments of Term Loans from the fixed charge coverage ratio (including retrospectively for the prior periods) for all quarters beginning June 30, 2023, (iii) reset the fixed charge coverage ratio financial covenant level for the quarters ending
September 30, 2023 and December 31, 2023, (iv) eliminated the senior leverage ratio financial covenant effective with the quarter ended June 30, 2023, (v) extended the minimum undrawn availability financial covenant through the delivery of the June
30, 2024 compliance certificate, and (vi) excluded the amount of all amendment fees and expenses incurred in connection with this amendment as well as prior unamortized fees associated with the Term Loans from bank EBITDA and the fixed charge
coverage ratio financial covenant.
On August 3, 2023, we repaid the remaining outstanding balance of our Term Loans and recorded a loss on extinguishment of debt for the remaining unamortized debt issuance costs of $168,000 in the condensed consolidated statement of operations.
On December 12, 2023, we entered into an eighth amendment to the Credit Facility, which among other things, (i) extended the maturity date to December 12, 2028 from May
28, 2026, (ii) amended the definition of “Applicable Margin” to provide for a pricing grid, with the Applicable Margin for Term SOFR loans ranging from 2.75% to 3.25% and the Applicable Margin for base rate loans
ranging from 1.75% to 2.25%, in each case based on average daily undrawn availability for the most recently completed calendar quarter, (iii) amended the existing fixed charge coverage ratio financial covenant that is only tested if undrawn
availability (which may include up to $8,000,000 of suppressed availability) is less than 22.5% of the aggregate revolving commitments, and (iv) amended the definitions of Consolidated EBITDA and fixed charge coverage ratio and certain component
definitions used therein.
We had $115,000,000 and $145,200,000 outstanding under the Revolving Facility at December 31, 2023 and March 31, 2023, respectively. In addition, $6,370,000 was outstanding for letters of credit at December 31,
2023. At December 31, 2023, after certain contractual adjustments, $114,168,000 was available under the Revolving Facility. The interest rate on our Revolving Facility was 8.71% and 8.13% respectively, at December 31, 2023 and March 31,
2023, respectively.
The Credit Facility, as amended, requires us to maintain a minimum fixed charge coverage ratio if undrawn availability is less than 22.5% of the aggregate revolving commitments and a specified minimum undrawn
availability. At December 31, 2023, the undrawn availability was greater than the 22.5% threshold, therefore, the fixed charge coverage ratio financial covenant was not required to be tested. We were in compliance with these covenants as of
December 31, 2023.
Convertible Notes
On March 31, 2023, we entered into a note purchase agreement, as amended, (the “Note Purchase Agreement”) with Bison Capital Partners VI, L.P. and Bison Capital Partners VI-A, L.P. (collectively, the “Purchasers”) and
Bison Capital Partners VI, L.P., as the purchaser representative (the “Purchaser Representative”) for the issuance and sale of $32,000,000 in aggregate principal amount of convertible notes due in 2029 (the “Convertible Notes”), which was used for
general corporate purposes. The Convertible Notes bear interest at a rate of 10.0% per annum, compounded annually, and payable (i) in kind or (ii) in cash, annually in arrears on April 1 of each year, commencing on April 1, 2024. The Convertible
Notes have an initial conversion price of approximately $15.00 per share of common stock. (“Conversion Option”). Unless and until we deliver a redemption notice, the Purchasers of the Convertible Notes may convert their Convertible Notes at any
time at their option. Upon conversion, the Convertible Notes will be settled in shares of our common stock. Except in the case of the occurrence of a fundamental transaction, as defined in the form of convertible promissory note, we may not redeem
the Convertible Notes prior to March 31, 2026. After March 31, 2026, we may redeem all or part of the Convertible Notes for a cash purchase (the “Company Redemption”) price.
On June 8, 2023, we entered into the first amendment to the Note Purchase Agreement, which among other things, removed a provision that specified the Purchasers would be entitled to receive a dividend or distribution
payable in certain circumstances. This amendment was effective as of March 31, 2023.
On August 1, 2023, we entered into the second amendment to the Note Purchase Agreement, which amended the definition of “Permitted Restricted Payments” to permit the prepayment of our Term Loans.
In connection with the Note Purchase Agreement, we entered into common stock warrants (the “Warrants”) with the Purchasers, which mature on March 30, 2029. The fair value of the Warrants, using Level 3 inputs and the
Monte Carlo simulation model, was zero at December 31, 2023 and March 31, 2023.
The Company Redemption option has been combined with the Conversion Option as a compound net derivative liability (the “Compound Net Derivative Liability”). The Compound Net Derivative Liability has been recorded within
convertible note, related party in the condensed consolidated balance sheets at December 31, 2023 and March 31, 2023. The fair value of the Conversion Option and the Company Redemption option using Level 3 inputs and the Monte Carlo simulation
model was a liability of $13,500,000 and $10,400,000, and an asset of $3,380,000 and $1,970,000 at December 31, 2023 and March 31, 2023, respectively. During the three and nine months ended December 31, 2023, we recorded $1,160,000 and $1,690,000,
respectively, as the change in fair value of the Compound Net Derivative Liability in the condensed consolidated statement of operations and condensed consolidated statement of cash flows.
The Convertible Notes also contain additional features, such as, default interest and options related to a fundamental transaction, which were not separately accounted for as the value of such features were not material
at December 31, 2023 and March 31, 2023.
Accounts Receivable Discount Programs
We use accounts receivable discount programs offered by 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 allow 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 accounts receivable discount programs:
|
Nine Months Ended
December 31, |
||||||||
|
2023
|
2022
|
|||||||
|
Receivables discounted
|
$
|
465,073,000
|
$
|
428,868,000
|
||||
|
Weighted average number of days collection was accelerated
|
334
|
323
|
||||||
|
Annualized weighted average discount rate
|
6.8
|
%
|
5.0
|
%
|
||||
|
Amount of discount recognized as interest expense
|
$
|
29,395,000
|
$
|
19,131,000
|
||||
Capital Expenditures and Commitments
Capital Expenditures
Our total capital expenditures, including finance leases and non-cash capital expenditures were $559,000 and $3,632,000 for the nine months ended December 31, 2023 and 2022, respectively. These capital expenditures primarily include the purchase
of equipment for our operations. We expect to incur approximately $1,500,000 of capital expenditures during fiscal 2024 to support our operations. We have used and expect to continue using our working capital and additional capital lease
obligations to finance these capital expenditures.
Related Party Transactions
Lease
In December 2022, we entered into an operating lease for our 35,000 square foot manufacturing, warehouse, and office facility in Ontario, Canada, with a company co-owned by a member of management. The lease, which commenced January 1, 2023, had
an initial term of one year with a base rent of approximately $27,000 per month and included options to renew for up to four years. In November 2023, we exercised one of these options to renew for an additional one-year period. The rent expense
recorded for the related party lease was $81,000 and $243,000 for the three and nine months ended December 31, 2023.
Convertible Note and Election of Director
In connection with the issuance and sale of our Convertible Notes on March 31, 2023, the Board appointed Douglas Trussler, a co-founder of Bison Capital in 2001, to the Board. Mr. Trussler’s compensation will be consistent with our previously
disclosed standard compensation practices for non-employee directors, which are described in our Definitive Proxy Statement, filed with the SEC on July 28, 2023.
Litigation
We are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business,
and our compliance with law, code, and regulations related to all matters including but not limited to environmental, information security, taxes, levies, tariffs and such.
Critical Accounting Policies
There have been no material changes to, except as noted below, our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2023, which was filed on June 14, 2023.
Recently Adopted Accounting Pronouncements
Supplier Finance Programs
In September 2022, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50) Disclosure of Supplier
Finance Program Obligations. This standard requires qualitative and quantitative disclosures sufficient to enable users of the financial statements to understand the nature, activity during the period, changes from period to period and
potential magnitude of supplier finance programs. The guidance is effective for fiscal years beginning after December 15, 2022.
During the three months ended December 31, 2023, we launched a supplier finance program as part of our ongoing efforts to improve cash flow and liquidity. This program allows certain of our suppliers to sell their receivables due from us to a
participating financial institution at the sole discretion of both the supplier and the financial institution. The program is administered by a third party. We have no economic interest in the sale of these receivables and no direct relationship
with the financial institution. Payments to the third-party administrator are based on services rendered and are not on related to the volume or number of financing agreements between suppliers, financial institution, and the third-party
administrator. We are not a party to agreements negotiated between participating suppliers and the financial institution. Our obligations to our suppliers, including amounts due and payment terms, are not affected by a supplier's decision to
participate in this program. We do not provide guarantees and there are no assets pledged to the financial institution or the third-party administrator for the committed payment in connection with this program. Any amounts confirmed as outstanding
supplier invoices are included within accounts payable on the condensed consolidated balance sheets. As of December 31, 2023, we had no outstanding supplier obligations confirmed under this program.
Accounting Pronouncements Not Yet Adopted
Disclosure Improvements
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This standard was issued in
response to the SEC’s disclosure update and simplification initiative, which affects a variety of topics within the Accounting Standards Codification. The amendments apply to all reporting entities within the scope of the affected Topics unless
otherwise indicated. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. We are currently evaluating
the impact this guidance will have on our financial statement disclosures.
Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This standard requires us to disclose significant segment expenses that are regularly provided
to the CODM and are included within each reported measure of segment operating results. The standard also requires us to disclose the total amount of any other items included in segment operating results, which were not deemed to be significant
expenses for separate disclosure, along with a qualitative description of the composition of these other items. In addition, the standard also requires disclosure of the CODM’s title and position, as well as detail on how the CODM uses the reported
measure of segment operating results to evaluate segment performance and allocate resources. The standard also aligns interim segment reporting disclosure requirements with annual segment reporting disclosure requirements. This guidance is
effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial
statement disclosures.
Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740). This standard requires us to provide further disaggregated income tax disclosures for specific
categories on the effective tax rate reconciliation, as well as additional information about federal, state/local and foreign income taxes. The standard also requires us to annually disclose our income taxes paid (net of refunds received),
disaggregated by jurisdiction. This guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The standard is to be applied prospective basis, although optional retrospective application is permitted.
We are currently evaluating the impact this guidance will have on our financial statement disclosures.
| 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, 2023, which was filed with the SEC on
June 14, 2023.
| 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, 2023.
Inherent Limitations on Effectiveness of 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 have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that occurred during the three months ended
December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
| Item 1. |
Legal Proceedings
|
We are subject to various lawsuits and claims. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business,
and our compliance with law, code, and regulations related to all matters including but not limited to environmental, information security, taxes, levies, tariffs and such.
| 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, 2023, filed on June 14, 2023.
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds
|
Limitation on Payment of Dividends and Share Repurchases
The Credit Facility currently permits the payment of up to $30,000,000 of dividends and share repurchases for fiscal year 2024, subject to pro forma compliance with amended financial covenants.
Purchases of Equity Securities by the Issuer
Shares repurchased during the three months ended December 31, 2023 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, 2023:
|
||||||||||||||||
|
Open market and privately negotiated purchases
|
-
|
$
|
-
|
-
|
$
|
18,255,000
|
||||||||||
|
November 1 - November 30, 2023:
|
||||||||||||||||
|
Open market and privately negotiated purchases
|
-
|
$
|
-
|
-
|
18,255,000
|
|||||||||||
|
December 1 - December 31, 2023:
|
||||||||||||||||
|
Open market and privately negotiated purchases
|
-
|
$
|
-
|
-
|
18,255,000
|
|||||||||||
|
Total
|
0
|
0
|
$
|
18,255,000
|
||||||||||||
| (1) |
As of December 31, 2023, $18,745,000 had been utilized and $18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 837,007 shares
repurchased under this program through December 31, 2023. 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 3. |
Defaults Upon Senior Securities
|
None.
| (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.
|
|||
|
3.3
|
Amendment to Certificate of Incorporation of the Company
|
||||
|
3.4
|
Amendment to Certificate of Incorporation of the Company
|
||||
|
3.5
|
Amendment to Certificate of Incorporation of the Company
|
||||
|
3.6
|
Amended and Restated By-Laws of Motorcar Parts of America, Inc.
|
||||
|
3.7
|
Certificate of Amendment of the Certificate of Incorporation of the Company
|
||||
|
3.8
|
Amendment to the Amended and Restated By-Laws of Motorcar Parts of America, Inc., as adopted on June 9, 2016
|
||||
|
3.9
|
Amendment to the Amended and Restated By-Laws of the Company
|
||||
|
3.10
|
Third Amendment to the Amended and Restated By-Laws of Motorcar Parts of America, Inc., as adopted on January 26, 2022
|
||||
|
4.1
|
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
|
||||
|
4.2
|
2004 Non-Employee Director Stock Option Plan
|
||||
|
4.3
|
2010 Incentive Award Plan
|
||||
|
4.4
|
Amended and Restated 2010 Incentive Award Plan
|
||||
|
Number
|
Description of Exhibit
|
Method of Filing
|
|||
|
4.5
|
Second Amended and Restated 2010 Incentive Award Plan
|
||||
|
4.6
|
2014 Non-Employee Director Incentive Award Plan
|
||||
|
4.7
|
Third Amended and Restated 2010 Incentive Award Plan
|
||||
|
4.8
|
Fourth Amended and Restated 2010 Incentive Award Plan
|
||||
|
4.9
|
2022 Incentive Award Plan
|
||||
|
4.10
|
Form of Convertible Promissory Note
|
||||
|
4.11
|
Form of Common Stock Warrant
|
||||
|
4.12
|
First Amended and Restated Convertible Promissory Note
|
||||
|
4.13
|
First Amended and Restated Common Stock Warrant
|
||||
|
10.1
|
Seventh Amendment to Amended and Restated Loan Agreement, dated as of August 3, 2023, among Motorcar Parts of America, Inc., D & V Electronics Ltd., Dixie Electric Ltd., and Dixie Electric Inc., each lender from time to time party
thereto, and PNC Bank, National Association, as administrative agent
|
||||
| 10.2 |
Second Amendment to the Note Purchase Agreement
|
||||
|
10.3
|
Eighth Amendment to Amended and Restated Loan Agreement, dated as of December 12, 2023, among Motorcar Parts of America, Inc., D & V Electronics Ltd., Dixie Electric Ltd., and Dixie Electric Inc., each lender from time to time party
thereto, and PNC Bank, National Association, as administrative agent
|
||||
|
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.
|
||||
|
Number
|
Description of Exhibit
|
Method of Filing
|
|||
|
101.INS
|
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document).
|
||||
|
101.SCM
|
Inline XBRL Taxonomy Extension Schema Document
|
||||
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document
|
||||
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Linkbase Document
|
||||
|
101.LAB
|
Inline XBRL Taxonomy Extension Label Linkbase Document
|
||||
|
101.PRE
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document
|
||||
|
104
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
|
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 9, 2024
|
By:
|
/s/ David Lee
|
|
David Lee
|
||
|
Chief Financial Officer
|
||
|
Dated: February 9, 2024
|
By:
|
/s/ Kamlesh Shah
|
|
Kamlesh Shah
|
||
|
Chief Accounting Officer
|
||
44
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; 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 9, 2024
|
/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.
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Date: February 9, 2024
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/s/ David Lee
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David Lee
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Chief Financial Officer
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Exhibit 31.3
CERTIFICATIONS
I, Kamlesh Shah, 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.
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Date: February 9, 2024
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/s/ Kamlesh Shah
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Kamlesh Shah
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Chief Accounting Officer
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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, 2023 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:
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The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
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| 2. |
The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Selwyn Joffe
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Selwyn Joffe
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Chief Executive Officer
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February 9, 2024
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In connection with the Quarterly Report of Motorcar Parts of America, Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2023 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
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| 2. |
The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ David Lee
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David Lee
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Chief Financial Officer
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February 9, 2024
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In connection with the Quarterly Report of Motorcar Parts of America, Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), I,
Kamlesh Shah, 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
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| 2. |
The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Kamlesh Shah
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Kamlesh Shah
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Chief Accounting Officer
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February 9, 2024
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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.