10-Q 1 brhc20056962_10q.htm 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023

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

FOR THE TRANSITION PERIOD FROM       TO

Commission File No. 001-33861

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
MPAA
The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

There were 19,595,355 shares of Common Stock outstanding at August 2, 2023.

MOTORCAR PARTS OF AMERICA, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
 
 
4
 
4
 
5
 
6
 
7
 
8
 
9
 
24
 
30
 
31
     
PART II — OTHER INFORMATION
 
 
32
 
32
 
32
 
32
 
32
 
 33
 
36

2
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.

3
PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements

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

 
June 30, 2023
    
March 31, 2023
  
ASSETS
  
(Unaudited)
        
Current assets:
            
Cash and cash equivalents
  
$
10,887,000
    
$
11,596,000
  
Short-term investments
    
2,159,000
      
2,011,000
  
Accounts receivable — net
    
146,645,000
      
119,868,000
  
Inventory
    
364,187,000
      
356,254,000
  
Contract assets
    
27,732,000
      
25,443,000
  
Prepaid expenses and other current assets
    
20,566,000
      
22,306,000
  
Total current assets
    
572,176,000
      
537,478,000
  
Plant and equipment — net
    
44,244,000
      
46,052,000
  
Operating lease assets
    
88,760,000
      
87,619,000
  
Long-term deferred income taxes
    
32,417,000
      
32,625,000
  
Long-term contract assets
    
314,463,000
      
318,381,000
  
Goodwill and intangible assets — net
    
5,046,000
      
5,348,000
  
Other assets
    
1,081,000
      
1,062,000
  
TOTAL ASSETS
  
$
1,058,187,000
    
$
1,028,565,000
  
LIABILITIES AND SHAREHOLDERS’  EQUITY
                
Current liabilities:
                
Accounts payable and accrued liabilities
  
$
142,965,000
    
$
141,766,000
  
Customer finished goods returns accrual
    
33,378,000
      
37,984,000
  
Contract liabilities
    
49,003,000
      
40,340,000
  
Revolving loan
    
167,000,000
      
145,200,000
  
Other current liabilities
    
5,170,000
      
4,871,000
  
Operating lease liabilities
    
8,914,000
      
8,767,000
  
Current portion of term loan
    
12,020,000
      
3,664,000
  
Total current liabilities
    
418,450,000
      
382,592,000
  
Term loan, less current portion
    
-
      
9,279,000
  
Convertible notes, related party
     31,252,000
       30,994,000  
Long-term contract liabilities
    
194,708,000
      
193,606,000
  
Long-term deferred income taxes
    
1,985,000
      
718,000
  
Long-term operating lease liabilities
    
77,013,000
      
79,318,000
  
Other liabilities
    
11,340,000
      
11,583,000
  
Total liabilities
    
734,748,000
      
708,090,000
  
Commitments and contingencies
    
     
 
Shareholders’ equity:
                
Preferred stock; par value $0.01 per share, 5,000,000 shares authorized; none issued
    
-
      
-
  
Series A junior participating preferred stock; par value $0.01 per share, 20,000 shares authorized; none issued
    
-
      
-
  
Common stock; par value $0.01 per share, 50,000,000 shares authorized; 19,599,145 and 19,494,615 shares issued and outstanding at June 30, 2023 and March 31, 2023, respectively
    
196,000
      
195,000
  
Additional paid-in capital
    
232,866,000
      
231,836,000
  
Retained earnings
    
87,337,000
      
88,747,000
  
Accumulated other comprehensive income (loss)
    
3,040,000
      
(303,000
)
Total shareholders’ equity
    
323,439,000
      
320,475,000
  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  
$
1,058,187,000
    
$
1,028,565,000
  

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

4
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended
  
 
June 30,
  
   
2023
    
2022
  
             
Net sales
  
$
159,705,000
    
$
163,985,000
  
Cost of goods sold
    
133,138,000
      
133,683,000
  
Gross profit
    
26,567,000
      
30,302,000
  
Operating expenses:
                
General and administrative
    
12,602,000
      
13,634,000
  
Sales and marketing
    
5,419,000
      
5,542,000
  
Research and development
    
2,375,000
      
3,113,000
  
Foreign exchange impact of lease liabilities and forward contracts
    
(4,270,000
)
    
678,000
  
Total operating expenses
    
16,126,000
      
22,967,000
  
Operating income
    
10,441,000
      
7,335,000
  
Other expenses:
                
Interest expense, net
    
11,720,000
      
6,921,000
  
Change in fair value of compound net derivative liability
     140,000       -  
Total other expenses
     11,860,000       6,921,000  
(Loss) income before income tax (benefit) expense    
(1,419,000
)
    
414,000
  
Income tax (benefit) expense    
(9,000
)
    
589,000
  
Net loss  
$
(1,410,000
)
  
$
(175,000
)
Basic net loss per share
  
$
(0.07
)
  
$
(0.01
)
Diluted net loss per share
  
$
(0.07
)
  
$
(0.01
)
Weighted average number of shares outstanding:
                
Basic
    
19,508,626
      
19,123,354
  
Diluted
    
19,508,626
      
19,123,354
  

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

5

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

   
Three Months Ended
  
 
June 30,
  
   
2023
    
2022
  
             
Net loss
  
$
(1,410,000
)
  
$
(175,000
)
Other comprehensive income (loss), net of tax:
                
Foreign currency translation gain (loss)
    
3,343,000
      
(868,000
)
Total other comprehensive income (loss), net of tax
    
3,343,000
      
(868,000
)
Comprehensive income (loss)
  
$
1,933,000
    
$
(1,043,000
)

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

6

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)

 
Common Stock
                          
   
Shares
    
Amount
    
Additional
Paid-in
Capital
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Total
  
                                     
Balance at March 31, 2023
    
19,494,615
    
$
195,000
    
$
231,836,000
    
$
88,747,000
    
$
(303,000
)
  
$
320,475,000
  
Compensation recognized under employee stock plans
    
-
      
-
      
1,310,000
      
-
      
-
      
1,310,000
  
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
    
104,530
      
1,000
      
(280,000
)
    
-
      
-
      
(279,000
)
Foreign currency translation
    
-
      
-
      
-
      
-
      
3,343,000
      
3,343,000
  
Net loss
    
-
      
-
      
-
      
(1,410,000
)
    
-
      
(1,410,000
)
Balance at June 30, 2023
    
19,599,145
    
$
196,000
    
$
232,866,000
    
$
87,337,000
    
$
3,040,000
    
$
323,439,000
  

 
Common Stock
                          
   
Shares
    
Amount
    
Additional
Paid-in
Capital
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
 Income (Loss)
   
Total
  
                                     
Balance at March 31,2022
    
19,104,751
    
$
191,000
    
$
227,184,000
    
$
92,954,000
    
$
(5,066,000
)
  
$
315,263,000
  
Compensation recognized under employee stock plans
    
-
      
-
      
1,249,000
      
-
      
-
      
1,249,000
  
Exercise of stock options, net of shares withheld for employee taxes
    
25,543
      
-
      
191,000
      
-
      
-
      
191,000
  
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes
    
84,684
      
1,000
      
(895,000
)
    
-
      
-
      
(894,000
)
Foreign currency translation
    
-
      
-
      
-
      
-
      
(868,000
)
    
(868,000
)
Net loss
    
-
      
-
      
-
      
(175,000
)
    
-
      
(175,000
)
Balance at June 30, 2022
    
19,214,978
    
$
192,000
    
$
227,729,000
    
$
92,779,000
    
$
(5,934,000
)
  
$
314,766,000
  

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

7

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

    Three Months Ended  

 
June 30,
  
   
2023
    
2022
  
Cash flows from operating activities:
            
Net loss
 
$
(1,410,000
)
  
$
(175,000
)
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation and amortization
    
3,033,000
      
3,124,000
  
Amortization of interest
    
713,000
      
306,000
  
Accrued interest on convertible notes, related party
     800,000       -  
Amortization of core premiums paid to customers
    
2,490,000
      
2,863,000
  
Amortization of finished goods premiums paid to customers
    
167,000
      
181,000
  
Noncash lease expense
    
2,504,000
      
1,939,000
  
Foreign exchange impact of lease liabilities and forward contracts
    
(4,270,000
)
    
678,000
  
Change in fair value of compound net derivative liability
     140,000       -  
(Gain) loss on short-term investments
    
(121,000
)
    
294,000
  
Net provision for inventory reserves
    
3,366,000
      
3,942,000
  
Net provision for customer payment discrepancies and credit losses
    
1,159,000
      
300,000
  
Deferred income taxes
    
1,595,000
      
(62,000
)
Share-based compensation expense
    
1,310,000
      
1,249,000
  
Loss on disposal of plant and equipment
    
1,000
      
9,000
  
Changes in operating assets and liabilities:
                
Accounts receivable
    
(27,518,000
)
    
11,427,000
  
Inventory
    
(10,782,000
)
    
(24,252,000
)
Prepaid expenses and other current assets
    
2,391,000
      
1,122,000
  
Other assets
    
16,000
      
6,000
  
Accounts payable and accrued liabilities
    
927,000
      
5,898,000
  
Customer finished goods returns accrual
    
(4,679,000
)
    
(9,289,000
)
Contract assets
    
(792,000
)
    
(37,000
)
Contract liabilities
    
9,320,000
      
1,384,000
  
Operating lease liabilities
    
(1,863,000
)
    
(1,446,000
)
Other liabilities
    
1,033,000
      
(443,000
)
Net cash used in operating activities
    
(20,470,000
)
    
(982,000
)
Cash flows from investing activities:
                
Purchase of plant and equipment
    
(40,000
)
    
(1,375,000
)
Purchase of short-term investments
    
(27,000
)
    
(86,000
)
Net cash used in investing activities
    
(67,000
)
    
(1,461,000
)
Cash flows from financing activities:
                
Borrowings under revolving loan
    
26,000,000
      
13,000,000
  
Repayments of revolving loan
    
(4,200,000
)
    
(22,000,000
)
Repayments of term loan
    
(938,000
)
    
(938,000
)
Payments for debt issuance costs
    
(418,000
)
    
(21,000
)
Payments on finance lease obligations
    
(492,000
)
    
(604,000
)
Exercise of stock options, net of cash used to pay employee taxes
    
-
      
191,000
  
Cash used to net share settle equity awards
    
(279,000
)
    
(894,000
)
Net cash provided by (used in) financing activities
    
19,673,000
      
(11,266,000
)
Effect of exchange rate changes on cash and cash equivalents
    
155,000
      
(90,000
)
Net decrease in cash and cash equivalents
    
(709,000
)
    
(13,799,000
)
Cash and cash equivalents — Beginning of period
    
11,596,000
      
23,016,000
  
Cash and cash equivalents  — End of period
  
$
10,887,000
    
$
9,217,000
  
Supplemental disclosures of cash flow information:
                
Cash paid for interest, net
  
$
10,120,000
    
$
6,548,000
  
Cash paid for income taxes, net of refunds
    
645,000
      
712,000
  
Cash paid for operating leases
    
3,081,000
      
2,647,000
  
Cash paid for finance leases
    
554,000
      
672,000
  
Plant and equipment acquired under finance leases
    
31,000
      
75,000
  
Assets acquired under operating leases
    
-
      
144,000
  
Non-cash capital expenditures
    
-
      
401,000
  
Debt issuance costs included in accounts payable and accrued liabilities
     187,000       -  

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

8
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 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 systems 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

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 months ended June 30, 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 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.

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 receivable discount programs with certain customers and their respective banks (see Note 10).

Accounts receivable — net is comprised of the following:

 
  
June 30, 2023
    
March 31, 2023
  
Accounts receivable — trade
  
$
165,486,000
    
$
136,076,000
  
Allowance for credit losses
    
(303,000
)
    
(339,000
)
Customer payment discrepancies
    
(2,076,000
)
    
(1,634,000
)
Customer returns RGA issued
    
(16,462,000
)
    
(14,235,000
)
Total accounts receivable — net
  
$
146,645,000
    
$
119,868,000
  
9
4. Inventory

Inventory is comprised of the following:

 
  
June 30, 2023
    
March 31, 2023
  
Inventory
            
Raw materials
  
$
149,545,000
    
$
147,880,000
  
Work-in-process
    
10,097,000
      
7,033,000
  
Finished goods
    
202,874,000
      
201,198,000
  
 
    
362,516,000
      
356,111,000
  
Less allowance for excess and obsolete inventory
    
(16,412,000
)
    
(16,436,000
)
Inventory — net
    
346,104,000
      
339,675,000
  
Inventory unreturned
    
18,083,000
      
16,579,000
  
Total inventory
  
$
364,187,000
    
$
356,254,000
  

5. Contract Assets

During the three months ended June 30, 2023 and 2022, the Company reduced the carrying value of Remanufactured Cores held at customers’ locations by $778,000 and $572,000, respectively.

Contract assets are comprised of the following:

 
  
June 30, 2023
    
March 31, 2023
  
Short-term contract assets
            
Cores expected to be returned by customers
  
$
15,915,000
    
$
13,463,000
  
Core premiums paid to customers     9,775,000       9,812,000  
Upfront payments to customers
    
1,458,000
      
1,593,000
  
Finished goods premiums paid to customers
    
584,000
      
575,000
  
Total short-term contract assets
  
$
27,732,000
    
$
25,443,000
  
                 
Remanufactured cores held at customers’ locations
  
$
268,906,000
    
$
271,628,000
  
Core premiums paid to customers     36,401,000       38,310,000  
Long-term core inventory deposits     5,569,000       5,569,000  
Finished goods premiums paid to customers     2,651,000       2,530,000  
Upfront payments to customers
    
936,000
      
344,000
  
 Total long-term contract assets
  
$
314,463,000
    
$
318,381,000
  

10
6. Significant Customer and Other Information

Significant Customer Concentrations

The largest customers accounted for the following percentage of consolidated net sales:

   
Three Months Ended
  
 
  
June 30,
  
 
  
2023
    
2022
  
Net sales
            
Customer A
    
34
%
    
37
%
Customer C
   
28
%
    
20
%
Customer B
   
20
%
    
25
%
Customer D
    5 %     4 %

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:

 
  
June 30, 2023
    
March 31, 2023
  
Accounts receivable - trade
            
Customer A
    
34
%
    
33
%
Customer C
   
30
%
    
21
%
Customer B
   
15
%
    
18
%
Customer D     8 %     12 %

Geographic and Product Information

The Company’s products are sold predominantly in North America and accounted for the following percentages of net sales:

   
Three Months Ended
  
 
  
June 30,
  
 
  
2023
    
2022
  
Product line
            
Rotating electrical products
    
64
%
    
67
%
Brake-related products
    
22
%
    
17
%
Wheel hub products
    
11
%
    
12
%
Other products
    
3
%
    
4
%
 
   
100
%
    
100
%

Significant Supplier Concentrations

The Company had no suppliers that accounted for more than 10% of inventory purchases for the three months ended June 30, 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”). The loans under the Credit Facility mature on May 28, 2026 and the lenders have a security interest in substantially all of the assets of the Company. The interest rate on the Company’s Term Loans and Revolving Facility was 8.52% and 8.46% respectively, at June 30, 2023, and 8.02% and 8.13% respectively, at March 31, 2023.

On August 3, 2023, the Company entered into a seventh amendment to the Credit Facility, which among other things, (i) permits the Company to repay its outstanding balance of Term Loans, (ii) permits 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) resets the fixed charge coverage ratio financial covenant level for the quarters ending September 30, 2023 and December 31, 2023, (iv) eliminates the senior leverage ratio financial covenant effective with the quarter ended June 30, 2023, (v) extends the minimum undrawn availability financial covenant through the delivery of the June 30, 2024 compliance certificate, and (vi) excludes 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. The modifications to the financial covenants were effective as of June 30, 2023.



The Credit Facility, among other things, requires the Company to maintain certain financial covenants, including a maximum senior leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all amended financial covenants as of June 30, 2023.

The following summarizes information about the Term Loans:

 
  
June 30, 2023
    
March 31, 2023
  
Principal amount of Term Loans
  
$
12,187,000
    
$
13,125,000
  
Unamortized financing fees
    
(167,000
)
    
(182,000
)
Net carrying amount of Term Loans
    
12,020,000
      
12,943,000
  
Less current portion of Term Loans
    
(12,020,000
)
    
(3,664,000
)
Long-term portion of Term Loans
  
$
-
    
$
9,279,000
  


On August 3, 2023, the Company repaid the outstanding balance of its Term Loans and wrote-off the remaining unamortized financing fees recorded in connection with the Term Loans.



The Company had $167,000,000 and $145,200,000 outstanding under the Revolving Facility at June 30, 2023 and March 31, 2023, respectively. In addition, $6,370,000 was outstanding for letters of credit at June 30, 2023. At June 30, 2023, after certain contractual adjustments, $65,250,000 was available under the Revolving Facility.


Convertible Notes


On March 31, 2023, the Company entered into a note purchase agreement, (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.


12

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:



   
June 30, 2023
    
March 31, 2023
 
             
Principal amount of Convertible Notes
  
$
32,000,000
    
$
32,000,000
  
Less: unamortized debt discount attributed to Compound Net Derivative Liability
    
(8,229,000
)
    
(8,430,000
)
Less: unamortized debt discount attributed to debt issuance costs
    
(1,089,000
)
    
(1,006,000
)
Carrying amount of the Convertible Notes
    
22,682,000
      
22,564,000
  
Plus: Compound Net Derivative Liability
    
8,570,000
      
8,430,000
  
Net carrying amount of Convertible Notes, related party
  
$
31,252,000
    
$
30,994,000
  



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 at June 30, 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 June 30, 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 $10,800,000 and $10,400,000, and an asset of $2,230,000 and $1,970,000 at June 30, 2023 and March 31, 2023, respectively. During the three months ended June 30, 2023, the Company recorded $140,000 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 June 30, 2023 and March 31, 2023.



Interest expense related to the Convertible Notes is as follows:


   
Three Months Ended
  
   
June 30,
  
   
2023
  
       
Contractual interest expense
  
$
800,000
  
Accretion of debt discount
    
201,000
  
Amortization of issuance costs
    
27,000
  
Total interest expense
  
$
1,028,000
  



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.

13
8. Contract Liabilities

Contract liabilities are comprised of the following:

 
  
June 30, 2023
    
March 31, 2023
  
Short-term contract liabilities
  
   

Customer allowances earned
  
$
23,518,000
    
$
19,997,000
  
Customer core returns accruals
    
16,259,000
      
11,112,000
  
Accrued core payment
    
3,141,000
      
3,056,000
  
Customer deposits
    
3,037,000
      
3,232,000
  
Core bank liability
    
1,699,000
      
1,686,000
  
Finished goods liabilities
   
1,349,000
      
1,257,000
  
      Total short-term contract liabilities
  
$
49,003,000
    
$
40,340,000
  
Long-term contract liabilities
                
Customer core returns accruals
  
$
171,982,000
    
$
170,420,000
  
Core bank liability
    
13,152,000
      
13,582,000
  
Accrued core payment
    
9,213,000
      
9,171,000
  
Finished goods liabilities
    
361,000
      
433,000
  
      Total long-term contract liabilities
  
$
194,708,000
    
$
193,606,000
  

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 a gain of $3,770,000 and $20,000 during the three months ended June 30, 2023 and 2022, respectively. These amounts are included in foreign exchange impact of lease liabilities and forward contracts in the condensed consolidated statements of operations.

Balance sheet information for leases is as follows:

Leases
  
Classification
  
June 30, 2023
    
March 31, 2023
  
Assets:
  
 
            
Operating
  
Operating lease assets
  
$
88,760,000
    
$
87,619,000
  
Finance
  
Plant and equipment
    
5,001,000
      
5,549,000
  
Total leased assets
  
 
  
$
93,761,000
    
$
93,168,000
  
 
  
 
                
Liabilities:
  
 
                
Current
  
 
                
Operating
  
Operating lease liabilities
  
$
8,914,000
    
$
8,767,000
  
Finance
  
Other current liabilities
    
1,802,000
      
1,851,000
  
Long-term
  
 
                
Operating
  
Long-term operating lease liabilities
    
77,013,000
      
79,318,000
  
Finance
  
Other liabilities
    
2,333,000
      
2,742,000
  
Total lease liabilities
  
 
  
$
90,062,000
    
$
92,678,000
  

14
Lease cost recognized in the condensed consolidated statements of operations is as follows:

   
Three Months Ended
  
 
  
June 30,
  
 
  
2023
    
2022
  
Lease cost
            
Operating lease cost
  
$
3,742,000
    
$
3,165,000
  
Short-term lease cost
    
293,000
      
454,000
  
Variable lease cost
    
186,000
      
185,000
  
Finance lease cost:
                
Amortization of finance lease assets
    
403,000
      
539,000
  
Interest on finance lease liabilities
    
62,000
      
68,000
  
Total lease cost
  
$
4,686,000
    
$
4,411,000
  

Maturities of lease commitments at June 30, 2023 by fiscal year were as follows:

Maturity of lease liabilities
  
Operating Leases
    
Finance Leases
    
Total
  
2024 - remaining nine months
  
$
10,383,000
    
$
1,521,000
    
$
11,904,000
  
2025
    
12,352,000
      
1,576,000
      
13,928,000
  
2026
    
12,042,000
      
844,000
      
12,886,000
  
2027
    
10,822,000
      
353,000
      
11,175,000
  
2028
    
10,725,000
      
194,000
      
10,919,000
  
Thereafter
    
53,929,000
      
2,000
      
53,931,000
  
Total lease payments
    
110,253,000
      
4,490,000
      
114,743,000
  
Less amount representing interest
    
(24,326,000
)
    
(355,000
)
    
(24,681,000
)
Present value of lease liabilities
  
$
85,927,000
    
$
4,135,000
    
$
90,062,000
  

Other information about leases is as follows:

 
  
June 30, 2023
    
March 31, 2023
  
Lease term and discount rate
            
Weighted-average remaining lease term (years):
            
Finance leases
    
2.7
      
2.9
  
Operating leases
    
8.9
      
9.0
  
Weighted-average discount rate:
                
Finance leases
    
5.9
%
    
5.9
%
Operating leases
    
5.8
%
    
5.8
%

10. Accounts Receivable Discount Programs

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

15
The following is a summary of accounts receivable discount programs:

   
Three Months Ended
  
 
  
June 30,
  
 
  
2023
    
2022
  
Receivables discounted
  
$
104,332,000
    
$
142,624,000
  
Weighted average number of days collection was accelerated
    
337
      
327
  
Annualized weighted average discount rate
    
6.4
%
    
3.7
%
Amount of discount recognized as interest expense
  
$
6,252,000
    
$
4,874,000
  

11. Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss 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 per share:

   
Three Months Ended
  
 
  
June 30,
  
 
  
2023
    
2022
  
Net loss
  
$
(1,410,000
)
  
$
(175,000
)
Basic shares
    
19,508,626
      
19,123,354
  
Effect of potentially dilutive securities
    
-
      
-
  
Diluted shares
    
19,508,626
      
19,123,354
  
Net loss per share:
                
Basic net loss per share
  
$
(0.07
)
  
$
(0.01
)
Diluted net loss per share
  
$
(0.07
)
  
$
(0.01
)


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 per share. For the three months ended June 30, 2023 and 2022, there were 2,067,168 and 2,301,901, respectively, of potential common shares not included in the calculation of diluted net loss per share because their effect was anti-dilutive. In addition, for the three months ended June 30, 2023, there were 2,186,667 of potential common shares not included in the calculation of diluted loss per share under the “if-converted” method for the Convertible Notes because their effect was anti-dilutive. The potential common shares related to the Warrants issued in connection with the Convertible Notes (see Note 7) are anti-dilutive until they become exercisable and as of June 30, 2023, the Warrants were not exercisable.

12. Income Taxes

The Company recorded an income tax benefit of $9,000, or an effective tax rate of 0.6%, and income tax expense of $589,000, or an effective tax rate of 142.3%, for the three months ended June 30, 2023 and 2022, respectively. Effective tax rates are based on current annual projections and any changes in future periods could result in an effective tax rate that is materially different from the current estimate. The effective tax rate for the three months ended June 30, 2023, was primarily impacted by (i) foreign income taxed at rates that are different from the federal statutory rate, (ii) non-deductible executive compensation under Internal Revenue Code Section 162(m), and (iii) specific jurisdictions that the Company does not expect to recognize the benefit of losses.

The Company and its subsidiaries file income tax returns in the U.S. federal, various state, and foreign jurisdictions with varying statutes of limitations. At June 30, 2023, the Company is not under any examination in any material jurisdiction, and remains subject to examination from the years ended March 31, 2018. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

16
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 $50,125,000 and $48,486,000 at June 30, 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
  
  Derivatives Not Designated as
  
June 30,
  
Hedging Instruments
  
2023
    
2022
  
Forward foreign currency exchange contracts
  
$
500,000
 
$
(698,000
)

The fair value of the forward foreign currency exchange contracts of $4,389,000 and $3,889,000 is included in prepaid expenses and other current assets in the condensed consolidated balance sheets at June 30, 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 three months ended June 30, 2023 and 2022.

17
14. Fair Value Measurements

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

   
June 30, 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
  
$
2,159,000
    
$
2,159,000
    
$