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

Form 10-K/A
(Amendment No. 1)10-K

☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2016

For the fiscal year ended March 31, 2018

OR

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________to_____________     

For the transition period from__________to__________         

Commission File No. 001-33861

MOTORCAR PARTS OF AMERICA, INC.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: common stock, $0.01 par value per share (registered on the NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes  ☑No ☐

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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

Large accelerated filer ☐
Accelerated filer ☑
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Smaller reporting company ☐
  (Do not check if a 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 ☑

As of September 30, 2015,2017, which was the last business day of the registrant’s most recently completed fiscal second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $566,792,048$553,613,587 based on the closing sale price as reported on the NASDAQ Global Market.

There were 18,630,44418,893,102 shares of common stock outstanding as of July 20, 2016.June 7, 2018.

DOCUMENTS INCORPORATED BY REFERENCE:

In accordance with General Instruction G (3) of Form 10-K, the information required by Part III hereof will either be incorporated into this Form 10-K by reference to the registrant’s Definitive Proxy Statement for the registrant’s next Annual Meeting of Stockholders filed within 120 days of March 31, 2018 or will be included in an amendment to this Form 10-K filed within 120 days of March 31, 2018.
 
TABLE OF CONTENTS

EXPLANATORY NOTE
3PART I
 
Item 1. Business
5
Item 1A. Risk Factors
10
Item 1B. Unresolved Staff Comments
16
Item 2. Properties
16
Item 3. Legal Proceedings
16
Item 4. Mine Safety Disclosures
16
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
17
Item 6. Selected Financial Data
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
41
Item 8. Financial Statements and Supplementary Data
41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
41
Item 9A. Controls and Procedures
41
Item 9B. Other Information
43
 
PART III
 
Item 10. Directors, Executive Officers and Corporate Governance
444
Item 11. Executive Compensation
944
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
3544
Item 13. Certain Relationships and Related Transactions, and Director Independence
3744
Item 14. Principal AccountingAccountant Fees and Services
3744
 
PART IV
 
Item 15. Exhibits, Financial Statement Schedules
3845
Item 16. Form 10-K Summary
51
SIGNATURES
3952
 
Table of Contents
EXPLANATORY NOTEMOTORCAR PARTS OF AMERICA, INC.

This Amendment No. 1 on Form 10-K (this “Amendment”GLOSSARY

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

“Used Core” — An automobile part which has been used in the operation of a vehicle. Generally, the Used Core is an original equipment (“OE”) amendsautomobile 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 Annual Report on Form 10-Kcustomers for Used Cores returned to us under our core exchange program. Our customers receive these Used Cores from consumers who deliver a Used Core to obtain credit from our customers upon the fiscal year ended March 31, 2016, that was previously filed withpurchase of a newly remanufactured automobile part. When sufficient Used Cores cannot be obtained from our customers, we will purchase Used Cores from core brokers, who are in the Securitiesbusiness of buying and Exchange Commission (the “SEC”) on June 14, 2016 (the “Original Filing”). Weselling Used Cores. The Used Cores purchased from core brokers or returned to us by our customers under the core exchange program, and which have been physically received by us, are filing the Amendment to include the information required by Part IIIpart of Form 10-K and notour raw material or work in process inventory included in the Original Filing, as we will be filing our definitive proxy statement later than 120 days after the end of our fiscal year ended March 31, 2016 (“Fiscal 2016”).long-term core inventory.

Except as set forth in Part III below, no other changes are made to“Remanufactured Core” — The Used Core underlying an automobile part that has gone through the Original Filing. Unless expressly stated, this Amendment does not reflect events occurring afterremanufacturing 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 filingsalvageable components of the Original Filing, nor does it modify or updateUsed Core and additional new components into a remanufactured automobile part. Remanufactured Cores are included in any way the disclosures containedour on-hand finished goods inventory and in the Original Filing. remanufactured finished good product held for sale at customer locations. Used Cores returned by consumers to our customers but not yet returned to us continue to be classified as Remanufactured Cores until we physically receive these Used Cores. All Remanufactured Cores are included in our long-term core inventory or in our long-term core inventory deposit.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Unless the context otherwise requires, all references in this AmendmentAnnual Report on Form 10-K to “the Company,” “we,” “us,” “MPA,” and “our” refer to Motorcar Parts of America, Inc. and its subsidiaries.
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PART III

Item 10.Directors, Executive Officers and Corporate Governance

Our directors, their ages and present positions with us as of July 27, 2016 are as follows:

NameAgePosition with the Company
Selwyn Joffe58Chairman of the Board of Directors, President and Chief Executive Officer
Scott J. Adelson55Director
Rudolph J. Borneo75Director, Chairman of the Compensation Committee and member of the Ethics and Nominating and Corporate Governance Committees
David Bryan64Director, member of the Compensation Committee
Joseph Ferguson49Director, member of the Audit Committee
Philip Gay58Director, Chairman of the Audit Committee and Ethics Committee, and member of the Compensation and Nominating and Corporate Governance Committees
Duane Miller69Director, Chairman of the Nominating and Corporate Governance Committee, member of the Audit, Compensation, and Ethics Committees
Jeffrey Mirvis52Director, member of the Compensation Committee

Selwyn Joffe has been our ChairmanThis Form 10-K may contain forward-looking statements within the meaning of the BoardPrivate Securities Litigation Reform Act of Directors, President1995 with respect to our future performance that involve risks and Chief Executive Officer since February 2003. He has beenuncertainties. Various factors could cause actual results to differ materially from those expressed or implied by such statements. These factors include, but are not limited to: concentration of sales to a directorsmall number of large customers; changes in the financial condition of or our relationship with any of our Company since 1994major customers; increases in the average accounts receivable collection period; the loss of sales to customers; delays in payments by customers; the increasing customer pressure for lower prices and Chairman since November 1999. From 1995 until his electionmore favorable payment and other terms; lower revenues than anticipated from new and existing contracts; the increasing demands on our working capital; the significant strain on working capital associated with large inventory purchases from customers; any meaningful difference between expected production needs and ultimate sales to his present positions, he servedour customers; investments in operational changes or acquisitions; our ability to obtain any additional financing we may seek or require; our ability to maintain positive cash flows from operations; potential future changes in our previously reported results as a consultant to us. Prior to February 2003, Mr. Joffe was Chairman and Chief Executive Officer of Protea Group, Inc. a company specializing in consulting and acquisition services. From September 2000 to December 2001, Mr. Joffe served as President and Chief Executive Officer of Netlock Technologies, a company that specializes in securing network communications. In 1997, Mr. Joffe co-founded Palace Entertainment, Inc., a roll-up of amusement parks and served as its President and Chief Operating Officer until August 2000. Prior to the founding of Palace Entertainment, Inc., Mr. Joffe was the President and Chief Executive Officer of Wolfgang Puck Food Company from 1989 to 1996. Mr. Joffe is a graduate of Emory University with degrees in both Business and Law and is a memberresult of the baridentification and correction of errors in our accounting policies or procedures or the potential material weaknesses in our internal control over financial reporting; our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults; increases in interest rates; the impact of high gasoline prices; consumer preferences and general economic conditions; increased competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers; difficulty in obtaining Used Cores and component parts or increases in the costs of those parts; political, criminal or economic instability in any of the Stateforeign countries where we conduct operations; currency exchange fluctuations; unforeseen increases in operating costs; risks associated with cyber-attacks; risks associated with conflict minerals; the impact of Georgia as well as a Certified Public Accountant. Asnew accounting pronouncements and tax laws, including the U.S. Tax Cuts and Jobs Act, and interpretations thereof; uncertainties affecting our most senior executive, Mr. Joffe provides the Board of Directors with insight intoability to estimate our business operations, managementtax rate and strategic opportunities. His history with our Companyother factors discussed herein and industry experience led the Board of Directors to recommend to our shareholders in our Proxy Statement for our Annual Meeting of Shareholders held on March 24, 2016 (the “Proxy Statement”) that they vote for Mr. Joffe as a director of our Company at the Annual Meeting of Shareholders held on March 24, 2016 (the “Annual Meeting”) and our shareholders elected Mr. Joffe to serve as a director at the Annual Meeting.

Scott J. Adelson joined our Board of Directors on April 11, 2008. Mr. Adelson is also a director and member of the compensation committee of QAD Inc., a public software company, since April 2006. Mr. Adelson is a Co-President and Global Co-Head of Corporate Finance for Houlihan Lokey, a leading international investment bank. During his 26 plus yearsother filings with the firm, Mr. Adelson has helped advise hundreds of companies on a diverseSecurities and in-depth variety of corporate finance issues, including mergersExchange Commission (the “SEC”). These and acquisitions. Mr. Adelson has written extensively on a number of corporate financeother risks and securities valuation subjects. He is an active member of Board of Directors of various privately-held middle-market businesses including Pacific Island Restaurants,uncertainties may cause our actual results to differ materially and adversely from those expected in any forward-looking statements. Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as well as several recognized non-profit organizations, such as the USC Entrepreneur Program. Mr. Adelson holds a bachelor degree from the University of Southern California and a Master of Business Administration degree from the University of Chicago, Graduate School of Business. Mr. Adelson’s broad business skills and experience, leadership expertise, knowledge of complex global business and financial matters led the Board of Directorsrequired by law, we undertake no obligation to recommend to our shareholders in the Proxy Statement that they voterevise or update publicly any forward-looking statements for Mr. Adelson as a director of our Company at the Annual Meeting and our shareholders elected Mr. Adelson to serve as a director at the Annual Meeting.any reason.
 
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Dr. David Bryan joined our BoardPART I
Item 1.
Business

General

We are a leading manufacturer, remanufacturer, and distributor of Directorsaftermarket automotive and light truck applications. We also, to a lesser extent, are a manufacturer, remanufacturer, and distributor of heavy duty truck and industrial and agricultural application parts. These replacement parts are sold for use on June 9, 2016. Dr. Bryan is also a member of our Compensation Committee. Dr. Bryan currently teaches at University of California at Santa Cruz.  He also provides consulting expertisevehicles after initial vehicle purchase. These automotive parts are sold to multiple Santa Cruz independentautomotive retail chain stores and charter schools,warehouse distributors throughout North America and is involved with companies developing effective toolsto major automobile manufacturers for online education. Dr. Bryan was founding Head of New Roads School from 1995both their aftermarket programs and warranty replacement programs (“OES”). We estimate the market size to 2013.  Dr. Bryan received a B.A. from the State University of New York at Stony Brook, an M.S. from the University of California at Los Angeles and a J.D. and Ph.D. from the State University of New York at Buffalo.  Dr. Bryan was not onebe over $125 billion for each of the nominees up for election as a director at the Annual Meeting.  He was elected to serve as a director by the Board of Directors on June 9, 2016.light duty and heavy duty markets in North America.

Joseph Ferguson joined our BoardThe current population of Directors on June 9, 2016. Mr. Fergusonlight duty vehicles in the U.S. is also a member of our Audit Committee. Mr. Ferguson is a Co-Founder and Managing Partner at Vicente Capital Partners, a Los Angeles-based investment firm providing capital to privately held growth companies across North America. Prior to co-founding Vicente in 2009, Mr. Ferguson was a partner at Kline Hawkes & Company, which he joined at the firm’s inception in 1995. Mr. Ferguson began his career as an investment banker for Merrill Lynch & Co where he was a member of the Energy and Natural Resources Groupapproximately 271 million and the General Corporate Finance Group. From 1989 to 1994, he workedaverage age of these vehicles is approximately 11.7 years. The aged vehicle population remains favorable. Although miles driven fluctuate primarily based on over 30 public and private transactionsfuel prices, it has steadily increased for numerous emerging growth and middle market companies. Mr. Ferguson received a B.B.Athe past year. We believe demand for aftermarket automotive parts generally increases with the age of vehicles. In addition, increases in Finance from Southern Methodist University and an M.B.A from the UCLA Anderson School of Management.  Mr. Ferguson was not one of the nominees up for election as a director at the Annual Meeting.  He was elected to serve as a director by the Board of Directors on June 9, 2016.miles driven can accelerate replacement rates.

Rudolph J. Borneo joined our Board of Directors on November 30, 2004. Mr. Borneo retired from R.H. Macy’s, Inc. on March 31, 2009. At the time of his retirement, his position was Vice ChairmanThe automotive and Director of Stores of Macy’s West, a division of R.H. Macy’s, Inc. Mr. Borneo served as President of Macy’s California from 1989 to 1992 and President of R.H. Macy’s West from 1992 until his appointment as Vice Chairman and Director of Stores in February 1995. In addition, Mr. Borneolight truck parts aftermarket is currently Board Chairman of Smoke Eaters Hot Wings Inc., a privately-held company. He earned a Bachelor of Science degree in business administration from Monmouth University. Mr. Borneodivided into two markets. The first is the Chairmando-it-yourself (“DIY”) market, which is generally serviced by the large retail chain outlets. Consumers who purchase parts from the DIY channel generally install parts into their vehicles themselves. In most cases, this is a less expensive alternative than having the repair performed by a professional installer. The second is the professional installer market, commonly known as the do-it-for-me (“DIFM”) market. Traditional warehouse distributors, dealer networks, and commercial divisions of our Compensation Committeeretail chains service this market. Generally, the consumer in this channel is a professional parts installer. Our products are distributed to both the DIY and a member of our Audit and Nominating and Corporate Governance Committees. Mr. Borneo’s extensive experience in management of employees, organizational management, general business and retail knowledge and financial literacy led the Board of Directors to recommend to our shareholders in the Proxy Statement that they vote in favor of Mr. Borneo as a director of our Company at the Annual Meeting and our shareholders elected Mr. Borneo to serve as a director at the Annual Meeting.DIFM markets.

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

In addition, we are now in the business of diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles. The global market for diagnostics is approximately $5 billion, with the smallest but fastest growing segment of this being in the electric vehicle market.

Growth Strategies

We are focused on growing our Boardshare in all channels within both the light duty and heavy duty aftermarket, including DIY, DIFM, and OES, as well as in the OE (original equipment) market for our diagnostics business. We are well positioned for growth in all channels, in particular the DIFM market in three ways: (i) our auto parts retail customers are expanding their efforts to target the DIFM market, (ii) we sell our products under private label and our own brand names directly to suppliers that focus on professional installers, and (iii) we sell our products to original equipment manufacturers for distribution to the professional installer both for warranty replacement and their general aftermarket channels. We have been successful in growing sales to all channels of Directors on November 30, 2004. He chairs our Audit Committees andthe aftermarket.

Our goal is a memberto take advantage of multiple growth strategies. To accomplish this, key elements of our Compensation and Nominating and Corporate Governance Committees. Mr. Gay currently serves as Managing Director of Triple Enterprises, a business advisory service firm that assists mid-cap sized companies with financing, mergers and acquisitions and strategic financing, which he had previously managed from March 2000 until June 2004. From June 2004 until June 2010, Mr. Gay served as President, Chief Executive Officer and a Director of Grill Concepts, Inc., a company that operates a chain of upscale casual restaurants throughout the United States. From March 2000 to November 2001, Mr. Gay served as an independent consultant with El Paso Energy from time to time and assisted El Paso Energy with its efforts to reduce overall operating and manufacturing overhead costs. Previously he has served as Chief Financial Officer for California Pizza Kitchen (1987 to 1994) and Wolfgang Puck Food Company (1994 to 1996), and he has held various positions, including Chief Operating Officer and Chief Executive Officer, at Color Me Mine and Diversified Food Group from 1996 to 2000. Mr. Gay also serves on the board of Slap Fish and on the advisory board of Giggles N Hug. Mr. Gay is also a retired Certified Public Accountant, a former audit manager at Laventhol and Horwath and a graduate of the London School of Economics. Mr. Gay's leadership experience, general business knowledge, financial literacy and expertise, accounting skills and competency and overall financial acumen led the Board of Directors to recommend to our shareholders in the Proxy Statement that they vote for Mr. Gay as a director of our Company at the Annual Meeting and our shareholders elected Mr. Gay to serve as a director at the Annual Meeting.strategy include:
·
Grow our current product lines both with existing and potential new customers.  We continue to develop and offer current and new sales programs to ensure that we are doing all we can to support our customers’ businesses. We remain dedicated to managing growth and continuing to focus on enhancements to our infrastructure and making investments in resources to support our customers.
·
Introduction of new product lines.  We continue to strive to expand our business by exploring new product lines including working with our customers to identify potential new product opportunities.
 
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Duane Miller joined our Board of Directors on June 5, 2008. Mr. Miller is currently employed by the Genesee County Regional Chamber of Commerce as Executive Vice President. Prior to joining the Genesee County Regional Chamber of Commerce, he was employed by the City of Flint, Michigan, as the Director of Government Operations, from February 2009 to August 2009. Mr. Miller retired from General Motors Corporation in April 2008 after 37 years of service. At the time of his retirement, Mr. Miller served as executive director, GM Service and Parts Operations (“SPO”) Field Operations where he was responsible for all SPO field activities, running GM Parts (OE), AC Delco (after-market) and GM Accessories business channels, as well as SPO’s Global Independent Aftermarket. Mr. Miller served on the Board of Directors of OEConnection, an automotive ecommerce organization focused on applying technology to provide supply chain solutions and analysis. He currently serves on the Boards of Directors of Health Coalition, McLaren Regional Medical Center in Flint, Michigan and Prima Civitas Foundation, headquartered in Lansing, Michigan. His experience also includes serving on the Boards of Directors of the Urban League of Flint, Michigan, the Boys and Girls Club of Flint, Michigan and the Flint/Genesee County Convention and Visitor’s Bureau. Mr. Miller earned a Bachelor of Science degree in marketing from Western Michigan University, and attended the Executive Development Program at the University of California Berkeley, Haas School of Business. Mr. Miller is a member of our Audit and Compensation Committees and is chair of our Nominating and Corporate Governance Committee. Mr. Miller’s significant experience with the automotive parts industry, combined with his organizational, management and business understanding, led the Board of Directors to recommend to our shareholders in the Proxy Statement that they vote for Mr. Miller as a director of our Company at the Annual Meeting and our shareholders elected Mr. Miller to serve as a director at the Annual Meeting.
·
The strategic acquisition of other companies or businesses.  We have in the past and intend to continue making strategic acquisitions to grow our business. We maintain an in-house acquisition team that continuously works to identify potential new targets.
·
Creating value for our customers.  A core part of our strategy is ensuring that we add meaningful value for our customers. We consistently support and pilot our customers’ supply management initiatives in addition to providing demand analytics, a suite of inventory management services, a library of online training guides, market share, and retail store layout information to our customers.
·
Technological innovation.  We continue to expand our research and development teams as we further develop in-house technologies and advanced testing methods. This elevated level of technology ensures our customers receive the highest quality products and support services that can be offered.
Products

Jeffrey MirvisOur products include joined(i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake master cylinders, and (iv) other products, which include turbochargers, brake power boosters, and diagnostic equipment. We added turbochargers through an acquisition in July 2016. We began selling brake power boosters in August 2016. As a result of an acquisition in July 2017, our Board of Directors on February 3, 2009. Mr. Mirvis is currently the Chief Executive Officer of MGT Industries, Inc. (“MGT”)business also now includes developing and selling diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), a privately-held apparel company based in Los Angeles. As Chief Executive Officer of MGT, Mr. Mirvis successfully moved all production and sourcing to Asia. During his thirteen-year tenure as chief executive, Mr. Mirvis has gained valuable knowledge of manufacturing in Asia. Prior to joining MGT in 1990, Mr. Mirvis served as a commercial loan officer at Union Bank of California following his completion of the Union Bank of California’s Commercial Lending Program. He earned a Bachelor of Arts degree in economics from the University of California at Santa Barbara. He has been a board member of Wildwood School in Los Angeles and the Jewish Federation in Los Angeles. Mr. Mirvis is a member of our Audit and Compensation Committees. Mr. Mirvis’ international business experience, operational and production expertise, leadership experience and organizational management led the Board of Directors to recommend to our shareholders in the Proxy Statement that they voteelectric power trains for Mr. Mirvis as a director of our Company at the Annual Meeting and our shareholders elected Mr. Mirvis to serve as a director at the Annual Meeting.electric vehicles.

Our directors will hold office untilOE diagnostic products are viewed as industry leading, paving the next annual meetingway for the development of shareholders or until their successors are electedincreasingly better electric vehicle and qualified.hybrid vehicle applications. We produce diagnostic equipment for some of the top OE automotive companies in the world.

Corporate Governance,Our products meet or exceed original equipment manufacturer specifications. We produce both new and remanufactured units. Remanufacturing generally creates a supply of parts at a lower cost to the end user than newly manufactured parts and makes available automotive parts that are no longer manufactured. Our remanufactured parts are generally sold at competitively lower prices than most new replacement parts. We believe most of our automotive parts are non-elective replacement parts in all makes and models of vehicles because they are required for a vehicle to operate.

We recycle materials, including metal from the Used Cores and corrugated packaging, in keeping with our focus of positively impacting the environment.

The increasing complexity of cars and light trucks and the number of different makes and models of these vehicles have resulted in a significant increase in the number of different automotive parts required to service vehicles. We carry over 14,500 stock keeping units (“SKUs”) for automotive parts that are sold under our customers’ widely recognized private label brand names and our Quality-Built®, Pure Energy™, Xtreme®, Talon®, Reliance™and other brand names.

Segment Reporting

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

Sales, Marketing and Distribution

We sell our products to the largest automotive chains primarily in North America, including Advance (inclusive of Carquest, Autopart International, and Worldpac), AutoZone, Genuine Parts (NAPA), O’Reilly, and Pep Boys, with an aggregate of approximately 25,000 retail outlets. In addition, we sell our products to OES customers, professional installers, and a diverse group of automotive warehouse distributors. We sell diagnostic equipment directly and indirectly to some of the Board of Directors

Board Independence. Each of Duane Miller, Jeffrey Mirvis, Philip Gay, Joseph Ferguson, Dr. David Bryan, and Rudolph J. Borneo are independent within the meaning of the applicable SEC rules and the NASDAQ listing standards.

Board Leadership Structure. The Board of Directors does not have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board as the Board of Directors believes it is in theworld’s best interests of our Company to make that determination based on the position and direction of our Company and the membership of the Board of Directors. The roles of Chairman of the Board and Chief Executive Officer are currently held by the same person, Selwyn Joffe. The Board of Directors believes that Mr. Joffe’s service as both Chairman of the Board and Chief Executive Officer is in the best interest of our Company and its stockholders. Mr. Joffe possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing our Company and its business and is in the best position to develop agendas that ensure that our Board of Directors’ time and attention are focused on the most critical matters. We believe that our Company has been well served by this model because the combined role of Chairman of the Board and Chief Executive Officer has ensured that our directors and senior management act with a common purpose and in the best interest of our Company. This model enhances our ability to communicate clearly and consistently with our stockholders, employees, customers and suppliers. Although we have not designated a “lead director,” our Chairman of the Board works closely with the chairs of each of our committees on a variety of matters and our other directors, and all of our committee members are independent within the meaning of the applicable SEC rules and NASDAQ listing standards.OE automotive companies.
 
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Board’s Role in Risk Oversight. Our Board of Directors asWe publish printed and electronic catalogs with part numbers and applications for our products along with a whole has responsibility for risk oversight. Our Board of Directors met eight times in Fiscal 2016. Certain categories of risk are reviewed by particular committeesdetailed technical glossary and informational database. We believe that we maintain one of the Board of Directors, which reportmost extensive catalog and product identification systems available to the full Board of Directors as needed. The Audit Committee reviews the financial risks, including internal control, audit, financial reportingmarket.

We ship our products from our facilities and disclosure matters, by discussing these risks with management and our internal and external auditors. The Compensation Committee reviews risks relating to our executive compensation plans and arrangements. The Nominating and Corporate Governance Committee reviews risks related to our governance structure and processes and risks arising from related person transactions. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board of Directors is regularly informed about such risks.utilize various third party warehouse distribution centers in North America.

Audit Committee.Customers: Customer Concentration  The current members. While we continually seek to diversify our customer base, we currently derive, and have historically derived, a substantial portion of our Audit Committee are Philip Gay, Rudolph Borneo, Joseph Ferguson, Duane Miller,sales from a small number of large customers. Sales to our four largest customers in the aggregate represented 88%, 87%, and Jeffrey Mirvis, with Mr. Gay serving as chairman. Mr. Ferguson joined90%, and sales to our Audit Committee on June 9, 2016. Our Boardlargest customer, AutoZone, represented 41%, 44%, and 48% of Directors has determined that allour net sales during fiscal 2018, 2017 and 2016, respectively. Any meaningful reduction in the level of sales to any of these customers, deterioration of the Audit Committee members are independent withinfinancial condition of any of these customers or the meaningloss of the applicable SEC rulesany of these customers could have a materially adverse impact on our business, results of operations, and NASDAQ listing standards. Our Board of Directors has also determined that Mr. Gay is a financial expert within the meaning of the applicable SEC rules. The Audit Committee oversees our auditing procedures, receives and accepts the reports of our independent registered public accountants, oversees our internal systems of accounting and management controls and makes recommendations to the Board of Directors concerning the appointment of our auditors. The Audit Committee met four times in Fiscal 2016.condition.

Compensation Committee.Customer Arrangements; Impact on Working Capital  The current members. We have various length agreements with our customers. Under these agreements, which in most cases have initial terms of at least four years, we are designated as the exclusive or primary supplier for specified categories of our Compensation Committee are Rudolph Borneo, Dr. David Bryan, Philip Gay, Duane Miller,products. Because of the very competitive nature of the market and Jeffrey Mirvis,the limited number of customers for these products, our customers have sought and obtained price concessions, significant marketing allowances and more favorable delivery and payment terms in consideration for our designation as a customer’s exclusive or primary supplier. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables in accordance with Mr. Borneo serving as chairman. Dr. Bryan joineda schedule set forth in the relevant contract, (ii) support for a particular customer’s research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product, and (iv) store expansion or product development support. These contracts typically require that we meet ongoing performance standards. Our contracts with major customers expire at various dates through April 2021.

While these longer-term agreements strengthen our Compensation Committee on June 9, 2016. The Compensation Committee is responsiblecustomer relationships, the increased demand for developing our executive compensation policies. The Compensation Committee isproducts often requires that we increase our inventories and personnel. Customer demands that we purchase and maintain their Remanufactured Core inventory also responsible for evaluatingrequires the performanceuse of our Chief Executive Officerworking capital. The marketing and other senior officersallowances we typically grant our customers in connection with our new or expanded customer relationships adversely impact near-term revenues, profitability and making determinations concerningassociated cash flows from these arrangements. However, we believe the salary, bonusesinvestment we make in these new or expanded customer relationships will improve our overall liquidity and equity awards to be awarded to these officers. No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with the executive officers or directors of another entity. For further discussion of our Compensation Committee, see “Compensation Committee Interlocks and Insider Participation.” The Compensation Committee met four times in Fiscal 2016.cash flow from operations over time.

Nominating and Corporate Governance Committee.  The current members of our Nominating and Corporate Governance Committee are Rudolph Borneo, Philip Gay and Duane Miller, with Mr. Miller serving as chairman effective August 6, 2015. Each of the members of the Nominating and Corporate Governance Committee is independent within the meaning of applicable SEC rules. Our Nominating and Corporate Governance Committee is responsible for nominating candidates to our Board of Directors. Our Nominating and Corporate Governance Committee met three times in Fiscal 2016.Competition

In evaluating potential director nominees,The automotive parts aftermarket is highly competitive. We compete with several large and medium sized remanufacturers and diagnostic companies, including BBB Industries, Remy, Cardone Industries, AVL, Horiba, Siemens, and a large number of smaller regional and specialty remanufacturers. We also compete with overseas manufacturers, particularly those identified by shareholders,located in China, who are increasing their operations and could become a significant competitive force in the future.

We believe that the reputations for recommendationquality and customer service that a supplier provides are significant factors in our customers’ purchase decisions. As we continually strive to increase our Boardcompetitive advantages, we have created an online library of Directors,video courses, aimed at arming our Nominatingcustomers as they seek to train the next generation of technicians. We also offer live and Corporate Governance Committee seeks individuals with talent,web-based training courses via our recently created education facility within our Torrance headquarters. We believe our ability and experience from a wide variety of backgrounds to provide a diverse spectrum of experiencequality replacement automotive parts, rapid and expertise relevant to a diversified business enterprise such as ours. Our Company does not maintain a separate policy regarding the diversity of its board members. However, the Nominating and Corporate Governance Committee considers individuals with diverse and varied professional and other experiences for membership. A candidate should represent the interests of all shareholders, and not those of a special interest group, have a reputation for integrity and be willing to make a significant commitment to fulfilling the duties of a director. Our Nominating and Corporate Governance Committee will screen and evaluate all recommended director nominees based on the criteria set forth above,reliable delivery capabilities as well as other relevant considerations. Our Nominatingpromotional support also distinguishes us from many of our competitors. In addition, favorable pricing, our core exchange program, and Corporate Governance Committee will retain full discretion in considering its nomination recommendations to our Board of Directors.
Information about our non-director executive officers and significant employees

Our executive officers (other than executive officers whoextended payment terms are also members of our Board of Directors) and significant employees, their ages and present positions with our Company, are as follows:
very important competitive factors in customers’ purchase decisions.
 
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NameAgePosition with the Company
Kevin Daly57Chief Accounting Officer
Steve Kratz61Chief Operating Officer
David Lee46Chief Financial Officer
Doug Schooner47Chief Manufacturing Officer
Michael Umansky75Vice President, Secretary and General Counsel
Our executive officers are appointedWe seek to protect our proprietary processes and other information by relying on trade secret laws and serve at the discretionnon-disclosure and confidentiality agreements with certain of our Board of Directors. A brief description of the business experience of each of our executive officersemployees and other than executive officerspersons who are also members of our Board of Directors and significant employees is sethave access to that information.
forth below.
Operations

Kevin DalyProduction Process. The majority of our products are remanufactured. Our remanufacturing process begins with the receipt of Used Cores from our customers or core brokers. The Used Cores are evaluated for inventory control purposes and then sorted by part number. Each Used Core is completely disassembled into its fundamental components. The components are cleaned in an environmentally sound process that employs customized equipment and cleaning materials in accordance with the required specifications of the particular component. All components known to be subject to major wear and those components determined not to be reusable or repairable are replaced by new components. Non-salvageable components of the Used Core are sold as scrap.

After the cleaning process is complete, the salvageable components of the Used Core are inspected and tested as prescribed by our IATF 16949 approved quality control program, which has been implemented throughout the production processes. IATF 16949 is an internationally recognized, world class, automotive quality system that was launched in 2017, replacing the previous ISO TS 16949 quality control program. Upon passage of all tests, which are monitored by designated quality control personnel, all the component parts are assembled in a work cell into a finished product. Inspection and testing are conducted at multiple stages of the remanufacturing process, and each finished product is inspected and tested on equipment designed to simulate performance under operating conditions. To maximize remanufacturing efficiency, we store component parts ready for assembly in our Chief Accounting Officer since February 2008. Priorproduction facilities.

Our remanufacturing processes combine product families with similar configurations into dedicated factory work cells. This remanufacturing process, known as “lean manufacturing,” replaced the more traditional “batch” assembly line approach we had previously utilized and eliminated a large number of inventory moves and the need to this, Mr. Daly served astrack inventory movement through the remanufacturing process. This lean manufacturing process has been fully implemented at all of our Vice President, Controller since he joinedproduction facilities. This manufacturing enables us to significantly reduce the time it takes to produce a finished product. We continue to explore opportunities for improving efficiencies in January 2006. From May 2000 until he joined our Company, Mr. Daly served as Corporate Controller for Leiner Health Products Inc., a private label manufacturer of vitamins and over-the-counter pharmaceutical products based in Carson, California. From November 1994 until May 2000, Mr. Daly held various director level finance positions at Dexter Corporation. From November 1988 until October 1994, he held various positions in the finance and controller’s departments of FMC Corporation, based in Chicago, Illinois. From June 1985 to November 1988, Mr. Daly served as Controller of Bio-logic Systems Corp. Mr. Daly is a Certified Public Accountant and worked in the firm of Laventhol & Horwath from 1981 to 1985. Mr. Daly has a Bachelor of Science degree in Accounting from the University of Illinois and a Master of Business Administration degree from the University of Chicago, Booth Graduate School of Business.remanufacturing process.

Steve KratzOffshore Remanufacturing. has beenThe majority of our Chief Operating Officer since May 2007. Priorremanufacturing operations are conducted at our facilities in Mexico and Malaysia. We continue to this, Mr. Kratz served asmaintain production of certain remanufactured units that require specialized service and/or rapid turnaround in our Vice President-QA/Engineering since 2001. Mr. Kratz joined our Company in April 1988. Before joining us, Mr. Kratz was the General Manager of GKN Products Company, a division of Beck/Arnley-Worldparts.U.S. facilities. In addition, to serving aswe operate shipping and receiving warehouses and testing facilities in Singapore and China for our Chief Operating Officer, Mr. Kratz heads our quality assurance, research and development, engineering and information technology departments.products.

David LeeUsed Cores. has beenThe majority of our Chief Financial Officer since February 2008. PriorUsed Cores are obtained from customers through the core exchange program. The core exchange program consists of the following steps:

Our customers purchase from us a remanufactured unit to be sold to their consumer.

Our customers offer their consumers a credit to exchange their used unit (Used Core) at the time the consumer purchases a remanufactured unit.

We offer our customers a credit, which reduces our accounts receivable, to send us these Used Cores.

Our customers are not obligated to send us all the Used Cores exchanged by their consumers. We have historically purchased Used Cores from core brokers to supplement the supply sent to us. Although this Mr. Lee served as our Vice Presidentis not a primary source of Finance and Strategic Planning since January 2006, focusing primarily on financial management and strategic planning. Mr. Lee joined us in February 2005 as a Director of Finance and Strategic Planning. His primary responsibilities as Chief Financial Officer are treasury, budgeting and financial management. From August 2002 until he joined us in 2005, he served as corporate controller of Palace Entertainment, Inc., an amusement and water park organization. Prior to this, Mr. Lee held various corporate controller and finance positions for several domestic companies and served in the audit department of Deloitte LLP (formerly known as Deloitte & Touche LLP). Mr. LeeUsed Cores, it is a Certified Public Accountant. Mr. Lee earned his Bachelor of Arts degree in economics fromcritical source for meeting our raw material demands. Remanufacturing consumes, on average, more than one Used Core for each remanufactured unit produced since not all Used Cores are reusable. The yield rates depend upon both the University of California, San Diego,product and a Masters in Business Administration degree from the University of California Los Angeles Anderson School of Management.

Douglas Schooner, has been our Chief Manufacturing Officer since June 2014. Mr. Schooner joined our company in 1993 and became the Vice President, Global Manufacturing Operations in January 2001 until his promotion in June 2014. Mr. Schooner has held the positions of Engineer, Production Manager, Assistant Vice President, Production and Vice President, Manufacturing prior to assuming his current position with our company. As Vice President, Global Manufacturing Operations, Mr. Schooner is responsible for all manufacturing, materials and logistic operations for our facilities. Mr. Schooner has a Bachelor of Science degree in Mechanical Engineering from the California State University, Long Beach.

Michael Umansky has been our Vice President and General Counsel since January 2004 and is responsible for all legal matters. His responsibilities also include the oversight of Human Resources. His additional appointment as Secretary became effective September 1, 2005. Mr. Umansky was a partner of Stroock & Stroock & Lavan LLP, and the founding and managing partner of its Los Angeles office from 1975 until 1997 and was Of Counsel to that firm from 1998 to July 2001. Immediately prior to joining our Company, Mr. Umansky was in the private practice of law, and during 2002 and 2003, he provided legal services to us. From February 2000 until March 2001, Mr. Umansky was Vice President, Administration and Legal, of Hiho Technologies, Inc., a venture capital financed producer of workforce management software. Mr. Umansky is admitted to practice law in California and New York and is a graduate of The Wharton School of the University of Pennsylvania and Harvard Law School.customer specifications.
 
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There are no family relationships amongThe price of a finished remanufactured product sold is generally comprised of an amount for remanufacturing (“unit value”) and an amount separately invoiced for the Remanufactured Core included in the product (“Remanufactured Core charge”). The Remanufactured Core charge is equal to the credit we offer to induce the customer to use our directors or named executive officers. There are no material proceedingscore exchange program and send back the Used Cores. The ability to which anyobtain Used Cores, materials, and components of the types and quantities we need is essential to our ability to meet demand.

Purchased Finished Goods. In addition to our remanufactured goods, we also purchase finished goods from various suppliers, including several located in Asia. We perform supplier qualification, product inspection and testing according to our IATF 16949 certified quality system to assure product quality levels. We also perform periodic site audits of our directors or executive officers orsuppliers’ manufacturing facilities.

Return Rights. Under our customer agreements and general industry practice, our customers are allowed stock adjustments if their inventory of certain product lines exceeds the inventory necessary to support sales to their end-user consumers (stock adjustment returns). Customers have various contractual rights for stock adjustment returns, which are typically less than 5% of units sold. In some instances, we allow a higher level of returns in connection with significant restocking orders. Stock adjustment returns do not occur at any of their associates, is a party adversespecific time during the year. In addition, we allow customers to return goods to us that their end-user consumers have returned to them, whether or anynot the returned item is defective (warranty returns). We seek to limit the aggregate general right of return to less than 20% of unit sales.

As is standard in the industry, we only accept returns from on-going customers. If a customer ceases doing business with us, we have no further obligation to accept additional product returns from that customer. Similarly, we accept product returns and grant appropriate credits to new customers from the time the new customer relationship is established.

Employees

We employed 2,996 full-time global employees as of March 31, 2018. We use independent contractors and temporary employees to supplement our subsidiaries, or has a material interest adverseworkforce as needed. A union represents 2,266 of the employees at our Mexico facility. All other employees are non-union. We consider our relations with our employees to us or any of our subsidiaries. To our knowledge, none of our directors or executive officers has been convicted in a criminal proceeding during the last ten years (excluding traffic violations or similar misdemeanors), and none of our directors or executive officers was a party to any judicial or administrative proceeding during the last ten years (except for any matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activitiesbe satisfactory.

Governmental Regulation

Our operations are subject to federal, or state securitiesand local laws or a findingand regulations governing, among other things, emissions to air, discharge to waters, and the generation, handling, storage, transportation, treatment and disposal of any violation of federal or state securities laws.  Towaste and other materials. We believe that our knowledge, none of our directors or executive officersbusinesses, operations and facilities have been and are subject to any petition under federal bankruptcybeing operated in compliance in all material respects with applicable environmental and health and safety laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business associationand regulations, many of which he was an executive officer atprovide for substantial fines and criminal sanctions for violations. Potentially significant expenditures, however, could be required in order to comply with evolving environmental and health and safety laws, regulations or within two years beforerequirements that may be adopted or imposed in the time of such filing,future.

Access to Public Information

We file annual, quarterly and current reports, proxy statements and other information with the following exception:SEC. Our SEC filings are available free of charge to the extent that such personspublic over the Internet at the SEC’s website at www.sec.gov. Our SEC filings are involved in bankruptcy proceedings related to the Company’s subsidiary.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a)also available free of the Securities Exchange Act of 1934, as amended, requirescharge on our directorswebsite www.motorcarparts.com. You may also read and executive officers, and persons who own more than ten percent of our common stock, tocopy any document we file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Based solely on our review of copies of such forms received by us, or written representations from reporting persons that no such forms were required for those persons, we believe that our insiders complied with all applicable Section 16(a) filing requirements during Fiscal 2016, with the following exceptions:  On June 17, 2015 Mr. Joffe filed a Form 4 that was due on June 15, 2015. On June 26, 2015, Mr. Kratz filed a Form 4 that was due on June 25, 2015. On June 30, 2015, Messrs. Umansky, Lee, Daly, Schooner, and Kratz, and Richard Mochulsky (vice president of sales), filed Form 4’s that were due on June 26, 2015.

Code of Ethics

Our Board of Directors formally adopted new Code of Business Conduct and Ethics on January 15, 2015, which applies to all our officers, directors and employees. The Code of Business Conduct and Ethics is filed withat its Public Reference Room at 100 F. Street, NE, Washington, D.C. 20549. Please call the SEC and a copy is postedat (800) SEC-0330 for further information on our website at www.motorcarparts.com. We intend to disclose future amendments to certain provisionsthe operation of the code, or waivers of such provisions granted to executive officers and directors, on our website within four business days following the date of such amendment or waivers. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request addressed to the Corporate Secretary at Motorcar Parts of America, Inc., 2929 California Street, Torrance, CA 90503.

Item 11.
Executive Compensation

Compensation Discussion and Analysis

The following discussion and analysis of compensation arrangements of our named executive officers for Fiscal 2016 should be read together with the compensation tables and related disclosures set forth below. This discussion contains certain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt in the future may differ materially from currently planned programs as summarized in this discussion.Public Reference Room.
 
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Executive Compensation Summary.
Item 1A.
Risk Factors

The retentionWhile we believe the risk factors described below are all the material risks currently facing our business, additional risks we are not presently aware of experienced, highly-capableor that we currently believe are immaterial may also impair our business operations. Our financial condition or results of operations could be materially and dedicated executives is crucialadversely impacted by these risks, and the trading price of our common stock could be adversely impacted by any of these risks. In assessing these risks, you should also refer to the long-term successother information included in or incorporated by reference into this Form 10-K, including our consolidated financial statements and related notes thereto appearing elsewhere or incorporated by reference in this Form 10-K.

We rely on a few large customers for a majority of our Company. To achievebusiness, and the goalloss of recruiting, retaining and motivating our executives, our Compensation Committee has developed an overall executive compensation program that rewardsany of these employees for their contributionscustomers, significant changes in the prices, marketing allowances or other important terms provided to our Company.

The primary objectivesany of our practicesthese customers or adverse developments with respect to executive compensationthe financial condition of these customers could reduce our net income and operating results.

Our net sales are to:concentrated among a small number of large customers. Sales to our four largest customers in the aggregate represented 88%, and sales to our largest customer represented 41% of our net sales during fiscal 2018. We are under ongoing pressure from our major customers to offer lower prices, extended payment terms, increased marketing and other allowances and other terms more favorable to these customers because our sales to these customers are concentrated, and the market in which we operate is very competitive. These customer demands have put continued pressure on our operating margins and profitability, resulted in periodic contract renegotiation to provide more favorable prices and terms to these customers and significantly increased our working capital needs. In addition, this customer concentration leaves us vulnerable to any adverse change in the financial condition of these customers. Changes in terms with, significant allowances for and collections from these customers could affect our operating results and cash flows. The loss of or a significant decline in sales to any of these customers could adversely affect our business, results of operations, and financial condition.

Our offshore remanufacturing and logistic activities expose us to increased political and economic risks and place a greater burden on management to achieve quality standards.

Our overseas operations, especially our operations in Mexico, increase our exposure to political, criminal or economic instability in the host countries and to currency fluctuations. Risks are inherent in international operations, including:

·Provide appropriate incentives to our executive officers to implement our strategic business objectivesexchange controls and achieve the desired company performance;currency restrictions;
·currency fluctuations and devaluations;
·changes in local economic conditions;
·Reward our executive officers for their contributionrepatriation restrictions (including the imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries);
·global sovereign uncertainty and hyperinflation in certain foreign countries;
·laws and regulations relating to our success in building long-term shareholder value;export and import restrictions;
·exposure to government actions; and
·Provide compensation that will attract and retain superior talent and reward performance.exposure to local political or social unrest including resultant acts of war, terrorism or similar events.

Compensation Components.

WithThese and other factors may have a material adverse effect on our compensation objectivesoffshore activities and on our business, results of operations and financial condition. Our overall success as a business depends substantially upon our ability to manage our foreign operations. We may not continue to succeed in mind, our executive officer compensation program consists of five primary elements: (1) base salary; (2) an annual bonus; (3) long-term incentive compensation in the form of equity awards; (4) non-qualified deferred compensation arrangements;developing and (5) coverage under our broad-based employee benefit plans, such as our group healthimplementing policies and 401(k) plans, and executive perquisites.

Base Salary. Base salary is the “fixed” component of our executive compensation intended to meet the objective of attracting and retaining the executive officers of superior talentstrategies that are necessaryeffective in each location where we do business, and failure to managedo so could materially and leadadversely impact our Company.

Annual Bonus. We utilize annual bonuses that are designed to provide incentives to motivate the achievementbusiness, results of strategic business objectives, desired company performanceoperations, and individual performance goals.

Equity Award Program. Equity awards are a part of our overall executive compensation program because we believe that our long-term performance will be enhanced through the use of equity awards that reward our executives for maximizing shareholder value over time. Prior to fiscal 2014, we elected to use stock options that vest over time as the primary long-term equity incentive vehicle to promote retention of our key executives, but in subsequent fiscal years we used restricted stock and restricted stock unit awards, which generally vest over time. Although we have not adopted formal stock ownership guidelines, our named directors and executive officers currently hold a significant portion of our fully-diluted common stock, substantially through the ownership of stock options and restricted stock. In determining the number of stock options and/or restricted stock to be granted to executives, we historically have taken into account the individual’s position, scope of responsibility, ability to affect profits and shareholder value and the value of the stock options and/or restricted stock in relation to other elements of the individual executive’s total compensation. In fiscal 2011, we adopted our 2010 Incentive Award Plan, and we amended and restated this plan in fiscal 2013 to increase the number of shares of our common stock available for grant under the plan to 1,750,000.  This amendment and restatement was approved by our stockholders at the Annual Meeting of Stockholders held on March 28, 2013. At our Annual Meeting of Stockholders held on March 31, 2014, our stockholders approved a second amendment and restatement of the 2010 Plan that further increased the number of shares of common stock reserved for grant under the 2010 Plan from 1,750,000 to 2,750,000.

Deferred Compensation Benefits. We offer a non-qualified deferred compensation plan to selected executive officers which provides unfunded, non-tax qualified deferred compensation benefits. We believe this program helps promote the retention of our senior executives. Participants may elect to contribute a portion of their compensation to the plan and we made matching contributions of 100% of each participant’s elective contributions to the plan up to 3% of the participant’s compensation for the year. Contributions for Fiscal 2016 and year-end account balances for those executive officers can be found in the Non-Qualified Deferred Compensation table.

Other Benefits. We provide to our executive officers medical benefits that are generally available to our other employees. Executives are also eligible to participate in our other broad-based employee benefit plans, such as our long and short-term disability, life insurance and 401(k) plan. Historically, the value of executive perquisites, as determined in accordance with the rules of the SEC related to executive compensation, has not exceeded 10% of the base salary of any of our executives.financial condition.
 
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Determination of Compensation Decisions.Interruptions or delays in obtaining component parts could impair our business and adversely affect our operating results.

The Compensation Committee is responsible for establishing, developingIn our remanufacturing processes, we obtain Used Cores, primarily through the core exchange program with our customers, and maintainingcomponent parts from third-party manufacturers. We generally purchase up to 20% of our executive compensation program. The roleUsed Cores from core brokers. Historically, the Used Core returned from customers together with purchases from core brokers have provided us with an adequate supply of Used Cores. If there was a significant disruption in the supply of Used Cores, whether as a result of increased Used Core acquisitions by existing or new competitors or otherwise, our operating activities could be materially and adversely impacted. In addition, a number of the Compensation Committeeother components used in the remanufacturing process are available from a very limited number of suppliers. We are, as a result, vulnerable to any disruption in component supply, and any meaningful disruption in this supply would materially and adversely impact our operating results.

Increases in the market prices of key component raw materials could increase the cost of our products and negatively impact our profitability.

In light of the continuous pressure on pricing which we have experienced from our large customers, we may not be able to recoup the higher costs of our products due to changes in the prices of raw materials, particularly aluminum and copper. If we are unable to recover a substantial portion of our raw materials from Used Cores returned to us by our customers through the core exchange program, the prices of Used Cores that we purchase may reflect the impact of changes in the cost of raw materials. However, we are unable to determine what adverse impact, if any, sustained raw material price increases may have on our product costs or profitability.

Substantial and potentially increasing competition could reduce our market share and significantly harm our financial performance.

While we believe that we are well positioned in the automotive aftermarket, this market is to oversee our compensation and benefits plans and policies, administer our equity incentive plans and review and approve all compensation decisions relating to all executive officers and directors. In order for the Compensation Committee to perform its function, the following process for determining executive compensation decisions has been followed.very competitive. In addition, to the process outlined below, the Compensation Committee also may grant bonuses based on criteria developed independently of the process described below (any such bonusesother overseas manufacturers, particularly those located in China, are referred to as “Non-OGSM Bonuses”).  For Fiscal 2016, the only Non-OGSM Bonuses granted were $100 year-end bonuses.

Determining Goals. Prior to the beginning of each fiscal year, senior executivesincreasing their operations and department heads consult with each other and establish the Objective Goals Strategies and Measures (the “OGSM”) for our Company. The OGSM sets forth performance goals for each department of our Company and certain employees for the upcoming fiscal year. The OGSM providescould become a basis for developing a base financial operating plan for the upcoming fiscal year. The base financial operating plan, which is developed in conjunction with the OGSM process, is reviewed and approved by our Board of Directors.

On a quarterly basis, the Board of Directors reviews the actual financial performance of our Company against the goals set forthsignificant competitive force in the basefuture. We may not be successful competing against other companies, some of which are larger than us and have greater financial and other resources at their disposal. Increased competition could put additional pressure on us to reduce prices or take other actions, which may have an adverse effect on our operating plan. In addition, the membersresults. We may also lose significant customers or lines of the Board of Directors receive interim reports detailing the actual financial performance of our Company comparedbusiness to the plan.

Determining Executive Compensation.competitors.

Our methodfinancial results are affected by automotive parts failure rates that are outside of determining compensation varies from case to case based on a discretionary and subjective determination of what is appropriate at the time. In determining specific components of compensation, the Compensation Committee considers individual performance, level of responsibility, skills and experience, and other compensation awards or arrangements.our control.

Our general policy for setting base salariesoperating results are affected over the long term by automotive parts failure rates. These failure rates are impacted by a number of factors outside of our named executive officers (the “Senior Executives”) is to only increase such salariescontrol, including product designs that have resulted in greater reliability, the number of miles driven by consumers, and the average age of vehicles on the road. A reduction in the casefailure rates of promotions orautomotive parts would adversely affect our sales and profitability.

Our operating results may continue to fluctuate significantly.

We have experienced significant increasesvariations in our annual and quarterly results of operations. These fluctuations have resulted from many factors, including shifts in the demand and pricing for our products, general economic conditions, including changes in prevailing interest rates, and the introduction of new products. Our gross profit percentage fluctuates due to an officer’s dutiesnumerous factors, some of which are outside of our control. These factors include the timing and responsibilities. Such increaseslevel of marketing allowances provided to base salaries are reviewed byour customers, actual sales during the Compensation Committee onrelevant period, pricing strategies, the mix of products sold during a case-by-case basis. There were no salary increases in Fiscal 2016, except for (i) an increase in Mr. Daly’s salaryreporting period, and general market and competitive conditions. We also incur allowances, accruals, charges and other expenses that differ from $208,000period to $250,000, which took effect on February 1, 2016 and wasperiod based on the Committee’s evaluation of the executive compensation review conducted by Towers Watsonchanges in August 2015 and summarized in a report dated August 31, 2015 (the “Fiscal 2016 Towers Report”) with respectour business, which causes our operating income to the position of Chief Accounting Officer and its review and evaluation of Mr. Daly’s performance as Chief Accounting Officer of the Company and (ii) an increase in Mr. Lee’s salary from $220,000 to $290,000, which took effect on September 7, 2015 and was based on the Committee’s evaluation of the Fiscal 2016 Towers Report with respect to the position of Chief Financial Officer and its review and evaluation of  Mr. Lee’s performance as Chief Financial Officer of the Company.fluctuate.

AtOur lenders may not waive future defaults under our credit agreements.

Our credit agreement with our lenders contains certain financial and other covenants. If we fail to meet any of these covenants in the end of the fiscal year, department heads assess their progress against the base financial operating plan and evaluate their results. These self-assessments are presented to the Chief Executive Officer who then undertakes his own evaluation of the executives’ performance. This involves a two-step process whereby the Chief Executive Officer evaluates: (i) our Company’s actual financial performance against the budget, taking into account events that may be beyond the control of any given Senior Executive’s performance initiatives and (ii) each Senior Executive’s performance against his performance goals. Performance is evaluated in a non-formulaic manner with no specific weighting given to the performance measures. Whilefuture, there is no specific weighting given to each performance measure, individual performance goalsassurance that contribute most to the Company’s actual financial performance are given the most weight in determining bonus recommendations. The Chief Executive Officer considers both the financial performance of our Company and individual performance relative to each performance goal of the Senior Executives to develop bonus recommendations for each Senior Executive guided by the framework of our compensation consultant’s most recent review.lenders will waive any such defaults. If obtained, any such waiver may impose significant costs or covenants on us.
 
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The Compensation Committee reviewsUnfavorable currency exchange rate fluctuations could adversely affect us.

We are exposed to market risk from material movements in foreign exchange rates between the performance evaluationsU.S. dollar and the currencies of the Senior Executivesforeign countries in which we operate. In fiscal 2018, approximately 13% of our total expenses were in currencies other than the U.S. dollar. As a result of our extensive operations in Mexico, our primary risk relates to changes in the rates between the U.S. dollar and assesses the specific OGSM goalsMexican peso. To mitigate this currency risk, we enter into forward foreign exchange contracts to exchange U.S. dollars for Mexican pesos. We also enter into forward foreign exchange contracts to exchange U.S. dollars for Chinese yuan in order to mitigate risk related to our purchases and executionpayments to our Chinese vendors. The extent to which we use forward foreign exchange contracts is periodically reviewed in light of such goals for each Senior Executive.our estimate of market conditions and the terms and length of anticipated requirements. The Chief Executive Officer then presents his bonus recommendations for the Senior Executivesuse of derivative financial instruments allows us to reduce our exposure to the Compensation Committee (the “OGSM-based Bonus Recommendations”). The Compensation Committee then decides whether to approve or adjustrisk that the OGSM-based Bonus Recommendations. The Compensation Committee evaluates alleventual net cash outflow resulting from funding the expenses of the factors consideredforeign operations will be materially affected by changes in the Chief Executive Officer and reviews the compensation summariesexchange rates. We do not engage in currency speculation or hold or issue financial instruments for each Senior Executive, including base salary, bonus, equity awards (if any), deferred compensation benefits and other benefits. In determining specific components of compensation, the Compensation Committee considers individual performance, level of responsibility, skills and experience, and other compensation awards or arrangements.trading purposes. These measures are evaluatedcontracts generally expire in a non-formulaic manner with no specific weighting givenyear or less. Any change in the fair value of foreign exchange contracts is accounted for as an increase or decrease to any specific objectives that the executives were tasked with performing.general and administrative expenses in current period earnings.

Based on its reviewWe may continue to make strategic acquisitions of other companies or businesses and evaluation,these acquisitions introduce significant risks and uncertainties, including risks related to integrating the Compensation Committee makesacquired businesses and achieving benefits from the final determinationacquisitions.

In order to position ourselves to take advantage of growth opportunities, we have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties. These risks and uncertainties include:

·the difficulty in integrating newly-acquired businesses and operations in an efficient and effective manner;
·the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;
·the potential loss of key employees of the acquired businesses;
·the risk of diverting the attention of senior management from our operations;
·risks associated with integrating financial reporting and internal control systems;
·difficulties in expanding information technology systems and other business processes to accommodate the acquired businesses; and
·future impairments of any goodwill of an acquired business.

We may also incur significant expenses to pursue and consummate acquisitions. Any of the bonusesforegoing, or a combination of them, could cause us to be paid to the Senior Executives based on the OGSM process (the “OGSM Bonuses”),incur additional expenses and after taking into account any other factors (including factors that were not performance objectives) that it deems relevant in its discretion,materially and reports its decisions to the entire Boardadversely impact our business, financial condition, results of Directors.

Our Compensation Committee performs an annual review of our compensation policies, including the appropriate mix of base salary, bonuses and long-term incentive compensation. The Compensation Committee also reviews and approves all long-term incentive compensation and other benefits (including our 401(k) and our non-qualified deferred compensation plan).operations, or liquidity.

Determining Chief Executive Officer CompensationOur reliance on foreign suppliers for some of the automotive parts we sell to our customers or included in our products presents risks to our business.

The Compensation Committee is responsible for evaluatingA significant portion of automotive parts and components we use in our remanufacturing process are imported from suppliers located outside the performanceU.S., including various countries in Asia. As a result, we are subject to various risks of Mr. Joffe, our Chief Executive Officer,doing business in foreign markets and setting his annual compensation. In determining these elements of compensation for Mr. Joffe, the Compensation Committee considered the contributions Mr. Joffe has made to our Company bothimporting products from strategic and operational perspectives. The Compensation Committee reviews the key operating results and key strategic initiatives of our Company against the goals and base financial plan contained in the OGSM to determine if the Chief Executive Officer has achieved the goal of strategically enhancing our Company while maintaining favorable operating metrics. The Compensation Committee also takes into consideration the standard of living of the Los Angeles vicinity in which our corporate offices are located. The Compensation Committee separately reviews all relevant information, including reports provided by its outside consultant, and arrives at its decision for the Chief Executive Officer’s total compensation. The Chief Executive Officer’s performance is evaluated in a non-formulaic manner with no specific weighting given to any one of the performance measures. Mr. Joffe does not participate in any decision regarding his compensation. On May 18, 2012, we entered into a new employment agreement with Mr. Joffe which sets his base salary at $600,000 which will be reviewed from time to time in accordance with the Company’s established procedures for adjusting salaries of similarly situated employees. On June 12, 2014 we entered into a first amendment to the new employment agreement with Mr. Joffe which sets his base salary at $700,000 effective July 1, 2014. See the “Employment Agreements” section below for a further discussion of certain compensation amounts payable to Mr. Joffe pursuant to his employment agreement. Upon making its determination, the Compensation Committee reports its recommendations concerning Mr. Joffe’s compensation to the entire Board of Directors.abroad, such as:

Compensation Committee Consultant.
●significant delays in the delivery of cargo due to port security considerations;

●imposition of duties, taxes, tariffs or other charges on imports;
The Compensation Committee retained Towers Watson in August 2015 as its outside compensation consultant to conduct a compensation review for the top eighteen executive positions at the Company (the “Fiscal 2016 Review”). Towers Watson does not perform any other consulting work or any other services for our Company, reports directly to the Compensation Committee, and takes direction from the Chairman of the Compensation Committee. The Compensation Committee has assessed the independence of Towers Watson pursuant to the rules prescribed by the SEC and has concluded that no conflict of interest existed in Fiscal 2016 or currently exists that would prevent Towers Watson from serving as an independent consultant to the Compensation Committee. The Compensation Committee engaged Towers Watson to prepare a complete competitive assessment of our executive compensation practices in 2004, an updated assessment of the compensation of our Chief Executive Officer in 2006, a complete executive compensation assessment in 2009, a complete executive compensation review in 2011, and an updated assessment of the compensation of our Chief Executive Officer in 2012 (completed in fiscal 2013) and the Fiscal 2016 Review.
●imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that may be imported into the U.S. from countries or regions where we do business;
●financial or political instability in any of the countries in which our product is manufactured;
●potential recalls or cancellations of orders for any product that does not meet our quality standards;
 
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The Compensation Committee considers analysis
●disruption of imports by labor disputes or strikes and local business practices;
●political or military conflict involving the U.S., which could cause a delay in the transportation of our products and an increase in transportation costs;
●heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods;
●natural disasters, disease epidemics and health related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;
●inability of our non-U.S. suppliers to obtain adequate credit or access liquidity to finance their operations; and
●our ability to enforce any agreements with our foreign suppliers.

Any of the foregoing factors, or a combination of them, could increase the cost or reduce the supply of products available to us and advice from its outside consultant when making compensation decisions for the Chief Executive Officermaterially and adversely impact our business, financial condition, results of operations or liquidity.

In addition, because we depend on independent third parties to manufacture a significant portion of our wheel hub, master cylinder, and other Senior Executives. The outside consultant’s work forpurchased finished goods, we cannot be certain that we will not experience operational difficulties with such manufacturers, such as reductions in the Compensation Committee includes data analysis, market assessments, benchmarkingavailability of production capacity, errors in complying with merchandise specifications, insufficient quality controls and preparation of related reports, including for Fiscal 2016 Towers Report.failure to meet production deadlines or increases in manufacturing costs.

Peer Group.An increase in the cost or a disruption in the flow of our imported products may significantly decrease our sales and profits.

While the Compensation Committee does not itself undertakeMerchandise manufactured offshore represents a formalized benchmarking process, it does review the assessment provided by its outside consultant detailing the competitivenesssignificant portion of our executive compensation relative to our peer group when making its executive compensation decisions. Our peer group for compensation purposes includes Dorman Products Inc., Drew Industries Inc., Fuel Systems Solutions, Inc., Gentex Corp., Modine Manufacturing Co., Remy International, Inc., Shiloh Industries Inc., Spartan Motors Inc., Standard Motor Products Inc., Stoneridge Inc., Strattec Security Corp., Gentherm, Inc. and Superior Industries International Inc.  The Committee believes that this peer group is an appropriate basis for assessing the competitiveness of our executive compensation.

Fiscal 2016 Towers Report.  In reaching its executive compensation decisions for Fiscal 2016, the Committee considered analysis and advice containedtotal product purchases. A disruption in the Fiscal 2016 Towers Report regardingshipping or cost of such merchandise may significantly decrease our sales and profits. In addition, if imported merchandise becomes more expensive or unavailable, the competitiveness oftransition to alternative sources may not occur in time to meet our executive compensation in comparison to our peer group and compensation surveys.  Towers Watson determined that in aggregate the compensation levels reviewed by Towers Watson were within the competitive range with variations by position.  The compensation levels assessed by Towers Watson were based on actual payments or grants, as the casedemands. Merchandise from alternative sources may also be of base salary, bonuseslesser quality and long-term incentive grants.  In reaching its conclusions, Towers Watson appliedmore expensive than those we currently import. Risks associated with our reliance on imported merchandise include disruptions in the following standards for determining that compensation isshipping and importation or increase in line with competitive market practices:  base salary between 90% and 110%the costs of the median base salary; total cash compensation (base salary plus bonus) between 85% and 115% of the median total cash compensation; and total direct compensation (total cash compensation plus long-term incentive grants) between 80% and 120% of the median total direct compensation.

Future Compensation Consultant Engagement.  In light of the outcome of the non-advisory vote on the compensation of the Company’s named executive officers at the Annual Meeting of Shareholders of the Company held on March 24, 2016, the Compensation Committee expects to engage Towers Watson (or another independent compensation consultant) to prepare alternatives approaches to incentive compensation thatimported products. For example, common risks may address the concerns of shareholders who voted against the compensation of the Company’s named executive officers.

Senior Executive Compensation Decisions (Other than the Chief Executive Officer).

The Compensation Committee made its decisions for each of our Senior Executives (other than the Chief Executive Officer) with respect to OGSM Bonuses following the process described above, in each case the performance goals apply with respect to both the Company’s rotating electrical and undercar businesses:

Kevin Daly, Chief Accounting Officerbe:

·Provide timely and accurate services and information to our management, Board of Directors and other stakeholdersraw material shortages;
·Improve top-level financial knowledge and accounting controls and maintain regulatory compliance with accounting standards and practiceswork stoppages;
·strikes and political unrest;
·Keep abreastproblems with oceanic shipping, including shipping container shortages;
·increased customs inspections of all financial accounting pronouncements that may affect our financial reportingimport shipments or financial strategiesother factors causing delays in shipments;
·economic crises;
·international disputes and wars;
·loss of “most favored nation” trading status by the U. S. in relations to a particular foreign country;
·import duties;
·import quotas and other trade sanctions; and
·increases in shipping rates.

David Lee, Chief Financial OfficerProducts manufactured overseas and imported into the U.S. and other countries are subject to import restrictions and duties, which could delay their delivery or increase their cost.

·Monitor all metrics that may have an impact on our financial performance
·Maintain an effective treasury function, including budgeting and forecasting
During and following the 2016 U.S. presidential election, there has been discussion and commentary regarding potential significant changes to U.S. trade policies, legislation, treaties and tariffs, including NAFTA and trade policies and tariffs affecting China. There have also been discussions of a disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported products. It is unknown at this time whether and to what extent new legislation will be passed into law, pending or new regulatory proposals will be adopted, international trade agreements will be negotiated, or the effect that any such action may have, either positively or negatively, on our industry, or on us. Similar to many other multinational corporations, we do a significant amount of business that would be impacted by these changes. If any new legislation and/or regulations are implemented, or if existing trade agreements are renegotiated, it may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with such changes. Such operational changes could have a material adverse effect on our business, financial condition and results of operations.
 
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·Manage our cash flows
·Minimize the loan and interest expenses we incur
·Manage our shareholder relations
If our technology and telecommunications systems were to fail, or we were not able to successfully anticipate, invest in or adopt technological advances in our industry, it could have an adverse effect on our operations.

Steve Kratz, Chief Operating OfficerWe rely on computer and telecommunications systems to communicate with our customers and vendors and manage our business. The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty, operating malfunction, software virus or service provider failure, could disrupt our operations. In addition, our future growth may require additional investment in our systems to keep up with technological advances in our industry. If we are not able to invest in or adopt changes to our systems, or such upgrades take longer or cost more than anticipated, our business, financial condition and operating results may be adversely affected.

·Evaluate and manage the key operating metrics for us
·Increase quality of our product
·Implement strategies aimed at reducing our product costs and warranty rates
·Manage our recovery operations
·Improve our customer support services
·Manage and improve the performance of our information technology systems
Cyber-attacks or other breaches of information technology security could adversely impact our business and operations.

Doug Schooner, Chief Manufacturing OfficerCyber-attacks or other breaches of network or information technology security may cause equipment failure or disruption to our operations. Such attacks, which include the use of malware, computer viruses and other means for disruption or unauthorized access, on companies have increased in frequency, scope and potential harm in recent years. While, to the best of our knowledge, we have not been subject to cyber-attacks or to other cyber incidents which, individually or in the aggregate, have been material to our operations or financial conditions, the preventive actions we take to reduce the risk of cyber incidents and protect our information technology and networks may be insufficient to repel a major cyber-attack in the future. To the extent that any disruption or security breach results in a loss or damage to our data or unauthorized disclosure of confidential information, it could cause significant damage to our reputation, affect our relationship with our customers, suppliers and employees, and lead to claims against us and ultimately harm our business. Additionally, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. While we maintain specific cyber insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage.

·Maximize all manufacturing efficiencies to ensure fill rates to our customers
·Ensure the quality of our products through the manufacturing process
·Maintain appropriate levels of offshore production volume and capacity
·Maintain a global manufacturing and multifunctional support group
·Reorganize special order department to maintain changing unit technology
·Complete the reorganization of the production shop
·Improve product costs

Michael Umansky, Vice President, Secretary and General Counsel

·Limit our legal and other risk exposure
·Manage any litigation
·Control our legal and insurance costs
·Maintain our compliance standards, including compliance with SEC rules and regulations
·Manage our investor relations communications
·Develop and protect intellectual property for our business processes
·Advise on and implement any transactional business opportunities, including acquisitions, financings, SEC correspondence and customer contracts
·Oversee certain administrative functions, including human resource functions
·Determine and negotiate all required insurance
·Supervise contractual obligations
Regulations related to conflict minerals could adversely impact our business.

The Compensation Committee approvedDodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) contains provisions to improve transparency and accountability concerning the following base salaries, Non-OGSM Bonusessupply of certain minerals, known as “conflict minerals”, originating from the Democratic Republic of Congo (“DRC”) and OGSM Bonuses earned during Fiscal 2016adjoining countries. These rules could adversely affect the sourcing, supply, and pricing of materials used in our products, as the number of suppliers who provide conflict-free minerals may be limited. We may also suffer reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to modify our products to avoid the use of such materials. We may also face challenges in satisfying customers who may require that our products be certified as containing conflict-free minerals.

The products we manufacture or contract to manufacture contain small quantities of Tin and Gold. We manufacture or contract to manufacture one product with small quantities of Tantalum. For the reporting year ending December 31, 2017, 100% of applicable suppliers responded to our request for information on sourcing of their “conflict minerals.” This inquiry yielded 192 smelters, refiners, or metal processing facilities for these Senior Executives:

 Name   Base Salary    
Non-OGSM
Bonus
     OGSM Bonus  
          
David Lee $290,000  $100  $101,000 
Kevin Daly $250,000  $100  $58,800 
Steve Kratz $350,000  $100  $91,000 
Michael Umansky $506,000  $100  $123,900 
Doug Schooner $294,000  $100  $101,000 
minerals that are, or could be, in our supply chain. Of these, 89% were validated as conflict-free, per publicly available information on the Conflict Free Sourcing Initiative website. For the majority of the remaining entities reported to us, there is insufficient data for the industry to determine the source of materials for their smelters.
 
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Chief Executive Officer Compensation Decisions.Our strategy for managing risks associated with conflict minerals in products includes continuing to encourage our suppliers to engage in conflict-free sourcing, and obtaining data from our suppliers that is more applicable to the products we purchase. We continue to monitor progress on industry efforts to ascertain whether some facilities that suppliers identified are actually smelters. We do not believe conflict minerals pose risk to our operations. We are a member of the Automobile Industry Action Group (AIAG), and support their efforts in the conflict minerals area.

The Compensation Committee made its decisions for the Chief Executive Officer’s Fiscal 2016 OGSM Bonus (other than the Non-OGSM Bonus) following the process described aboveNatural disasters or other disruptions in our business in California and has established the following key individual performance goals:
·Overall responsibility for the financial results of the Company
·Develop key strategies in all areas aimed at driving our Company value
·Strengthen our relationships with key customers through long-term arrangements
·Ensure appropriate information is communicated to our Board of Directors
·Ensure that the appropriate management team and corporate focus is in place
·Develop an appropriate succession plan
·Maintain the appropriate financial structure for our Company, including, but not limited to, budgets and operating focus
·Make decisions on all key initiatives proposed by senior management
·Build sales
·Evaluate and propose systems and initiatives for continuous improvement in all disciplines of our business
·Identify and drive any acquisitions
·Integrate acquired businesses
·Prepare the infrastructure and develop plans to grow the Company
Baja California, Mexico could increase our operating expenses or cause us to lose revenues.

The Compensation Committee did not review Mr. Joffe’s base salaryA substantial portion of our operations are located in Fiscal 2016; however, effective July 1, 2014, his base salary was set at $700,000. See the “Employment Agreement” section below forCalifornia and Baja California, Mexico, including our headquarters, remanufacturing and warehouse facilities. Any natural disaster, such as an earthquake, or other damage to our facilities from weather, fire or other events could cause us to lose inventory, delay delivery of orders to customers, incur additional repair-related expenses, disrupt our operations or otherwise harm our business. These events could also disrupt our information systems, which would harm our ability to manage our operations worldwide and compile and report financial information. As a further discussionresult, we could incur additional expenses or liabilities or lose revenues, which could exceed any insurance coverage and would adversely affect our financial condition and results of certain compensation amounts payable to Mr. Joffe pursuant to his employment agreement. The Compensation Committee approved a Fiscal 2016 OGSM Bonus for Mr. Joffe of $700,000.operations.

Tax ConsiderationsWeakness in conditions in the global credit markets and macroeconomic factors could adversely affect our financial condition and results of operations.

Any weakness in the credit markets could result in significant constraints on liquidity and availability of borrowing terms from lenders and accounts payable with vendors. Modest economic growth in most major industrial countries in the world and uncertain prospects for continued growth threaten to cause tightening of the credit markets, more stringent lending standards and terms, and higher interest rates. The persistence of these conditions could have a material adverse effect on our borrowings and the availability, terms and cost of such borrowings. In addition, deterioration in the U.S. economy could materially and adversely impact our operating results.

Our stock price may be volatile and could decline substantially.

Our stock price may decline substantially as a result of developments in our business, the volatile nature of the stock market, and other factors beyond our control. The stock market has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for our common stock to decline, including (i) our operating results failing to meet the expectations of securities analysts or investors in any period, (ii) downward revisions in securities analysts’ estimates, (iii) market perceptions concerning our future earnings prospects, (iv) public or private sales of a substantial number of shares of our common stock, and (v) adverse changes in general market conditions or economic trends.

Our failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements.

Section 162(m)404 of the Internal Revenue CodeSarbanes-Oxley Act of 1986, as amended, (the “Code”2002 (“SOX”) generally disallows a tax deduction for annual compensation in excess of $1.0 million paidrequires our management to our named executive officers. Qualifying performance-based compensation (withinassess the meaning of Section 162(m) of the Code and regulations) is not subject to the deduction limitation if specified requirements are met. We generally intend to structure the performance-based portioneffectiveness of our executive compensation, when feasible,internal control over financial reporting at the end of each fiscal year and certify whether or not internal control over financial reporting is effective. Our independent accountants are also required to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, our Board of Directors or Compensation Committee may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.

In limited circumstances, we may agree to make certain items of income payable to our named executive officers tax-neutral to them. Accordingly, we have agreed to gross-up certain payments to our Chief Executive Officer to cover any excise taxes (and related income taxes on the “gross-up” payment) that he may be obligated to payexpress an opinion with respect to the first $3,000,000 of “parachute payments” (as defined in Section 280G of the Code) to be made to him upon a change of controleffectiveness of our Company.

Compensation Committee Report

The Compensation Committee has reviewedinternal controls. Any failure to maintain or implement new or improved internal controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to meet our periodic reporting obligations (which may result in our failure to maintain the listing standards for our common stock) or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and discussedannual auditor attestation reports regarding the Compensation Discussion and Analysiseffectiveness of our internal control over financial reporting required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in this Amendment.

By Members of the Compensation Committee

Rudolph Borneo, Chairman
Philip Gay
Duane Miller
Jeffrey Mirvisunder SOX.
 
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Compensation Risk AnalysisUncertainties in the interpretation and application of the Tax Cuts and Jobs Act of 2017 could materially affect our tax obligations and effective tax rate.

On December 22, 2017, the U.S. enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act requires complex computations not previously required by U.S. tax law. As such, the application of accounting guidance for such items is currently uncertain. Further, compliance with the Tax Act and the accounting for such provisions require preparation and analysis of information not previously required or regularly produced. In addition, the U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the Tax Act and impact our results of operations in future periods. Accordingly, while we have provided a provisional estimate on the effect of the Tax Act in our accompanying audited financial statements, further regulatory or GAAP accounting guidance for the law, our further analysis on the application of the law, and refinement of our initial estimates and calculations could materially change our current provisional estimates, which could, in turn, materially affect our tax obligations and effective tax rate. There may also be significant future effects that these tax reforms will have on our financial results and our business strategies. In addition, there is a risk that states or foreign jurisdictions may amend their tax laws in response to these tax reforms, which could have a material impact on our future results.

Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

The preceding “Compensation Discussionfollowing sets forth the location, type of facility, square footage and Analysis” section generally describesownership interest in each of our compensation policies, plansfacilities.

LocationType of Facility
Approx.
Square
Feet
Leased
or
Owned
Expiration
Torrance, CARemanufacturing, Warehouse, Administrative, and Office231,000LeasedMarch 2022
Tijuana, Mexico (1)Remanufacturing, Warehouse, and Office312,000LeasedDecember 2018
Tijuana, Mexico (2)Remanufacturing, Warehouse, and Office410,000LeasedDecember 2032
Ontario, CanadaManufacturing, Warehouse, and Office30,000LeasedDecember 2022
Singapore & MalaysiaRemanufacturing, Warehouse, and Office74,000LeasedVarious through December 2021
Shanghai, ChinaWarehouse and Office54,000LeasedMarch 2019
Winchester, VAWarehouse and Office13,000LeasedFebruary 2021

(1)All renewal options for our current lease for our remanufacturing, warehouse, and office space in Tijuana, Mexico, expiring on December 31, 2018, have been fully exercised. We would have to enter into a new agreement to extend this lease further. We can request an extension of the lease by sending a written notice to the landlord at least 150 days prior to the expiration date; however, there can be no assurance that the landlord would agree to the requested extension.
(2)The shell building and ancillary improvements on our new distribution center in Tijuana, Mexico, were completed in the latter part of fiscal 2018. We began shipping certain products to our customers in the first quarter of fiscal 2019 and we expect this facility to be fully operational to ship all our products during fiscal 2019.

We believe the above mentioned facilities are sufficient to satisfy our foreseeable warehousing, production, distribution and practices that are applicableadministrative office space requirements for our executivescurrent operations.
Item 3.
Legal Proceedings

We are subject to various lawsuits and management. Our Compensation Committee reviewsclaims in the relationship betweennormal course of business. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our risk management policies and practices, corporate strategy and compensation practices. Our Compensation Committee has determined that these plans and practices, as applied to all of our employees, including our executive officers, does not encourage excessive risk taking at any level of our Company. The Compensation Committee doesbusiness. We do not believe that risks arising from its compensation plans, policies or practices are reasonably likely tothe outcome of these other matters will have a material adverse effect on our Company.financial position or future results of operations.

Summary Compensation Table
Item 4.
Mine Safety Disclosures

The following table sets forth information concerning Fiscal 2016, 2015 and 2014 compensation of our named executive officers.

Name & Principal PositionFiscal Year Salary  Bonus (1)  
Stock
Awards
  
Options
Awards (2)
  
Non-Equity
Incentive Plan
Compensation
  
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings (3)
  
All Other
Compensation
(4)
  Total 
                          
Selwyn Joffe2016 $700,000  $700,100  $389,125  $374,663  $-  $-  $450,929  $2,614,817 
Chairman of the Board,2015  674,616   1,778,834   1,350,893   -   -   -   223,056   4,027,399 
President and CEO2014  600,000   1,174,806   434,312   374,790   -   -   729,209   3,313,117 
                                  
David Lee2016 $262,192  $101,100  $96,503  $92,951  $-  $-  $70,200  $622,946 
Chief Financial Officer2015  220,000   324,260   84,841   89,510   -   -   61,990   780,601 
 2014  220,000   208,458   108,112   93,586   -   -   57,004   687,160 
                                  
Kevin Daly2016 $214,462  $58,900  $52,921  $50,050  $-  $-  $29,591  $405,924 
Chief Accounting Officer2015  208,000   187,919   45,860   48,124   -   -   24,663   514,566 
2014  208,000   133,386   57,784   50,151   -   -   23,493   472,815 
                                  
Steve Kratz2016 $350,000  $91,100  $105,842  $101,531  $-  $-  $25,630  $674,103 
Chief Operating Officer2015  350,000   374,646   91,720   96,247   -   -   22,696   935,309 
2014  350,000   271,248   129,548   111,497   -   -   20,623   882,916 
                                  
Michael Umansky2016 $506,000  $124,000  $68,486  $67,211  $-  $-  $85,551  $851,248 
Vice President, Secretary2015  506,000   316,343   59,618   63,523   -   -   56,414   1,001,898 
and General Counsel2014  506,000   194,920   77,356   67,167   -   66,006   55,618   967,066 
                                  
Doug Schooner2016 $294,000  $101,100  $84,051  $80,081  $-  $-  $71,246  $630,478 
Chief Manufacturing Officer2015  286,385   265,089   59,618   61,598   -   -   62,767   735,457 
2014  250,000   182,388   75,492   64,928   -   333   56,905   630,045 
Not applicable.
 
(1)Bonus amounts for each named executive officer represent the bonus amount earned for each respective fiscal year and include a $100 bonus paid to each of the Company’s employees during December of each year, including the named executive officers.
(2)Option award amounts represent the aggregate grant date fair value of options granted during the fiscal years ended March 31, 2016, 2015, and 2014.
(3)All amounts represent nonqualified deferred compensation earnings.
(4)The following chart is a summary of the items that are included in the “All Other Compensation” totals for the fiscal year ended March 31, 2016:
16
Name 
Automobile
Expenses
  
Health
Insurance
Premiums
  
401K
Employer's
Contribution
  
Deferred
Compensation
Plan
Employer's
Contribution
  Other  Total 
                   
Selwyn Joffe $18,000  $86,426  $8,861  $337,642  $-  $450,929 
David Lee $-  $62,426  $7,774  $-  $-  $70,200 
Kevin Daly $-  $21,914  $6,043  $1,634  $-  $29,591 
Steve Kratz $-  $21,914  $3,716  $-  $-  $25,630 
Michael Umansky $1,097  $43,585  $11,890  $28,978  $-  $85,551 
Doug Schooner $-  $62,426  $8,820  $-  $-  $71,246 
2016 Grants of Plan-Based AwardsPART II

NameGrant Date 
All Other
Stock Awards:
Number of
Shares of Stock
or Units (1)
  
All Other
Option
Awards:
Number of
Securities
Underlying
Options (1)
  
Exercise or
Base Price of
Option Awards
  
Grant Date
Fair Value of
Stock and
Option Awards
 
              
Selwyn Joffe9/4/2015  -   26,200  $31.13  $374,663 
Selwyn Joffe9/4/2015  12,500   -  $31.13  $389,125 
David Lee9/4/2015  -   6,500  $31.13  $92,951 
David Lee9/4/2015  3,100   -  $31.13  $96,503 
Kevin Daly9/4/2015  -   3,500  $31.13  $50,050 
Kevin Daly9/4/2015  1,700   -  $31.13  $52,921 
Steve Kratz9/4/2015  -   7,100  $31.13  $101,531 
Steve Kratz9/4/2015  3,400   -  $31.13  $105,842 
Michael Umanksy9/4/2015  -   4,700  $31.13  $67,211 
Michael Umanksy9/4/2015  2,200   -  $31.13  $68,486 
Doug Schooner9/4/2015  -   5,600  $31.13  $80,081 
Doug Schooner9/4/2015  2,700   -  $31.13  $84,051 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Select Market under the trading symbol MPAA.

The following sets forth the high and low prices of our common stock:

  Fiscal 2018  Fiscal 2017 
  High  Low  High  Low 
1st Quarter $31.57  $25.39  $37.70  $25.50 
2nd Quarter $29.88  $24.24  $34.73  $25.78 
3rd Quarter $30.16  $23.92  $29.41  $21.75 
4th Quarter $28.98  $20.11  $30.87  $25.09 

As of June 7, 2018, there were 18,893,102 shares of common stock outstanding held by 12 holders of record. We have never declared or paid dividends on our common stock. The declaration of any prospective dividends is at the discretion of the board of directors and will be dependent upon sufficient earnings, capital requirements and financial position, general economic conditions, state law requirements, and other relevant factors. Additionally, our new credit facility permits the payment of up to $20,000,000 of dividends per calendar year, subject to a minimum availability threshold and pro forma compliance with financial covenants.

Purchases of Equity Securities by the Issuer

Share repurchase activity during the fourth quarter of fiscal 2018 was 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)
 
             
January 1 - January 31, 2018:            
Open market and privately negotiated purchases  -  $-   -  $8,145,000 
February 1 - February 28, 2018:                
Open market and privately negotiated purchases  208,081  $22.94   208,081   8,370,000 
March 1 - March 31, 2018:                
Open market and privately negotiated purchases  -  $-   -   8,370,000 
                 
Total  208,081       208,081  $8,370,000 
(1)These awards generally vest in three equal annual installments beginning on the first anniversaryOn February 2, 2018, our board of directors increased our share repurchase program authorization from $15,000,000 to $20,000,000 of our common stock. As of March 31, 2018, $11,630,000 of the grant date$20,000,000 had been utilized and $8,370,000 remained available to repurchase shares under the authorized share repurchase program, subject to continued employment.the limit in our credit facility. We retired the 511,746 shares repurchased under this program through March 31, 2018. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.
 
17
Outstanding Equity Awards at Fiscal Year EndCompensation Plan Information

The following table summarizes information regardingour equity awards granted to our named executive officers that remain outstandingcompensation plans as of March 31, 2016.2018:

  Option Awards Stock Awards 
Name 
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Vested
  
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Unvested
   
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
  
Option
Exercise
Price ($)
 
Option
Expiration
Date
 
Number of
Shares or
Units of Stock
Unvested (#)
   
Market Value
of Shares or
Units of Stock
Unvested ($)
 
                      
Selwyn Joffe                     
   75,000   -    -  $12.00 8/30/2016       
   109,100   -    -  $6.46 12/27/2022       
   124,100   -    -  $6.46 12/27/2022       
   55,800   27,900(1)  -  $9.32 9/2/2023       
   -   26,200(4)  -  $31.13 9/3/2025       
                     15,534(1) $589,981 
                     34,393(3) $1,306,246 
                     12,500(4) $474,750 
David Lee                           
   30,900   -    -  $6.46 12/27/2022         
   13,933   6,967(1)  -  $9.32 9/2/2023         
   3,100   6,200(2)  -  $22.93 6/21/2024         
   -   6,500(4)  -  $31.13 9/3/2025         
                     3,866(1) $146,831 
                     2,467(2) $93,697 
                     3,100(4) $117,738 
Kevin Daly                           
   -   3,734(1)  -  $9.32 9/2/2023         
   -   3,333(2)  -  $22.93 6/21/2024         
   -   3,500(4)  -  $31.13 9/3/2025         
                     2,066(1) $78,467 
                     1,333(2) $50,627 
                     1,700(4) $64,566 
Steve Kratz                           
   21,900   -    -  $6.46 12/27/2022         
   16,600   8,300(1)  -  $9.32 9/2/2023         
   3,333   6,667(2)  -  $22.93 6/21/2024         
   -   7,100(4)  -  $31.13 9/3/2025         
                     4,634(1) $175,999 
                     2,667(2) $101,293 
                     3,400(4) $129,132 
Michael Umansky                           
   7,400   -    -  $6.46 12/27/2022         
   10,000   5,000(1)  -  $9.32 9/2/2023         
   2,200   4,400(2)  -  $22.93 6/21/2024         
   -   4,700(4)  -  $31.13 9/3/2025         
                     2,766(1) $105,053 
                     1,733(2) $65,819 
                     2,200(4) $83,556 
Doug Schooner                           
   -   4,834(1)  -  $9.32 9/2/2023         
   2,133   4,267(2)  -  $22.93 6/21/2024         
   -   5,600(4)  -  $31.13 9/3/2025         
                     2,700(1) $102,546 
                     1,733(2) $65,819 
                     2,700(4) $102,546 
Plan Category 
Number of securities to
be issued upon
exercise of outstanding
options, warrants and
rights
(a)
  
Weighted-average
exercise price of
outstanding options
warrants and rights
(b)
  
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c )
 
Equity compensation plans approved by security holders  1,277,126(1) $16.97(2)  1,810,786(3)
Equity compensation plans not approved by security holders  N/A   N/A   N/A 
Total  1,277,126  $16.97   1,810,786 

(1)This award vests in three equal annual installments beginning onConsists of (i) stock options issued under the first anniversary of2004 Non-Employee Director Stock Option Plan, (ii) restricted stock units (“RSUs”) and stock options issued under the grant date, September 3, 2013, subject to continued employment.Third Amended and Restated 2010 Incentive Award Plan (the “2010 Plan”), and (iii) RSUs issued under our 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”).
(2)The weighted average exercise price does not reflect the shares that will be issued in connection with the settlement of RSUs, since RSUs have no exercise price.
(3)(2)This award vests in three equal annual installments beginning on the first anniversaryConsists of the grant date, June 24,shares available for future issuance under our 2010 Plan and 2014 subject to continued employment.Plan.
(3)This award vests in three equal annual installments beginning on the first anniversary of the grant date, June 11, 2014, subject to continued employment.
(4)This award vests in three equal annual installments beginning on the first anniversary of the grant date, September 4, 2015, subject to continued employment.
 
18
Option Exercises and Stock Vested

  Option Awards  Stock Awards 
Name 
Number of
Shares
Acquired on
 Exercise
  
Value
Realized on
Exercise
  
Number of
Shares
Acquired on
Vesting
  
Value
Realized on
Vesting
 
             
Selwyn Joffe  325,000  $7,314,412   32,729  $1,020,246 
David Lee  7,500  $162,056   5,100  $161,443 
Kevin Daly  10,900  $243,350   2,734  $86,544 
Steve Kratz  10,000  $250,176   5,966  $188,894 
Michael Umansky  -  $-   3,634  $115,040 
Doug Schooner  26,333  $655,616   3,567  $112,913 
Nonqualified Deferred CompensationPerformance Graph

The following table sets forth certain information regarding contributions, earnings and account balances undergraph compares the cumulative return to holders of our Amended and Restated Executive Deferred Compensation Plan, our only defined contribution plan that providescommon stock for the deferralfive years ending March 31, 2018 with the NASDAQ Composite Total Returns Index and the Zacks Retail and Wholesale Auto Parts Index. The comparison assumes $100 was invested at the close of compensationbusiness on a basis that is not-tax qualified, forMarch 31, 2013 in our common stock and in each of the named executive officers ascomparison groups, and assumes reinvestment of fiscal year ended March 31, 2016. A description of the material terms and conditions of the Amended and Restated Executive Deferred Compensation Plan follows.dividends.

Name 
Executive
Contributions
in Last FY(1)
  
Registrant
contribution
in last FY(2)
  
Aggregate
Earnings
in Last FY
  
Aggregate
Withdrawals/
Distributions
  
Aggregate
Balance at
Last FY
 
                
Selwyn Joffe $583,664  $337,642  $(23,942) $-  $19,983 
David Lee $-  $-  $-  $-  $- 
Kevin Daly $1,634  $1,634  $75  $-  $- 
Steve Kratz $-  $-  $-  $-  $- 
Michael Umansky $59,325  $28,978  $(84) $-  $604,726 
Doug Schooner $-  $-  $-  $-  $- 

The following table shows our contribution to each named executive officer’s account:

Name Contribution  Interest (a)  Total 
          
Selwyn Joffe $337,642  $-  $337,642 
David Lee $-  $-  $- 
Kevin Daly $1,634  $-  $1,634 
Steve Kratz $-  $-  $- 
Michael Umansky $28,978  $-  $28,978 
Doug Schooner $-  $-  $- 

(a)No interest is paid by the registrant.
 
 
19
Nonqualified Deferred Compensation Plan

We maintain the Motorcar Parts of America, Inc. Amended and Restated Executive Deferred Compensation Plan, an unfunded, non-qualified deferred compensation plan for a select group of management or highly compensated employees, including our named executive officers. Participants in the plan may elect to defer up to 100% of their gross W-2 compensation. We make matching contributions of 100% of each participant’s elective contributions to the plan, up to 3% of the participant’s compensation for the plan year or such other limit as the plan administrator determines in its discretion. The plan is designed to defer taxation to the participant on contributions and notional earnings thereon until distribution upon a separation of service, death, disability, change of control, unforeseeable emergency or in accordance with a participant’s previously made distribution elections, in each case as more specifically defined in the plan. Insurance annuity contracts provide funding for the plan, however, the annuity contracts are owned by us and remain subject to claims of our general creditors.

Employment Agreements

New Employment Agreement

On May 18, 2012, we entered into a new employment agreement (the “New Employment Agreement”) with Mr. Joffe, which terminates and supersedes Mr. Joffe’s previous employment agreement that was to expire on August 31, 2012. The New Employment Agreement provides for Mr. Joffe to serve as our Chairman, President and Chief Executive Officer for a term expiring on August 31, 2015, unless extended or earlier terminated. Pursuant to the New Employment Agreement, Mr. Joffe’s base salary was set at $600,000 per year and will be reviewed from time to time in accordance with our established procedures for adjusting salaries for similarly situated employees. Mr. Joffe is eligible to participate in our Annual Incentive Plan adopted and amended from time to time by the Board (the “Annual Incentive Plan”), with a target bonus equal to 100% of Mr. Joffe’s salary (the “Annual Incentive Bonuses”).

In June 2014, the Company and Mr. Joffe entered into Amendment No. 1 to the New Employment Agreement pursuant to which, effective as of July 1, 2014, (i) the last day of Mr. Joffe’s term of employment was changed from August 31, 2015 to July 1, 2019 and (ii) his base salary was increased from $600,000 to $700,000 per year. All other terms and conditions of the New Employment Agreement remain the same.

Pursuant to the New Employment Agreement, Mr. Joffe will also be eligible to receive annual awards under the 2010 Plan in such amounts as are determined by the Compensation Committee as administrator of the 2010 Plan in its sole and absolute discretion (the “Annual Awards”). Such awards may be in the form of options, restricted stock, restricted stock units, performance shares, performance units or such other form of award as determined by the Compensation Committee as administrator of the 2010 Plan in its sole and absolute discretion.
Item 6.
Selected Financial Data

The Annual Incentive Bonuses,following selected historical consolidated financial information for the Initial Equity Awardsperiods indicated below has been derived from and should be read in conjunction with our consolidated financial statements and related notes thereto.

Our selected income statement data below represents our continuing operations and excludes the Annual Awards, to the extent they constitute “incentive-based compensation” under Section 10Dresults of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), shall be subject to clawback by us todiscontinued subsidiary between the extent required by Section 10D(b)(2) of the Exchange Act, as determined by the applicable rulesacquisition in May 2011 and regulations promulgated thereunder from time to time by the U.S. SEC, as limited by California law to the extent California law applies.its bankruptcy in June 2013.

  Fiscal Years Ended March 31, 
Income Statement Data 2018  2017  2016  2015  2014 
Net sales $428,072,000  $421,253,000  $368,970,000  $301,711,000  $258,669,000 
Operating income  49,624,000   67,972,000   38,286,000   33,586,000   32,104,000 
Net income  16,316,000   37,573,000   10,563,000   11,453,000   6,482,000 
Basic net income per share $0.87  $2.02  $0.58  $0.68  $0.45 
Diluted net income per share $0.84  $1.93  $0.55  $0.65  $0.42 
Pursuant to the New Employment Agreement, Mr. Joffe will also receive:  (i) four weeks paid vacation each year during the term of the New Employment Agreement pursuant to our written vacation policy; (ii) a $1,500 monthly automobile allowance and payment by us of certain automobile-related expenses; (iii) during the term of the New Employment Agreement, if Mr. Joffe does not elect medical insurance coverage for himself and his eligible family through us, an allowance for such medical insurance in an amount equal to the cost which would have been incurred by us in supplying such coverage for Mr. Joffe and his eligible family; and (iv) $24,000 per year to be used by Mr. Joffe to purchase disability insurance for his benefit (the “Disability Insurance Payment” and, together with the benefits described in clauses (i), (ii) and (iii), the “Benefits”).
  March 31, 
Balance Sheet Data  2018   2017   2016   2015   2014 
Total assets $494,497,000  $436,139,000  $399,057,000  $413,078,000  $318,853,000 
Working capital (1)  (46,267,000)  (20,651,000)  (24,449,000)  43,863,000   3,447,000 
Revolving loan  54,000,000   11,000,000   7,000,000   -   10,000,000 
Term loan  16,981,000   19,999,000   23,047,000   79,222,000   87,277,000 
Capital lease obligations  5,084,000   2,512,000   2,608,000   528,000   318,000 
Other long term liabilities  20,960,000   25,986,000   35,066,000   36,049,000   26,477,000 
Shareholders’ equity $274,976,000  $248,681,000  $210,808,000  $190,203,000  $109,636,000 

The New Employment Agreement terminates on the date of Mr. Joffe’s death, in which event his accrued salary and Annual Incentive Bonus, if any, and reimbursable expenses and Benefits owing to him through the date of his death shall be paid to his estate, and his estate shall assume certain of his rights as specified in the New Employment Agreement.
(1)Our working capital is calculated as current assets less current liabilities. We carry our core inventory as a long-term asset in our consolidated balance sheets. As a result of our retrospective adoption of new accounting guidance, our deferred tax assets and liabilities were classified as noncurrent in the consolidated balance sheets from March 31, 2016 onward.
 
20
In
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives of management and any assumptions underlying any of the eventforegoing. Our actual results may differ significantly from those projected in the forward-looking statements. Our forward-looking statements and factors that Mr. Joffe’s employment is terminatedmight cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason.

Management Overview

We are a leading manufacturer, remanufacturer, and distributor of aftermarket automotive and light truck applications. We also, to a lesser extent, are a manufacturer, remanufacturer, and distributor of heavy duty truck and industrial and agricultural application parts. These replacement parts are sold for use on vehicles after initial vehicle purchase. These automotive parts are sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). We estimate the market size to be over $125 billion for each of the light duty and heavy duty markets in North America. We added turbochargers through an acquisition in July 2016. We began selling brake power boosters in August 2016. As a result of his physical or mental illness or incapacity as determinedan acquisition in accordanceJuly 2017, our business also now includes developing and selling diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles.

The current population of light duty vehicles in the U.S. is approximately 271 million and the average age of these vehicles is approximately 11.7 years. The aged vehicle population remains favorable. Although miles driven fluctuate primarily based on fuel prices, it has steadily increased for the past year. We believe demand for aftermarket automotive parts generally increases with the procedures set forthage of vehicles. In addition, increases in miles driven can accelerate replacement rates.

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

The heavy duty truck, industrial and Benefits owing to himagricultural aftermarket has some overlap with the automotive aftermarket as discussed above, but also has specialty distribution channels through the date of terminationOES channel and payment of the benefits pursuant to any disability insurance policy purchased by Mr. Joffe with the Disability Insurance Payment.auto-electric distributor channels.

In the event that Mr. Joffe’s employment is terminated by us for Cause (as definedaddition, we are now in the New Employment Agreement)business of diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), we will be released from any and all further obligations underelectric power trains for electric vehicles. The global market for diagnostics is approximately $5 billion, with the New Employment Agreement, except that we will pay Mr. Joffe his accrued salary and Annual Incentive Bonus, if any, and reimbursable expenses and Benefits owing to him throughsmallest but fastest growing segment of this being in the date of his termination.electric vehicle market.

In the event that Mr. Joffe’s employment is terminated by us without Cause (as defined in the New Employment Agreement) or Mr. Joffe voluntarily terminates the New Employment Agreement for Good Reason (as defined in the New Employment Agreement), then we will pay through the later of the date which is two years after the termination date or the last day of the term of the New Employment Agreement: (i) his salary as in effect immediately prior to the termination date; (ii) his average bonus earned for the two years immediately prior to the year in which the New Employment Agreement is terminated (or if such termination occurs within the first three months of our fiscal year, for the second and third years preceding the year in which such termination occurs); (iii) the Benefits; and (iv) reimbursable expenses.

If a Change in Control (as defined in the New Employment Agreement) occurs and Mr. Joffe voluntarily terminates the New Employment Agreement for Good Reason (as defined in the New Employment Agreement) or Mr. Joffe’s employment is terminated by us without Cause (as defined in the New Employment Agreement) within two years following a Change in Control, then Mr. Joffe will be entitled to receive either the severance benefit as described in the next sentence of this paragraph or the benefits described in the immediately preceding paragraph, whichever is more favorable to Mr. Joffe, and we will pay Mr. Joffe any reimbursable expenses owed to him through the termination date. The severance benefit will be equal to (i) two times Mr. Joffe’s salary at the annual rate in effect immediately prior to the date of the Change in Control plus (ii) two times Mr. Joffe’s average bonus earned for the two years immediately prior to the year in which the Change in Control occurs. The severance benefit will be paid to Mr. Joffe in a lump sum as soon as practicable, but no later than 30 days following the termination date.

In the event that the benefits provided for in the New Employment Agreement or otherwise payable to Mr. Joffe constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) and will be subject to the excise tax imposed by Section 4999 of the Code, Mr. Joffe will receive the greater of: (i) the largest portion, up to and including the total, of such benefits or (ii) the largest aggregate amount of such benefits that would result in no portion thereof being subject to excise tax under Section 4999 of the Code, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes and excise tax under Section 4999 of the Code, results in Mr. Joffe’s receipt, on an after-tax basis, of the greatest amount of the benefit.

The New Employment Agreement prohibits Mr. Joffe during the term of the New Employment Agreement or at any time thereafter from using or disclosing to any third party any of our confidential information and trade secrets. Pursuant to the New Employment Agreement, during the term of the New Employment Agreement, Mr. Joffe is also prohibited from: (i) competing with us; or (ii) soliciting or inducing any creditor, customer, supplier, officer, executive or agent of us or any of our subsidiaries or affiliates to sever its relationship with or leave the employ of any such entities.Segment Reporting

Pursuant to the New Employment Agreement,guidance provided under the FASB ASC for segment reporting, we agreed to reimburse Mr. Joffe for all reasonable legal fees and disbursements incurred by him in connection withhave identified our chief executive officer as CODM, have reviewed the negotiation, preparation and execution of the New Employment Agreement.

In conformity with our policy, all of our directors and officers execute confidentiality and nondisclosure agreements upon the commencement of employment. The agreements generally provide that all inventions or discoveriesdocuments used by the employee relatedCODM, and understand how such documents are used by the CODM to make financial and operating decisions. We have determined through this review process that our business comprises one reportable segment for purposes of recording and all confidential information developed or made known to the employee during the term of employment shall bereporting our exclusive property and shall not be disclosed to third parties without our prior approval.financial results.
 
21
Potential Payments Upon Termination or Change in Control TableCritical Accounting Policies

The following table provides an estimateWe prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States. Our significant accounting policies are discussed in detail below and in Note 2 of the inherent value of Mr. Joffe’s employment agreement described above, assuming the agreement was terminated on March 31, 2016, the last business day of Fiscal 2016. Please refernotes to “Employment Agreements” for more information.consolidated financial statements.

Benefit 
Termination by
Company
for Cause (1)
  Death (2)  
Disability
(3)
  
Voluntary
Termination by Mr.
Joffe for Good
Reason or
Termination by
Company w/o Cause
(4)
  
After Change in
Control:
Voluntary
Termination by
Mr. Joffe (5)
 
                
Salary Contribution $-  $-  $-  $1,400,000  $1,400,000 
Bonus $700,000  $700,000  $700,000  $1,700,200  $1,700,200 
Executive Awards (6) $-  $1,292,166  $1,292,166  $1,292,166  $1,292,166 
Healthcare $-  $-  $24,000  $172,852  $- 
Automobile Allowance (7) $-  $-  $-  $36,000  $- 
Accrued Vacation Payments $99,648  $99,648  $99,648  $207,340  $99,648 
In preparing our consolidated financial statements, we use estimates and assumptions for matters that are inherently uncertain. We base our estimates on historical experiences and reasonable assumptions. Our use of estimates and assumptions affect the reported amounts of assets, liabilities and the amount and timing of revenues and expenses we recognize for and during the reporting period. Actual results may differ from our estimates.

(1)Upon a termination for cause, Mr. Joffe will be entitled to his accrued salary, bonus, if any, reimbursable expenses, and benefits owing to him through the day of his termination.
Our remanufacturing operations require that we acquire Used Cores, a necessary raw material, from our customers and offer our customers marketing and other allowances that impact revenue recognition. These elements of our business give rise to more complex accounting than many businesses our size or larger.

New Accounting Pronouncements Not Yet Adopted

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, codified in ASC 606, “Revenue Recognition - Revenue from Contracts with Customers” (“ASC 606”), which amends the guidance in the former ASC 605, “Revenue Recognition”. ASC 606 as initially issued was effective for annual periods beginning after December 15, 2016, and interim periods within that reporting period for a public entity. We may elect either a full retrospective transition method, which requires the restatement of all periods presented, or a modified retrospective transition method, which requires a cumulative-effect adjustment as of the date of initial adoption. In August 2015, the FASB delayed the effective date by one year to annual periods beginning after December 15, 2017, and interim periods within that reporting period for a public entity. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We will adopt the new standard on April 1, 2018 and have elected to utilize the full retrospective transition method.

ASC 606 establishes the requirements for recognizing revenue from contracts with customers.  The standard requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under the new standard, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for the good or service. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

Due to the impact of the new standard, we have made changes to our business processes, systems, and controls. A project team was formed and evaluated and guided the implementation process. We performed a preliminary assessment, which included the identification of the key contractual terms in our primary revenue streams and the comparison of historical accounting policies and practices to the requirements of the new standard by revenue stream. The preliminary assessment resulted in the identification of potential accounting differences that will arise from the application of the new standard. The implementation team completed its contract review phase of the project during the third quarter, which included identifying the population of contracts and completing an analysis of the potential accounting impacts of the new standard on individual contracts. During the fourth quarter, the implementation team identified the changes to business processes, systems, and controls to support recognition, presentation, and disclosure under the new standard and will implement these changes during the first quarter of fiscal 2019 as described in the subsequent paragraphs.

Our primary revenue stream is derived from the sale of remanufactured products to our customers pursuant to long-term customer contracts.  We will continue to recognize revenue at a point in time as we satisfy our performance obligation of transferring control of the product to the customer.  We recognize revenues net of anticipated returns, marketing allowances, volume discounts, and other forms of variable consideration more fully described below.  We also reviewed customer options to acquire additional goods or services, and have preliminarily determined that no material rights exist within our contracts.  We do not currently anticipate the adoption of ASU 2014-09 will have a material impact on previously reported revenue amounts.  See discussion regarding the sale of Remanufactured Cores below.
 
(2)Mr. Joffe’s employment term will end on the date of his death. Upon such event, Mr. Joffe’s estate will be entitled to receive his accrued salary, bonus, if any, benefits (including accrued but unused vacation time) and reimbursable expenses, owing to Mr. Joffe through the date of his death. In addition, Mr. Joffe’s estate will assume Mr. Joffe’s rights under our equity incentive plans and certain of his rights under his New Employment Agreement.
(3)If during the employment term, Mr. Joffe is terminated by us as a result of his physical or mental illness or incapacity as determined in accordance with the procedures set forth in the New Employment Agreement, Mr. Joffe will be entitled to receive his accrued salary, bonus, if any, reimbursable expenses, and benefits owing to Mr. Joffe through the date of termination. In addition, Mr. Joffe will be entitled to receive the benefits payable pursuant to a disability insurance policy purchased by Mr. Joffe with the Disability Insurance Payment.
(4)Upon a termination by Mr. Joffe for good reason or by us without cause, Mr. Joffe will be entitled to receive through the later of the date which is two years after the termination date or August 31, 2015: (i) his salary at the annual rate as in effect immediately prior to the termination date; (ii) his average bonus earned for the two years immediately prior to the year in which his employment agreement is terminated (or if such termination occurs within the first three months of our fiscal year, for the second and third years preceding the year in which such termination occurs); (iii) the benefits; and (iv) reimbursable expenses.
(5)If a change in control occurs and Mr. Joffe voluntarily terminates his employment agreement for good reason or Mr. Joffe’s employment is terminated by us without cause within two years following a change in control, then Mr. Joffe will be entitled to receive either the severance benefit as described in the next sentence of this footnote or the benefits described in the immediately preceding footnote, whichever is more favorable to Mr. Joffe, and we will pay Mr. Joffe any reimbursable expenses owed to him through the termination date. The severance benefit will be equal to (i) two times Mr. Joffe’s salary at the annual rate in effect immediately prior to the date of the change in control plus (ii) two times Mr. Joffe’s average bonus earned for the two years immediately prior to the year in which the change in control occurs.
(6)Upon the termination of his employment agreement, for any reason other than termination by us for cause or termination by Mr. Joffe without good reason, any Executive Awards under our 2010 Incentive Plan which are not fully vested will immediately vest and remain exercisable by Mr. Joffe for a period of two years or, if shorter, until the ten year anniversary of the date of grant of each such Executive Award. The inherent value shown in the table is the additional compensation expense we would have recorded upon the immediate vesting of all Executive Awards which were not fully vested at March 31, 2016. Executive Awards include incentive stock options and nonqualified stock options, restricted stock, restricted stock units, performance awards, dividend equivalent rights, stock payments, deferred stock, deferred stock units, SARs and cash awards.
(7)Mr. Joffe is entitled to receive an automobile allowance in the amount of $1,500 per month, payable monthly. In addition, all costs of operating the automobile, including fuel, oil, insurance, repairs, maintenance and other expenses, are our responsibility.
Equity Based Employee Benefit Plans
We currently anticipate that the adoption of ASU 2014-09 will primarily impact reclassifications to certain balance sheet accounts to conform to the presentation and disclosure requirements of ASC 606. For example, we currently account for Remanufactured Cores anticipated to be returned as long-term core inventory and the refund liability as a contra-account receivable account as illustrated in Note 6 of the notes to consolidated financial statements for the year ended March 31, 2018. Under ASC 606, we currently anticipate we will reclassify this asset to a contractual asset and recognize a contractual liability for amounts expected to be refunded to customers.

2010 Incentive Award Plan. On December 10, 2010, our BoardWe also analyzed specific contractual provisions related to sales contracts that include Remanufactured Cores.  We recognize revenue for sales of Directors approved our 2010 Incentive Award Plan (the “Original 2010 Plan”). On January 14, 2011, our shareholders approvedcores not expected to be replaced by a similar Used Core sent back under the Original 2010 Plan. On February 25, 2013, our Boardcore exchange program only upon meeting certain criteria as described in Note 2, Summary of Directors approved our Amended and Restated 2010 Incentive Award Plan (the “Amended and Restated 2010 Plan”). On March 28, 2013, our shareholders approvedSignificant Accounting Policies, to the Amended and Restated 2010 Plan. On February 23, 2014, our Board of Directors approved our Second Amended and Restated 2010 Incentive Award Plan (the “2010 Plan”). Onconsolidated financial statements for the year ended March 31, 2014, our shareholders approved2018. The adoption of ASU 2014-09 may result in an acceleration of revenue recognition, as it requires us to estimate the 2010 Plan. The purposeamount of cores not expected to be returned upon the initial recognition of revenue for contracts that include Remanufactured Cores.  As we have elected the full retrospective method of adoption, the impact to each reporting period will be measured as the net impact of (i) the acceleration of revenue into a prior period versus what was previously recorded in that period and (ii) the acceleration of revenue into that period previously recognized in a later period (the change in the estimated volume of returns in the comparable recast periods). Given that third-party information available to meet the criteria outlined in Note 2, Summary of Significant Accounting Policies, may be available at different points of time in a given fiscal period, the timing of the 2010 Plan is to enhance the value of our Company and promote our success by linking the individual interests of our employeesrevenue recognized in these periods may be less predictive under ASC 605 as compared to the interestsestimation process required under ASU 2014-09. The anticipated increase to previously reported revenues for the year ended March 31, 2016 is less than $2.0 million. The anticipated decrease to previously reported revenues for the year ended March 31, 2017 is less than $0.9 million. The anticipated decrease to reported revenues in the current fiscal year ended March 31, 2018 is less than $0.4 million.

In order to properly determine the transaction price related to our sales contracts, we have also analyzed our various forms of consideration paid to our shareholders and by providingvendors, including up-front payments for future contracts. Based on the analysis completed through the year ended March 31, 2018, we currently do not anticipate a change to our employeeslegacy accounting practices as a result of the adoption of ASU 2014-09 to account for up-front payments to our vendors. Under current accounting practices, if we expect to generate future revenues associated with an incentive for outstanding performanceup-front payment, then an asset is recognized and amortized over the appropriate period of time as a reduction of revenue. If we do not expect to generate superior returnsadditional revenue then the up-front payment is recognized in the consolidated statements of income when payment occurs as a reduction of revenue.

ASU 2014-09 also codified the guidance on other assets and deferred costs relating to our shareholders. The 2010 Plan is also intendedcontracts with customers with the addition of ASC 340-40.  This guidance relates to the accounting for costs of an entity to obtain and fulfill a contract to provide goods or services to the Companycustomer.  Under the new guidance, an entity shall recognize as an asset the incremental costs of obtaining a contract with flexibility in its abilitya customer if the entity expects to motivate, attract, and retain the services of employees upon whose judgment, interest, and performancerecover those costs. In our success is largely dependent. The 2010 Plan does not provide for awards to non-employee directors or consultantsreview of the Company.various costs to obtain contracts with our customers, we have preliminarily determined that currently no significant costs are incurred that meet the capitalization criteria.  Our primary cost to fulfill contracts, other than inventory related costs, relates to shipping and handling activities, which continue to be expensed as incurred consistent with historical accounting practices.

Eligibility; Administration. EmployeesThe new guidance provides several practical expedients, which we anticipate adopting. The first of our Companythese practical expedients allows a company to expense incremental costs of obtaining a contract as incurred if the amortization period would have been one year or less. As noted above, we have preliminarily concluded that we do not have any such costs that qualify for capitalization but will apply the practical expedient to the extent that such costs incurred in prospective periods qualify. Similarly, we plan to adopt guidance that allows for the effects of its affiliates are eligiblea significant financing component to receive awards underbe ignored if a company expects that the 2010 Plan. The 2010 Plan is administered by our Compensation Committee, which may delegate its duties and responsibilities to subcommittees of our directors and/or officers, subject to certain limitations that may be imposed under applicable law or regulation, including Section 162(m)period between the transfer of the Code, Section 16goods and services to the customer and payment will be one year or less. Finally, we plan to adopt guidance that allows a company to account for shipping and handling activities that occur after control of the Exchange Act and/or stock exchange rules,related good transfers as applicable. The plan administrator has the authority to grant and set the termsfulfillment activities instead of all awards under, make all determinations and interpretations under, prescribe all forms for use with, and adopt rules for the administration of, the 2010 Plan, subject to its express terms and conditions.

Limitation on Awards and Shares Available. An aggregate of 2,750,000 shares of our common stock are available for issuance under awards granted pursuant to the 2010 Plan, which shares may be treasury shares, authorized but unissued shares, or shares purchased in the open market. The number of authorized shares will be reduced by 1 share for each share issued pursuant to a stock option or stock appreciation right (“SAR”) and by 2.5 shares for each share subject to a “full-value” equity award (which generally includes awards other than stock options and SARs,assessing such activities as restricted stock and restricted stock units).

The following types of shares will be added back to the available share limit under the 2010 Plan: (x) shares subject to awards that are forfeited, expire or are settled for cash, and (y) shares repurchased by the Company at the same price paid by a participant pursuant to the Company’s repurchase right with respect to restricted stock awards. However, the following types of shares will not be added back to the available share limit under the 2010 Plan: (A) shares tendered by a participant or withheld by the Company in payment of the exercise price of an option; (B) shares withheld to satisfy any tax withholding obligation with respect to an award; (C) shares subject to a SAR that are not issued in connection with the stock settlement of the SAR on exercise thereof; and (D) shares purchased on the open market with the cash proceeds from the exercise of options.

Awards granted under the 2010 Plan upon the assumption of, or in substitution for, awards authorized or outstanding under a qualifying equity plan maintained by an entity with which the Company enters into a merger or similar corporate transaction will not reduce the shares authorized for grant under the 2010 Plan. The maximum number of shares of our common stock that may be subject to one or more awards granted to any one participant pursuant to the 2010 Plan during any calendar year is 400,000, and the maximum amount that may be paid in cash pursuant to the 2010 Plan to any one participant during any calendar year is $5,000,000.performance obligations.
 
Financial Instruments

In January 2016, the FASB issued guidance that amends the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We expect to apply the amendments in the new guidance by means of a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the first quarter of fiscal 2019. The adoption of the new guidance is not expected to have a material impact on our consolidated financial statements.

Leases

In February 2016, the FASB issued new guidance that requires balance sheet recognition of a right-of-use asset and lease liability by lessees for operating leases. The new guidance also requires new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new guidance requires a modified retrospective approach with optional practical expedients. We will adopt this guidance in the first quarter of fiscal 2020. We are currently evaluating the impact the provisions of this guidance will have on our consolidated financial statements, but expect that it will result in a significant increase to our long-term assets and liabilities on the consolidated balance sheets.

Business Combinations

AwardsIn January 2017, the FASB issued guidance which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. A reporting entity should apply the amendment prospectively. The 2010 Plan providesadoption of this guidance in the first quarter of fiscal 2019 is not expected to have any material impact on our consolidated financial statements.

Goodwill Impairment

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

Modifications to Share-Based Payment Awards

In May 2017, the FASB issued guidance to provide clarity and nonqualified stock options (“NSOs”), restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalent rights, stock payments, deferred stock, deferred stock units, SARsreduce (i) the diversity in practice and cash awards. No determination has been made as(ii) the cost and complexity when applying the accounting guidance for equity-based compensation to a change to the typesterms or amountsconditions of awards that will be granted to specific individuals pursuanta share-based payment award. This update provides guidance about which changes to the 2010 Plan. Certain awards under the 2010 Plan may constituteterms or provide for a deferral of compensation, subject to Section 409A of the Code, which may impose additional requirements on the terms and conditions of such awards. All awards willa share-based payment award require an entity to apply modification accounting. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. This guidance should be set forthapplied prospectively to an award modified on or after that adoption date. The adoption of this guidance in award agreements, which will detail all terms and conditionsthe first quarter of the awards, includingfiscal 2019 is not expected to have any applicable vesting and payment terms. Awards other than cash awards will generally be settled in shares ofmaterial impact on our common stock, but the plan administrator may provide for cash settlement of any award. A brief description of each award type follows.

·Stock Options. Stock options provide for the purchase of shares of our common stock in the future at an exercise price set on the grant date. ISOs, by contrast to NSOs, may provide tax deferral beyond exercise and favorable capital gains tax treatment to their holders if certain holding period and other Code requirements are satisfied. The exercise price of a stock option may not be less than 100% of the fair market value of the underlying share on the date of grant (110% in the case of ISOs granted to certain significant shareholders), except with respect to certain substitute options granted in connection with a corporate transaction. The term of a stock option may not be longer than ten years (or five years in the case of ISOs granted to certain significant shareholders). Vesting conditions determined by the plan administrator may apply to stock options, may include continued service, performance and/or other conditions.
·Stock Appreciation Rights. SARs entitle their holder, upon exercise, to receive from us an amount equal to the appreciation of the shares subject to the award between the grant date and the exercise date. The exercise price of a SAR may not be less than 100% of the fair market value of the underlying share on the date of grant (except with respect to certain substitute SARs granted in connection with a corporate transaction) and the term of a SAR may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to SARs, and may include continued service, performance and/or other conditions.
·Restricted Stock; Deferred Stock; RSUs; Performance Awards. Restricted stock is an award of nontransferable shares of our common stock that remain forfeitable unless and until specified conditions are met, and which may be subject to a purchase price. For shares of restricted stock with performance-based vesting, dividends which are paid prior to vesting will only be paid to the extent that the performance-based vesting conditions are subsequently satisfied and the shares vest. Deferred stock and RSUs are contractual promises to deliver shares of our common stock in the future, which may also remain forfeitable unless and until specified conditions are met. Delivery of the shares underlying these awards may be deferred under the terms of the award or at the election of the participant, if the plan administrator permits such a deferral. Performance awards are contractual rights to receive a range of shares of our common stock, cash, or a combination of cash and shares, in the future based on the attainment of specified performance goals, in addition to other conditions which may apply to these awards. Conditions applicable to restricted stock, deferred stock, RSUs and performance shares may be based on continuing service with us or our affiliates, the attainment of performance goals and/or such other conditions as the plan administrator may determine.
·Stock Payments. Stock payments are awards of fully vested shares of our common stock that may, but need not be, made in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards.
·Dividend Equivalent Rights. Dividend equivalent rights represent the right to receive the equivalent value of dividends paid on shares of our common stock and may be granted alone or in tandem with awards other than stock options or SARs. Dividend equivalents are credited as of dividend payments dates during the period between the date an award is granted and the date such award vests, is exercised, is distributed or expires, as determined by the plan administrator. Dividend equivalents with respect to an award with performance-based vesting that are based on dividends paid prior to the vesting of such award will only be paid to the extent that the performance-based vesting conditions are subsequently satisfied and the award vests.
consolidated financial statements.
 
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Performance Awards. All awards may be grantedDerivatives and Hedging

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

Inventory

Non-core Inventory

Non-core inventory is comprised of (i) non-core raw materials, (ii) the non-core value of work in process, (iii) the non-core value of remanufactured finished goods, and (iv) purchased finished goods. Used Cores, the Used Core value of work in process, and the Remanufactured Core portion of finished goods are classified as performance awards (in additionlong-term core inventory as described below under the caption “Long-term Core Inventory.” Used Cores are a source of raw materials used in the remanufacturing of our products.

Non-core inventory is stated at the lower of cost or net realizable value. The cost of non-core remanufactured inventory approximates average historical purchase prices paid for raw materials, and is based upon the direct costs of material and an allocation of labor and variable and fixed overhead costs. The cost of purchased finished goods inventory approximates average historical purchase prices paid, and an allocation of fixed overhead costs. The cost of non-core inventory is evaluated at least quarterly during the fiscal year and adjusted as necessary to those identified abovereflect current lower of cost or net realizable value levels. These adjustments are determined for individual items of inventory within each of the three classifications of non-core inventory as performance awards), meaning that any such award will be subject to vesting and/or paymentfollows:

Non-core raw materials are recorded at average cost, which is based on the attainmentactual purchase price of specified performance goals.raw materials on hand. The plan administrator will determine whether performance awardsaverage cost is updated quarterly. This average cost is used in the inventory costing process and is the basis for allocation of materials to finished goods during the production process.

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

The cost of remanufactured finished goods includes the average cost of non-core raw materials and allocations of labor and variable and fixed overhead costs. The allocations of labor and variable and fixed overhead costs are intended to constitute “qualified performance-based compensation” (“QPBC”) withindetermined based on the meaning of Section 162(m)average actual use of the Code,production facilities over the prior twelve months, which approximates normal capacity. This method prevents the distortion in which case the applicable performance criteria will be selected from the list below in accordance with the requirementsallocated labor and overhead costs that would occur during short periods of Section 162(m) of the Code.
Section 162(m) of the Code imposes a $1,000,000 cap on the compensation deduction thatabnormally low or high production. In addition, we may take in respect of compensation paid to our “covered employees” (which should include our CEOexclude certain unallocated overhead such as severance costs, duplicative facility overhead costs, start-up costs, training, and our next four most highly compensated employees other than our CFO), but excludesspoilage from the calculation and expense these unallocated overhead as period costs.

We record an allowance for potentially excess and obsolete inventory based upon recent sales history, the quantity of amounts subject to this limitation any amounts that constitute QPBC. In order to constitute QPBC under Section 162(m)inventory on-hand, and a forecast of potential use of the Code,inventory. We periodically review inventory to identify excess quantities and part numbers that are experiencing a reduction in addition to certain other requirements, the relevant amounts must be payable onlydemand. Any part numbers with quantities identified during this process are reserved for at rates based upon the attainmentmanagement’s judgment, historical rates, and consideration of pre-established, objective performance goals set by our Compensation Committee during the first ninety days of the relevant performance periodpossible scrap and linked to shareholder-approved performance criteria.

For purposes of the 2010 Plan, one or more of the following performance criteria will be used in setting performance goals applicable to QPBC, and may be used in setting performance goals applicable to other performance awards: (i) net earnings (either before or after one or more of the following: (A) interest, (B) taxes, (C) depreciation and (D) amortization); (ii) gross or net sales or revenue; (iii) net income (either before or after taxes); (iv) adjusted net income; (v) operating earnings or profit; (vi) cash flow (including, but not limited to, operating cash flow and free cash flow); (vii) return on assets; (viii) return on capital; (ix) return on stockholders’ equity; (x) total stockholder return; (xi) return on sales; (xii) gross or net profit or operating margin; (xiii) costs; (xiv) funds from operations; (xv) expenses; (xvi) working capital; (xvii) earnings per share; (xviii) adjusted earnings per share; (xix) price per share of Common Stock; (xx) regulatory body approval for commercialization of a product; (xxi) implementation or completion of critical projects; (xxii) market share; and (xxiii) economic value, any ofliquidation values which may be measured either in absolute terms or as compared to any incremental increase or decrease orhigh as compared to results100% of a peer group or tocost if no liquidation market performance indicators or indices.exists for the part. We recorded reserves of $6,682,000 and $4,125,000 for excess and obsolete inventory at March 31, 2018 and 2017, respectively. The 2010 Plan also permits the plan administrator to provide for objectively determinable adjustments to the applicable performance criteria in setting performance goals for QPBC awards.

Certain Transactions.quantity thresholds and reserve rates are subjective and are based on management’s judgment and knowledge of current and projected industry demand. The plan administrator has broad discretion to equitably adjust the provisions of the 2010 Plan, as well as the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirablereserve estimates may, therefore, be revised if there are changes in the event of certain transactions and events affectingoverall market for our common stock, such as stock dividends, stock splits, mergers, acquisitions, consolidations and other corporate transactions. In addition,products or market changes that in the event of certain non-reciprocal transactions withmanagement’s judgment, impact our shareholders known as “equity restructurings,” the plan administrator will make equitable adjustmentsability to the 2010 Plan and outstanding awards. In the event of a change in control of the Company (as defined in the 2010 Plan), the surviving entity must assume outstanding awardssell or substitute economically equivalent awards for such outstanding awards; however, if the surviving entity refuses to assumeliquidate potentially excess or substitute for outstanding awards, then the administrator may cause all awards will vest in full immediately prior to the transaction. If the surviving entity assumes or substitutes for outstanding awards, and a participant undergoes a termination of employment by reason of “Involuntary Termination” or “Good Reason” (both as defined in the 2010 Plan) on or within two years following the change in control, then all of the participant’s awards assumed or substituted for will vest in full. Individual award agreements may provide for additional accelerated vesting and payment provisions.

Foreign Participants; Transferability; Participant Payments. The plan administrator may modify award terms, establish subplans and/or adjust other terms and conditions of awards, subject to the share limits described above, in order to facilitate grants of awards subject to the laws and/or stock exchange rules of countries outside of the United States. With limited exceptions for estate planning, domestic relations orders, certain beneficiary designations and the laws of descent and distribution, awards under the 2010 Plan are generally non-transferable prior to vesting and are exercisable only by the participant. With regard to tax withholding, exercise price and purchase price obligations arising in connection with awards under the 2010 Plan, the plan administrator may, in its discretion, accept cash or check, shares of our common stock that meet specified conditions, a “market sell order” or such other consideration as it deems suitable.obsolete inventory.
 

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Plan AmendmentWe record vendor discounts as reductions of inventories that are recognized as reductions to cost of sales as the inventories are sold.

Inventory Unreturned

Inventory unreturned represents our estimate, based on historical data and Termination. The Boardprospective information provided directly by the customer, of Directors may amend or terminatefinished goods shipped to customers that we expect to be returned, under our general right of return policy, after the 2010 Plan at any time; however, except in connection with certain changes in capital structure, shareholder approval will be required for any amendment that increasesbalance sheet date. Because all cores are classified separately as long-term assets, the number of shares available underinventory unreturned balance includes only the 2010 Plan or “reprices” any stock option or SAR (including any grant of cash or another award in respect of any stock option or SAR when the option or SAR price per share exceeds the fair marketadded unit value of a finished good. The return rate is calculated based on expected returns within the underlying shares). No award may be granted pursuant tonormal operating cycle of one year. As such, the 2010 Plan after the tenth anniversary of the date on which we adopted the 2010 Plan.
Federal Income Tax Consequences. The following is a general summary underrelated amounts are classified in current law of the material federal income tax consequences to participants in the 2010 Plan. This summary deals with the general tax principles that apply and is provided only for general information. Some kinds of taxes, such as state, local and foreign income taxes, are not discussed.assets.

Incentive Stock Options. The grant of an ISO will not be a taxable event for the grantee or result in a business expense deduction for us. A grantee will not recognize taxable income upon exercise of an ISO (except that the alternative minimum tax may apply), and any gain realized upon a disposition of our common stock received pursuant to the exercise of an ISO will be taxed as long-term capital gain if the grantee holds the shares of common stock for at least two years after the date of grant and for one year after the date of exercise (the “holding period requirement”). We will not be entitled to any business expense deduction with respect to the exercise of an ISO, except as discussed below.

For the exercise of an option to qualify for the foregoing tax treatment, the grantee generally must be our employee or an employee of our subsidiary from the date the optionInventory unreturned is granted through a date within three months prior to the date of exercise of the option.

If all of the foregoing requirements are met except the holding period requirement mentioned above, the grantee will recognize ordinary income upon the disposition of the common stock in an amount generally equal to the excess of the fair market value of the common stock at the time the option was exercised over the option exercise price (but not in excess of the gain realized on the sale). The balance of the realized gain, if any, will be a capital gain. We will be allowed a business expense deduction to the extent the grantee recognizes ordinary income, subject to our compliance with Section 162(m) of the Code and to certain reporting requirements.

Non-Qualified Options. The grant of a NSO will not be a taxable event for the grantee or result in a compensation expense deduction for us. Upon exercising a NSO, a grantee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the common stock on the date of exercise. Upon a subsequent sale or exchange of shares acquired pursuant to the exercise of a NSO, the grantee will have taxable capital gain or loss, measured by the difference between the amount realized on the disposition and the tax basis of the shares of common stock (generally, the amount paid for the shares plus the amount treated as ordinary income at the time the option was exercised).

If we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deductionvalued in the same amountmanner as our finished goods inventory.

Long-term Core Inventory

Long-term core inventory consists of:

Used Cores purchased from core brokers and generallyheld in inventory at our facilities,

Used Cores returned by our customers and held in inventory at our facilities,

Used Cores returned by end-users to customers but not yet returned to us which are classified as Remanufactured Cores until they are physically received by us,

Remanufactured Cores held in finished goods inventory at our facilities; and

Remanufactured Cores held at customer locations as a part of the finished goods sold to the customer. For these Remanufactured Cores, we expect the finished good containing the Remanufactured Core to be returned under our general right of return policy or a similar Used Core to be returned to us by the customer, in each case, for credit.

Long-term core inventory is recorded at average historical purchase prices determined based on actual purchases of inventory on hand. The cost and net realizable value of Used Cores for which sufficient recent purchases have occurred are deemed the same time as the grantee recognizes ordinary income.

Restricted Stock. A grantee who is awarded shares of restricted stock will not recognize any taxable income for federal income tax purposes in the year of the award, provided that the shares of common stock are subject to restrictions requiring the restricted stock to be nontransferable and subject to a substantial risk of forfeiture. However, the grantee may elect under Section 83(b) of the Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the common stock on the date of the award, less the purchase price if any, determined without regardfor purchases that are made in arm’s length transactions.

Long-term core inventory recorded at average historical purchase prices is primarily made up of Used Cores for newer products related to more recent automobile models or products for which there is a less liquid market. We purchase these Used Cores from core brokers to supplement the restrictions. Ifyield from returned cores and the grantee does not make such a Section 83(b) election, the fair market value of the common stockunder return by consumers.

Used Cores obtained in core broker transactions are valued based on the date the restrictions lapse, less theaverage purchase price. The average purchase price if any, will be treatedof Used Cores for more recent automobile models is retained as compensation incomethe cost for these Used Cores in subsequent periods even as the source of these Used Cores shifts to the grantee and will be taxable in the year the restrictions lapse. If we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generallyour core exchange program.

Long-term core inventory is recorded at the same time aslower of cost or net realizable value. In the grantee recognizes ordinary income.absence of sufficient recent purchases we use the net selling price that our customers have agreed to pay for Used Cores that are not returned to us under our core exchange program to assess whether Used Core cost exceeds Used Core net realizable value on a customer-by-customer basis.
 
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Restricted Stock Units. There are no immediate tax consequencesWe classify all of receiving an award of restricted stock units under the 2010 Plan. A grantee who is awarded restricted stock units will be required to recognize ordinary income in an amount equal to the fair market value of shares issued to such grantee at the endour core inventories as long-term assets. The determination of the restriction period or, if later,long-term classification is based on our view that the date on which shares are delivered in respect of the RSUs. If the delivery date of the shares is deferred more than a short period after vesting, employment taxes will be due in the year of vesting. If we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

Dividend Equivalent Awards. Grantees who receive dividend equivalent awards will be required to recognize ordinary income equal to the amount distributed to the grantee pursuant to the award. If we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

Stock Appreciation Rights. There are no immediate tax consequences of receiving an award of SARs under the Incentive Award Plan. Upon exercising a SAR, a grantee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the common stockcores is not consumed or realized in cash during our normal operating cycle, which is one year for most of the cores recorded in inventory. According to guidance provided under the FASB ASC, current assets are defined as “assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.” We do not believe that the economic value of core inventories, which we classify as long-term, is consumed because the credits issued upon the return of Used Cores offset the amounts invoiced when the Remanufactured Cores included in finished goods were sold. We do not expect the economic value of core inventories to be consumed, and thus we do not expect to realize cash, until our relationship with a customer ends, a possibility that we consider remote based on existing long-term customer agreements and historical experience.

However, historically for a portion of finished goods sold, our customers will not send us a Used Core to obtain the credit we offer under our core exchange program. Therefore, based on our historical estimate, we derecognize the core value for these finished goods as we believe the economic value has been consumed and we have realized cash.

For these reasons, we concluded that it is more appropriate to classify core inventory as long-term assets.

Long-term Core Inventory Deposit

The long-term core inventory deposit represents the cost of Remanufactured Cores we have purchased from customers, which are held by the customers and remain on the datecustomers’ premises. The costs of exercise. If we comply with applicable reporting requirements and with the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

Performance Share Awards. Grantees who receive performance share awards generally will not realize taxable incomethese Remanufactured Cores were established at the time of the granttransaction based on the then current cost, determined as noted under the caption “Long-term Core Inventory”. The selling value of these Remanufactured Cores was established based on agreed upon amounts with these customers. We expect to realize the performance shares,selling value and the related cost of these Remanufactured Cores should our relationship with a customer end, a possibility that we will not be entitled to a deduction at that time. When the award is paid, whether in cash or common stock, the grantee will have ordinary income,consider remote based on existing long-term customer agreement and if we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a corresponding deduction.historical experience.

Stock Payment Awards. Grantees who receive a stock payment in lieu of a cash payment that would otherwise have been made will be taxedOur inventory balances are as if the cash payment has been received, and, if we comply with applicable reporting requirements and subject to the restrictions of Section 162(m) of the Code, we will have a deduction in the same amount.follows at March 31:

Deferred Stock. A grantee receiving deferred stock generally will not have taxable income upon the issuance of the deferred stock and we will not then be entitled to a deduction. However, when shares underlying the deferred stock are issued to the grantee, he or she will realize ordinary income and, if we comply with applicable reporting requirements and subject to the restrictions of Section 162(m) of the Code, we will be entitled to a deduction in an amount equal to the difference between the fair market value of the shares at the date of issuance over the purchase price, if any, paid for the deferred stock. Employment taxes with respect to these awards will generally be due in the year of vesting.
  2018  2017 
Non-core inventory      
Raw materials $25,805,000  $21,515,000 
Work in process  635,000   641,000 
Finished goods  53,973,000   48,337,000 
   80,413,000   70,493,000 
Less allowance for excess and obsolete inventory  (4,138,000)  (2,977,000)
Total $76,275,000  $67,516,000 
         
Inventory unreturned $7,508,000  $7,581,000 
Long-term core inventory        
Used cores held at the Company's facilities $53,278,000  $38,713,000 
Used cores expected to be returned by customers  12,970,000   11,752,000 
Remanufactured cores held in finished goods  34,201,000   27,667,000 
Remanufactured cores held at customers' locations (1)  203,751,000   185,938,000 
   304,200,000   264,070,000 
Less allowance for excess and obsolete inventory  (2,544,000)  (1,148,000)
Total $301,656,000  $262,922,000 
         
Long-term core inventory deposits $5,569,000  $5,569,000 

Performance Awards. The award of a performance or annual incentive award will have no federal income tax consequences for us or for the grantee. The payment of the award is taxable to a grantee as ordinary income. If we comply with applicable reporting requirements and, subject to the restrictions of Section 162(m) of the Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

Section 409A of the Code. Certain types of awards under the 2010 Plan, including, but not limited to RSUs and deferred stock, may constitute, or provide for, a deferral of compensation subject to Section 409A of the Code. Unless certain requirements set forth in Section 409A of the Code are complied with, holders of such awards may be taxed earlier than would otherwise be the case ( e.g. , at the time of vesting instead of the time of payment) and may be subject to an additional 20% penalty tax (and, potentially, certain interest penalties). To the extent applicable, the 2010 Plan and awards granted under the 2010 Plan are intended to be structured and interpreted to comply with Section 409A of the Code and the Department of Treasury regulations and other interpretive guidance that may be issued under Section 409A of the Code.
(1)Remanufactured cores held at customers’ locations represent the core portion of our customers’ finished goods at our customers’ locations.
 

27
Section 162(m)Revenue Recognition

We recognize revenue when our performance is complete, and all of the Code. In general, under Section 162(m)following criteria have been met:

Persuasive evidence of the Code, income tax deductions of publicly-held corporations may be limitedan arrangement exists,

Delivery has occurred or services have been rendered,

The seller’s price to the extent total compensation for certain executive officers exceeds $1 million (less the amount of any “excess parachute payments” as defined in Section 280G of the Code) in any taxable year of the corporation. However, under Section 162(m) of the Code, the deduction limit does not apply to certain “performance-based” compensation. Stock optionsbuyer is fixed or determinable, and SARs will satisfy the “performance-based” exception if (a) the awards are made by a qualifying compensation committee, (b) the plan sets the maximum number of shares that can be granted to any person within a specified period and (c) the compensation is based solely on an increase in the stock price after the grant date. The 2010 Plan has been designed to permit the plan administrator to grant stock options and SARs which will qualify as “performance-based compensation.” In addition, other performance-based awards under the 2010 Plan may be intended to constitute QPBC, as discussed above.
2003 Long-Term Incentive Plan. Upon the receipt of the approval of our shareholders of the Original 2010 Plan, the 2010 Plan replaced our 2003 Long-Term Incentive Plan on January 14, 2011 and no further grants of awards under can be made under the 2003 Long-Term Incentive Plan.

2004 Non-Employee Director Stock Option Plan. The purpose of our 2004 Non-Employee Director Stock Option Plan (the “Non-Employee Director Stock Option Plan”)
Collectability is to foster and promote our long-term financial success and interests and to materially increase the value of the equity interests in the Company by: (a) increasing our ability to attract and retain talented men and women to serve on our Board of Directors, (b) increasing the incentives that these non-employee directors have to help us succeed and (c) providing our non-employee directors with an increased opportunity to share in our long-term growth and financial success.reasonably assured.

Under the Non-Employee Director Stock Option Plan, each non-employee director was granted options to purchase 25,000 shares of our common stock upon their election to our Board of Directors. In addition, each non-employee director was awarded an option to purchase an additional 3,000 shares of our common stock for each full year of service on our Board of Directors. The exercise price for each of these options was equal to the fair market value of our common stock on the date the option was granted. The exercise price of an option was payable only in cash or an equivalent acceptable to our Compensation Committee. The Non-Employee Director Stock Option Plan also permitted the “cashless” exercise of options granted under the Non-Employee Director Stock Option Plan. Options awarded under the Non-Employee Director Stock Option Plan were not transferable other than as designated by the grantee by will or by the laws of descent and distribution unless otherwise provided in the option agreements pursuant to which such Options were awarded. Other than the options described in this paragraph, no non-employee director shall be eligible to receive any equity interest in the Company in consideration of such non-employee director’s service on our board.

Each of these options has a ten-year term. One-third of the options will be exercisable immediately upon grant, and one-half of the remaining portion of each option grant will vest and become exercisable on the first and second anniversary dates of the date of grant. Any options which remain unvested at the time a non-employee director’s service as a member of our board terminates shall terminate upon such termination of service unless such termination results from such non-employee director’s death or occurs upon a change of control, in which case all of such unvested options shall immediately vest upon such death or Change of Control (as defined in the Non-Employee Director Stock Option Plan). In the event of a Change of Control (as defined in the Non-Employee Director Stock Option Plan), we may, after notice to the grantee, require the grantee to “cash out” his rights by transferring them to the Company in exchange for their equivalent “cash value.”

A total of 275,000 shares of common stock were reserved for grants of stock options under the Non-Employee Director Stock Option Plan. In March 2014, the Non-Employee Director Stock Option Plan was replaced and the Company will not make any further grants under this plan.

Tax Consequences. Under current tax laws, the grant of an option generally will not be a taxable event to the optionee, and we will not be entitled to a deduction with respect to such grant. Upon the exercise of an option, the non-employee director optionee will recognize ordinary income at the time of exercise equal to the excess of the then fair market value of the shares of common stock received over the exercise price. The taxable incomeFor products shipped free-on-board (“FOB”) shipping point, revenue is recognized upon exercise of a nonqualified option will be treated as compensation income subject to withholding, and we will be entitled to deduct as a compensation expense an amount equal to the ordinary income an optionee recognizes with respect to such exercise. When common stock received upon the exercise of a nonqualified option subsequently is sold or exchanged in a taxable transaction, the holder thereof generally will recognize capital gain (or loss) equal to the difference between the total amount realized and the fair market value of the common stock on the date of exercise;shipment. For products shipped FOB destination, revenues are recognized on the characterestimated or actual date of such gain or lossdelivery. We include shipping and handling charges in the gross invoice price to customers and classify the total amount as long-term or short-term capital gain or loss will depend uponrevenue. All shipping and handling costs are expensed as incurred and included in cost of sales.

Revenue Recognition; Net-of-Core-Value Basis

The price of a finished remanufactured product sold to customers is generally comprised of separately invoiced amounts for the holding periodRemanufactured Core included in the product (“Remanufactured Core value”) and the unit value. The unit value is recorded as revenue based on our then current price list, net of applicable discounts and allowances. Based on our experience, contractual arrangements with customers and inventory management practices, a significant portion of the sharesremanufactured automotive parts we sell to customers are replaced by similar Used Cores sent back for credit by customers under our core exchange program. In accordance with our net-of-core-value revenue recognition policy, we do not recognize the Remanufactured Core value as revenue when the finished products are sold. We generally limit the number of Used Cores sent back under the core exchange program to the number of similar Remanufactured Cores previously shipped to each customer.

Revenue Recognition — Core Revenue

Full price Remanufactured Cores: When we ship a remanufactured product, we invoice certain customers for the Remanufactured Core value portion of the product at the full Remanufactured Core sales price but do not recognize revenue for the Remanufactured Core value at that time. For these Remanufactured Cores, we recognize core revenue based upon an estimate of the rate at which our customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under our core exchange program.

Nominal price Remanufactured Cores: We invoice other customers for the Remanufactured Core value portion of the product shipped at a nominal Remanufactured Core price. Unlike the full price Remanufactured Cores, we only recognize revenue from nominal Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program when we believe that we have met all of the following exercise.criteria:

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

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

The reconciliation must be completed and agreed to by the customer.

The amount must be billed to the customer.
 
AmendmentRevenue Recognition; General Right of Return

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

We provide for such anticipated returns of inventory by reducing revenue and our Boardthe related cost of Directors may terminate,sales for the Non-Employee Director Stock Option Plan, provided that no such action shall adversely affect any material vested benefits or rightsunits estimated to be returned as further described under the Non-Employee Director Stock Option Plan without the consent of the non-employee director affected by such action. In addition, no amendment may be made without the approval of our shareholders if shareholder approval is necessary in order to comply with applicable law.

2014 Non-Employee Director Incentive Award Plan. On February 23, 2014, our Board of Directors approved our 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”). On March 31, 2014, our shareholders approved the 2014 Plan. The purpose of the 2014 Plan is to enhance our valuecaptions “Customer Finished Goods Returns Accrual” and promote our success by linking the individual interests of non-employee directors to the interests of our shareholders and by providing such individuals with an incentive for outstanding performance to generate superior returns to our shareholders. The 2014 Plan is also intended to provide us with flexibility in our ability to motivate, attract, and retain the services of such individuals upon whose judgment, interest, and performance our success is largely dependent. The 2014 Plan does not provide for awards to employees or consultants of the Company. The 2014 Plan supersedes and replaces our 2004 Non-Employee Director Stock Option Plan in its entirety.

Director Equity Compensation Policy

As contemplated by the 2014 Plan, the Board adopted a director equity compensation policy (the “Policy”) upon effectiveness of the 2014 Plan. The Board may, at any time and from time to time, terminate, modify, amend or suspend the Policy; provided, however, that, without the prior consent of the Non-Employee Directors, no such action may adversely affect any rights or obligations with respect to any earned but unpaid Awards hereunder, whether or not the amounts of such Awards have been computed and whether or not such Awards are then payable. Each equity award described in the Policy shall be subject to the terms and conditions of the Plan and the applicable Award Agreement.

Under the 2014 Plan, upon a Non-Employee Director’s initial election or appointment (as applicable) to the Board on or after the effective date of the 2014 Plan, such Non-Employee Director shall automatically be granted, without further action by the Company, the Board, or the Company’s stockholders, an award of Restricted Stock Units (as defined in the 2014 Plan) to acquire a number of shares of Common Stock (rounded down to the nearest whole number) equal to the quotient obtained by dividing (i) $100,000 by (ii) the Fair Market Value (as defined in the 2014 Plan) of a share of Common Stock on the date of grant (rounded down to the nearest two decimal places) (each such grant, an “Initial RSU Award”). On the date of each annual meeting of the Company’s stockholders to occur on or after the effective date of the 2014 Plan, each Non-Employee Director shall automatically be granted, without further action by the Company, the Board, or the Company’s stockholders, an award of Restricted Stock Units to acquire a number of shares of Common Stock (rounded down to the nearest whole number) equal to the quotient obtained by dividing (i) $50,000 by (ii) the Fair Market Value (as defined in the 2014 Plan) of a share of Common Stock on the date of grant (rounded down to the nearest two decimal places) (each such grant, an “Annual RSU Award” and, together with the Initial RSU Awards, the “RSU Awards”)“Inventory Unreturned”.

One-third (1/3rd) of each RSU Award will vestOur allowance for warranty returns is established based on eacha historical analysis of the first (1st), second (2nd)level of this type of return as a percentage of total unit sales. Stock adjustment returns do not occur at any specific time during the year, and third (3rd) anniversariesthe expected level of these returns cannot be reasonably estimated based on a historical analysis. Our allowance for stock adjustment returns is based on specific customer inventory levels, inventory movements, and information on the estimated timing of stock adjustment returns provided to us by our customers. The return rate for stock adjustments is calculated based on expected returns within the normal operating cycle of one year.

Customer Finished Goods Returns Accrual

The customer finished goods returns accrual represents the non-core sales value of estimated warranty and stock adjustment returns and is classified as a current liability due to the expectation that these returns will occur within the normal operating cycle of one year. Our customer finished goods returns accrual was $17,805,000 and $17,667,000 at March 31, 2018 and 2017, respectively.

Accrued Core Payment

The accrued core payment represents the full Remanufactured Core sales price of Remanufactured Cores we have purchased from our customers, generally in connection with new business, which are held by these customers and remain on their premises. At the same time, we record the long-term core inventory for the Remanufactured Cores purchased at its cost, determined as noted under the caption “Long-term Core Inventory”. The difference between the full Remanufactured Core sales price of Remanufactured Cores and its related cost is treated as sales allowance reducing revenue when the purchases are made. We expect to realize the selling value and the related cost of these Remanufactured Cores should our relationship with a customer end, a possibility that we consider remote based on existing long-term customer agreement and historical experience.

The repayments for these Remanufactured Core inventory purchases are made through the issuance of credits against that customer’s receivables either on a one-time basis or over an agreed-upon period. The accrued core payment is recorded as current and noncurrent liability in the consolidated balance sheets based on whether repayments will occur within the normal operating cycle of one year. Our net accrued core payment was $35,009,000 and $24,063,000 at March 31, 2018 and 2017, respectively. This increase in our accrued core payment was due to increased core purchases in connection with new business awarded to us during fiscal 2018.

Sales Incentives

We provide various marketing allowances to our customers, including sales incentives and concessions. Marketing allowances related to a single exchange of product are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered. Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in accordance with a schedule set forth in the relevant contract. Sales incentive amounts are recorded based on the value of the date of grant, subject to the holder’s continued status as a Non-Employee Director through each applicable vesting date; provided, however, that each RSU Award will vest in full (to the extent then-unvested) upon the holder’s Termination of Service (as defined in the 2014 Plan) due to his or her death.  In addition, each RSU Award will vest in full immediately prior to a Change in Control (as defined in the 2014 Plan), subject to the holder’s continued status as a Non-Employee Director through at least immediately prior to such Change in Control (as defined in the 2014 Plan).
On June 10, 2015, the Board amended and restated the Director Compensation Corporate Policy. The only change effectuated by the amendment and restatement was the date of the Annual RSU Awards, which was changed to the date of the adoption of the amendment and restatement and each anniversary thereof.incentive provided.
 
DescriptionGoodwill

We evaluate goodwill for impairment at least annually during the fourth quarter of each fiscal year or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. We have concluded that there is one reporting unit and therefore test goodwill for impairment at the entity level. In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the carrying value of net assets to the fair value of the 2014 Planreporting unit. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered impaired and no further testing is required. If the carrying value of the reporting unit exceeds the fair value, goodwill is potentially impaired and the second step of the impairment test must be performed. In the second step, we would compare the implied fair value of the goodwill to its carrying value to determine the amount of the impairment loss, if any. We completed the required annual testing of goodwill for impairment during the fourth quarter of fiscal 2018, and determined through the qualitative assessment that our goodwill of $2,551,000 at March 31, 2018 is not impaired.

Eligibility; AdministrationIntangible Assets

Our intangible assets other than goodwill are finite–lived and amortized on a straight-line basis over their respective useful lives. We analyze our finite-lived intangible assets for impairment when and if indicators of impairment exist. At March 31, 2018, our net intangible assets were $3,766,000 and there were no indicators of impairment.

Income Taxes

We account for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur. A Directorvaluation allowance is provided to reduce deferred tax assets when it is more likely than not that a portion of the Company who isdeferred tax asset will not an officerbe realized.

The primary components of our income tax expense are (i) the current liability or other employee (as determinedrefund due for federal, state and foreign income taxes and (ii) the change in the amount of the net deferred income tax asset, including the effect of any change in the valuation allowance.

In December 2017, new tax legislation was enacted in the United States (Tax Reform Act) which resulted in significant changes to income tax expense.  As a result of the Tax Reform Act, we re-measured certain deferred tax assets and liabilities based on the newly enacted federal rate of 21%.  Accordingly, the federal net deferred tax assets were written down to account for the change. These tax changes represent provisional amounts based on our current interpretation of the Tax Reform Act and may change as we receive additional clarification and implementation guidance. We will continue to analyze the effects of the Tax Reform Act on our financial statements and operations. Any additional impacts from the enactment of the Tax Reform Act will be recorded as they are identified during the measurement period as provided for in accordance with Section 3401(c)Staff Accounting Bulletin No. 118.

Realization of the Codedeferred tax assets is dependent upon our ability to generate sufficient future taxable income. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and the Treasury Regulations thereunder)liabilities and any valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. A valuation allowance is established when we believe it is not more likely than not all or some of the Company or of any Affiliate (each “Non-Employee Director”)a deferred tax assets will be eligiblerealized. In evaluating our ability to receive awards underrecover deferred tax assets within the jurisdiction in which they arise, we consider all available positive and negative evidence. Deferred tax assets arising primarily as a result of net operating loss carry-forwards and research and development credits in connection with our 2014 Plan. AsJuly 2017 acquisition have been offset completely by a valuation allowance due to the uncertainty of March 31, 2016, seven Non-Employee Directors are eligible to participatetheir utilization in future periods. Should the 2014 Plan. Our 2014 Plan will be administered byactual amount differ from our Board, which may delegate its duties and responsibilities to committeesestimate, the amount of our directors and/or officers, subject to certain limitations that mayvaluation allowance could be imposed under applicable law or regulation, including Section 16 of the Exchange Act and/or stock exchange rules, as applicable. The plan administrator will have the authority to grant and set the terms of all awards under, make all determinations and interpretations under, prescribe all forms for use with, and adopt rules for the administration of, our 2014 Plan, subject to its express terms and conditions.

Under our 2014 Plan, an aggregate of 342,000 shares of our common stock are available for issuance under awards granted pursuant to our 2014 Plan, which shares may be treasury shares, authorized but unissued shares, or shares purchased in the open market. The number of authorized shares will be reduced by 1 share for each share issued pursuant to a stock option or SAR and by 1.7 shares for each share subject to a “full-value” equity award (which generally includes awards other than stock options and SARs, such as restricted stock and restricted stock units).

Our 2014 Plan provides for the grant of nonqualified stock options (“NSOs”), restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalent rights, stock payments, deferred stock, deferred stock units and SARs. Certain awards under our 2014 Plan may constitute or provide for a deferral of compensation, subject to Section 409A of the Code, which may impose additional requirements on the terms and conditions of such awards. All awards will be set forth in award agreements, which will detail all terms and conditions of the awards, including any applicable vesting and payment terms. Awards will generally be settled in shares of our common stock, but the plan administrator may provide for cash settlement of any award. A brief description of each award type follows.

·Stock Options. Stock options provide for the purchase of shares of our common stock in the future at an exercise price set on the grant date. The exercise price of a stock option may not be less than 100% of the fair market value of the underlying share on the date of grant, except with respect to certain substitute options granted in connection with a corporate transaction. The term of a stock option may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to stock options, may include continued service, performance and/or other conditions.

·Stock Appreciation Rights. SARs entitle their holder, upon exercise, to receive from us an amount equal to the appreciation of the shares subject to the award between the grant date and the exercise date. The exercise price of a SAR may not be less than 100% of the fair market value of the underlying share on the date of grant (except with respect to certain substitute SARs granted in connection with a corporate transaction) and the term of a SAR may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to SARs, and may include continued service, performance and/or other conditions.

·Restricted Stock; Deferred Stock; RSUs; Performance Awards. Restricted stock is an award of nontransferable shares of our common stock that remain forfeitable unless and until specified conditions are met, and which may be subject to a purchase price. For shares of restricted stock with performance-based vesting, dividends which are paid prior to vesting will only be paid to the extent that the performance-based vesting conditions are subsequently satisfied and the shares vest. Deferred stock and RSUs are contractual promises to deliver shares of our common stock in the future, which may also remain forfeitable unless and until specified conditions are met. Delivery of the shares underlying these awards may be deferred under the terms of the award or at the election of the participant, if the plan administrator permits such a deferral. Performance awards are contractual rights to receive a range of shares of our common stock, cash, or a combination of cash and shares, in the future based on the attainment of specified performance goals, in addition to other conditions which may apply to these awards. Conditions applicable to restricted stock, deferred stock, RSUs and performance shares may be based on continuing service with us or our affiliates, the attainment of performance goals and/or such other conditions as the plan administrator may determine.
impacted.
 
·Stock Payments. Stock payments are awards of fully vested shares of our common stock that may, but need not be, made in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards.
Financial Risk Management and Derivatives

·Dividend Equivalent Rights. Dividend equivalent rights represent the right to receive the equivalent value of dividends paid on shares of our common stock and may be granted alone or in tandem with awards other than stock options or SARs. Dividend equivalents are credited as of dividend payments dates during the period between the date an award is granted and the date such award vests, is exercised, is distributed or expires, as determined by the plan administrator. Dividend equivalents with respect to an award with performance-based vesting that are based on dividends paid prior to the vesting of such award will only be paid to the extent that the performance-based vesting conditions are subsequently satisfied and the award vests.
We are exposed to market risk from material movements in foreign exchange rates between the U.S. dollar and the currencies of the foreign countries in which we operate. As a result of our significant operations in Mexico, our primary risk relates to changes in the rates between the U.S. dollar and the Mexican peso. To mitigate this currency risk, we enter into forward foreign exchange contracts to exchange U.S. dollars for Mexican pesos. We also enter into forward foreign exchange contracts to exchange U.S. dollars for Chinese yuan in order to mitigate risk related to our purchases and payments to our Chinese vendors. The extent to which we use forward foreign exchange contracts is periodically reviewed in light of our estimate of market conditions and the terms and length of anticipated requirements. The use of derivative financial instruments allows us to reduce our exposure to the risk that the eventual net cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in the exchange rates. We do not engage in currency speculation or hold or issue financial instruments for trading purposes. These contracts generally expire in a year or less. Any changes in the fair value of foreign exchange contracts are accounted for as an increase or decrease to general and administrative expenses in current period earnings.

Performance Awards. AllShare-based Payments

In accounting for share-based compensation awards, may be granted as performance awards (in addition to those identified above as performance awards), meaningwe follow the accounting guidance for equity-based compensation, which requires that any suchwe measure the cost of employee services received in exchange for an award will be subject to vesting and/or paymentof equity instruments based on the attainment of specified performance goals.

Certain Transactions. The plan administrator has broad discretion to equitably adjust the provisions of our 2014 Plan, as well as the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirable changes in the event of certain transactions and events affecting our common stock, such as stock dividends, stock splits, mergers, acquisitions, consolidations and other corporate transactions. In addition, in the event of certain non-reciprocal transactions with our shareholders known as “equity restructurings,” the plan administrator will make equitable adjustments to our 2014 Plan and outstanding awards. In the event of a change in controlgrant-date fair value of the company (as defined in our 2014 Plan),award. The cost associated with stock options is estimated using the surviving entity must assume outstanding awards or substitute economically equivalent awards for such outstanding awards; however, ifBlack-Scholes option-pricing model. The cost associated with restricted stock units is measured based on the surviving entity refuses to assume or substitute for outstanding awards, then the administrator may cause all awards will vest in full immediately prior to the transaction. If the surviving entity assumes or substitutes for outstanding awards, and a participant undergoes a terminationnumber of employment by reason of “Involuntary Termination” or “Good Reason” (both as defined in our 2014 Plan) on or within two years following the change in control, then all of the participant’s awards assumed or substituted for will vest in full. Individual award agreements may provide for additional accelerated vesting and payment provisions.

Foreign Participants; Transferability; Participant Payments. The plan administrator may modify award terms, establish sub-plans and/or adjust other terms and conditions of awards, subject to the share limits described above, in order to facilitate grants of awards subject to the laws and/or stock exchange rules of countries outside of the United States. With limited exceptions for estate planning, domestic relations orders, certain beneficiary designationsshares granted and the laws of descent and distribution, awards under our 2014 Plan are generally non-transferable prior to vesting and are exercisable only by the participant. With regard to tax withholding, exerciseclosing price and purchase price obligations arising in connection with awards under our 2014 Plan, the plan administrator may, in its discretion, accept cash or check, shares of our common stock that meet specified conditions,on the grant date, subject to continued employment. The cost of equity instruments is recognized in the consolidated statements of income on a “market sell order” or such other considerationstraight-line basis over the period during which an employee is required to provide service in exchange for the award. In addition, we account for forfeitures as it deems suitable.they occur.

Plan AmendmentSubsequent Events

Credit Facility

On June 5, 2018 we entered into an Amended and Termination. Restated Credit Facility (the “New Credit Facility”), with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $200,000,000 revolving loan facility, subject to borrowing base restrictions, a $20,000,000 sublimit for borrowings by Canadian borrowers, and a $15,000,000 sublimit for letters of credit (the “New Revolving Facility) and (ii) a $30,000,000 term loan facility (the “New Term Loans”). The Board may amend or terminate our 2014 Plan at any time; however, except inloans under the New Credit Facility mature on June 5, 2023. In connection with certain changesthe New Credit Facility, the lenders were granted a security interest in capital structure, shareholder approval willsubstantially all of our assets.

Results of Operations

The following discussion and analysis should be required for any amendment that increasesread together with the number of shares available under our 2014 Plan or “reprices” any stock option or SAR (including any grant of cash or another award in respect of any stock option or SAR when the option or SAR price per share exceeds the fair market value of the underlying shares). No award may be granted pursuant to the 2010 Plan after the tenth anniversary of the date on which we adopt our 2014 Plan.financial statements and notes thereto appearing elsewhere herein.
 
2016 Plan Federal Income Tax ConsequencesThe following summarizes certain key operating data for the periods indicated:

  Fiscal Years Ended March 31, 
  2018  2017  2016 
          
Gross profit percentage  24.7%  27.3%  27.4%
Cash flow (used in) provided by operations $(13,944,000) $(5,269,000) $15,334,000 
Finished goods turnover (1)  6.3   6.7   6.5 

(1)Finished goods turnover is calculated by dividing the cost of goods sold for the year by the average between beginning and ending non-core finished goods inventory values, for each fiscal year. We believe that this provides a useful measure of our ability to turn our inventory into revenues.

Fiscal 2018 Compared to Fiscal 2017

Net Sales and Gross Profit

The following is a general summary under current law of the material federal income tax consequences to participants in our 2014 Plan. This summary deals with the general tax principles that applysummarizes net sales and is provided only for general information. Some kinds of taxes, such as state, local and foreign income taxes, are not discussed.gross profit:

  Fiscal Years Ended March 31, 
  2018  2017 
       
Net sales $428,072,000  $421,253,000 
Cost of goods sold  322,199,000   306,207,000 
Gross profit  105,873,000   115,046,000 
Gross profit percentage  24.7%  27.3%

Non-Qualified Options. Net SalesThe grant. Our net sales for fiscal 2018 increased by $6,819,000, or 1.6%, to $428,072,000 compared to net sales for fiscal 2017 of a NSO will not be a taxable event for the grantee or result in a compensation expense deduction for us. Upon exercising a NSO, a grantee will recognize ordinary income in an amount equal$421,253,000. Our prior year net sales were positively impacted by $9,261,000 due to the difference between the exercise pricechange in our estimate for anticipated stock adjustment returns. The increase in our fiscal 2018 net sales was primarily due to growth in sales of our rotating electrical products and the fair market valuebrake booster products, in addition to sales of the common stock on the datediagnostic equipment as a result of exercise. Upon a subsequent sale or exchangeour July 2017 acquisition. Sales of shares acquired pursuant to the exerciserotating electrical products represented 78.0% and 78.6%, wheel hub products represented 16.9% and 18.5%, brake master cylinder products represented 2.3% and 2.9%, and other products represented 2.8% and 0%, of a NSO, the grantee will have taxable capital gain or loss, measurednet sales for fiscal 2018 and 2017, respectively. Our net sales were further impacted by the difference between the amount realized on the disposition and the tax basis of the shares of common stock (generally, the amount paid for the shares plus the amount treatedcertain customer allowances as ordinary income at the time the option was exercised).

If we comply with applicable reporting requirements, we will be entitled to a business expense deductiondiscussed below in the same amount and generally at the same time as the grantee recognizes ordinary income.Gross Profit paragraph.

Restricted Stock.Gross Profit. A grantee who is awarded sharesOur gross profit percentage was 24.7% for fiscal 2018 compared to 27.3% for fiscal 2017.  Gross profit for fiscal 2018 was impacted by $8,459,000 for customer allowances and initial return and stock adjustment accruals related to new business entered into during fiscal 2018, less a cost of restrictedgoods sold offset of $649,000, transition expenses of $1,831,000 in connection with the expansion of our operations in Mexico, and a cost of goods sold impact of $269,000 for inventory step-up amortization.  In addition, our gross profit for fiscal 2018 was further impacted by higher returns and lower overhead absorption.  Our gross profit for fiscal 2017 was impacted by $12,727,000 for customer allowances and initial return and stock will not recognize any taxable incomeadjustment accruals related to new business less a cost of goods sold offset of $568,000, and a cost of goods sold impact of $1,457,000 for federal income tax purposesstart-up and ramp-up costs incurred related to our launch of brake power boosters. This decrease was partially offset by a 0.4% increase from the change in the year of the award, provided that the shares of commonestimate relating to stock are subject to restrictions requiring the restricted stock to be nontransferable and subject to a substantial risk of forfeiture. However, the grantee may elect under Section 83(b) of the Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the common stock on the date of the award, less the purchase price, if any, determined without regard to the restrictions. If the grantee does not make such a Section 83(b) election, the fair market value of the common stock on the date the restrictions lapse, less the purchase price, if any, will be treated as compensation income to the grantee and will be taxable in the year the restrictions lapse. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.adjustments.

Restricted Stock Units. There are no immediate tax consequencesIn addition, our gross profit was further impacted by the lower of receiving an awardcost or net realizable value revaluation for remanufactured cores held at customers’ locations of restricted stock units under our 2014 Plan. A grantee who is awarded restricted stock units will be required to recognize ordinary income in an amount equal to the fair market value of shares issued to such grantee at the end of the restriction period or, if later, the date on which shares are delivered in respect of the RSUs. If the delivery date of the shares is deferred more than a short period after vesting, employment taxes will be due in the year of vesting. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount$9,091,000 for fiscal 2018 and generally at the same time as the grantee recognizes ordinary income.

Dividend Equivalent Awards. Grantees who receive dividend equivalent awards will be required to recognize ordinary income equal to the amount distributed to the grantee pursuant to the award. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

Stock Appreciation Rights. There are no immediate tax consequences of receiving an award of SARs under the Incentive Award Plan. Upon exercising a SAR, a grantee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the common stock on the date of exercise. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

Performance Share Awards. Grantees who receive performance share awards generally will not realize taxable income at the time of the grant of the performance shares, and we will not be entitled to a deduction at that time. When the award is paid, whether in cash or common stock, the grantee will have ordinary income, and, if we comply with applicable reporting requirements, we will be entitled to a corresponding deduction.

Stock Payment Awards. Grantees who receive a stock payment in lieu of a cash payment that would otherwise have been made will be taxed as if the cash payment has been received, and, if we comply with applicable reporting requirements, we will have a deduction in the same amount.$5,788,000 for fiscal 2017.
 
Operating Expenses

The following summarizes operating expenses:

  Fiscal Years Ended March 31, 
  2018  2017 
       
General and administrative $35,527,000  $31,124,000 
Sales and marketing  15,030,000   12,126,000 
Research and development  5,692,000   3,824,000 
         
Percent of net sales        
         
General and administrative  8.3%  7.4%
Sales and marketing  3.5%  2.9%
Research and development  1.3%  0.9%

Deferred StockGeneral and Administrative.. A grantee receiving deferred stock generally will not have taxable income upon the issuance Our general and administrative expenses for fiscal 2018 were $35,527,000, which represents an increase of the deferred stock$4,403,000, or 14.1%, from general and we will not then be entitledadministrative expenses for fiscal 2017 of $31,124,000. The increase in fiscal 2018 was primarily due to (i) $1,573,000 of increased employee-related expenses to support our growth initiatives, (ii) a deduction. However, when shares underlying the deferred stock are issuedgain of $2,313,000 recorded during fiscal 2018 due to the grantee, he or she will realize ordinary income and, if we comply with applicable reporting requirements, we will be entitled to a deductionchange in an amount equal to the difference between the fair market value of the shareswarrant liability compared to a gain of $3,764,000 recorded during fiscal 2017, (iii) $1,093,000 of increased general and administrative expenses at the dateour offshore locations due primarily to support our growth initiatives and fluctuations in foreign currency exchange rates, (iv) $913,000 of issuance over the purchase price, if any, paid for the deferred stock. Employment taxes with respectgeneral and administrative expenses attributable to these awards will generally be due in the yearour July 2017 acquisition, and (v) $285,000 of vestingincreased travel. These increases were partially offset by $1,341,000 of decreased legal and other professional services.

Performance Awards. Sales and Marketing. Our sales and marketing expenses for fiscal 2018 increased $2,904,000, or 23.9%, to $15,030,000 from $12,126,000 for fiscal 2017. The awardincrease was due primarily (i) $1,305,000 of a performance or annual incentive award will have no federal income tax consequencessales and marketing expenses attributable to our July 2017 acquisition, (ii) $1,012,000 for us or for the grantee. The paymentpersonnel added to support our growth initiatives, and (iii) $503,000 of the award is taxable to a grantee as ordinary income. If we comply with applicable reporting requirements, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.increased commissions.

Section 409AResearch and Development. Our research and development expenses increased by $1,868,000, or 48.8%, to $5,692,000 for fiscal 2018 from $3,824,000 for fiscal 2017. This increase was due primarily to (i) $1,755,000 attributable to our July 2017 acquisition and (ii) $399,000 for personnel added to support our growth initiatives. These increases were partially offset by (i) $170,000 of decreased expense for supplies and (ii) $119,000 of decreased expense for outside services.

Interest Expense

Interest Expense, net. Our interest expense, net for fiscal 2018 increased $2,351,000, or 18.0%, to $15,445,000 from $13,094,000 for fiscal 2017. The increase in interest expense in fiscal 2018 was due primarily to increased use of our accounts receivable discount programs, increased average outstanding borrowings as we continue to build our inventory to support anticipated higher sales, and the write-off of $231,000 of debt issuance costs.

Provision for Income Taxes

Income Tax. Our income tax expense was $17,863,000, an effective tax rate of 52.3%, and $17,305,000, an effective tax rate of 31.5% during fiscal 2018 and 2017, respectively. On December 22, 2017, the Tax Reform Act was enacted into law, which changed various corporate income tax provisions within the existing Internal Revenue Code. Certain typesThe Tax Reform Act, among other things, lowered the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of awards under our 2014 Plan, including, but not limitedforeign subsidiaries. As a result, we recorded a one-time non-cash tax charge of $4,863,000 related to RSUsthe revaluation of deferred tax assets and deferred stock, may constitute, or provide for,liabilities and a deferralone-time tax charge of compensation subject$530,000 due to Section 409Athe transition tax on deemed repatriation of the Code. Unless certain requirements set forth in Section 409A of the Code are complied with, holders of such awards may be taxed earlier than would otherwise be the case (e.g., at the time of vesting instead of the time of payment) and may be subject to an additional 20% penalty tax (and, potentially, certain interest penalties). To the extent applicable, our 2014 Plan and awards granted under our 2014 Plan are intended to be structured and interpreted to comply with Section 409A of the Code and the Department of Treasury regulations and other interpretive guidance that may be issued under Section 409A of the Code.

2016 Director Compensation

We use a combination of cash and equity incentives to compensate our non-employee directors. Directors who are also our employees received no compensation for their service on our Board of Directors in Fiscal 2016. To determine the appropriate level of compensation for our non-employee directors, we take into consideration the significant amount of time and dedication required by the directors to fulfill their duties on our Board of Directors and Board of Directors committees as well as the need to continue to attract highly qualified candidates to serve on our Board of Directors. The information provided in the following table reflects the compensation received by our directors for their service on our Board of Directors in Fiscal 2016.

Name 
Fees Earned
or Paid in
Cash
  
Stock Awards
(1)
  
Option
Awards (1)
  
All Other
Compensation
  Total 
                
Scott J. Adelson $55,000  $50,000  $-  $-  $105,000 
Rudolph Borneo $84,000  $50,000  $-  $-  $134,000 
David Bryan $-  $-  $-  $-  $- 
Joseph Ferguson $-  $-  $-  $-  $- 
Philip Gay $99,000  $50,000  $-  $-  $149,000 
Mel Marks (2) $55,000  $50,000  $-  $150,000  $255,000 
Duane Miller $80,626  $50,000  $-  $-  $130,626 
Jeffrey Mirvis $70,000  $50,000  $-  $-  $120,000 

(1)Award amounts reflect the aggregate grant date fair value of the awards.
(2)On March 12, 2016, Mel Marks, a member of the Board of Directors passed away.

Each of our non-employee directors receives annual compensation of $40,000 and is paid a fee of $3,000 for attending each Board of Directors meeting, $2,000 for attending each Audit Committee meeting and $1,000 for each Compensation Committee meeting. Each director is also reimbursed for reasonable out-of-pocket expenses incurred to attend Board of Directors or Board of Directors committee meetings. We pay Mr. Gay an additional $20,000 per year for assuming the responsibility for being Chairman of our Audit and Ethics Committees, we pay Mr. Borneo an additional $5,000 per year for assuming the responsibility for being Chairman of our Compensation Committee, and beginning August 2015 we pay Mr. Miller an additional $2,500 for being Chairman of our Nominating and Corporate Governance Committee.accumulated foreign income, during fiscal 2018.
 
UnderIn addition, the effective tax rate for fiscal 2018 is a blended rate reflecting the estimated benefit of one quarter of the federal tax rate reduction for fiscal 2018.

Fiscal 2017 Compared to Fiscal 2016

Net Sales and Gross Profit

The following summarizes net sales and gross profit:

  Fiscal Years Ended March 31, 
  2017  2016 
       
Net sales $421,253,000  $368,970,000 
Cost of goods sold  306,207,000   268,046,000 
Gross profit  115,046,000   100,924,000 
Gross profit percentage  27.3%  27.4%

Net Sales. Our net sales for fiscal 2017 increased by $52,283,000, or 14.2%, to $421,253,000 compared to net sales for fiscal 2016 of $368,970,000. The increase in our 2014 Non-Employee Director Incentive Award Plan, each non-employee directornet sales was across all existing product lines. $9,261,000 of this increase is granted an awarddue to the change in our estimate for anticipated stock adjustment returns. Sales of restrictedrotating electrical products represented 78.6% and 78.7%, wheel hub products represented 18.5% and 19.6%, and brake master cylinder products represented 2.9% and 1.7%, of net sales for fiscal 2017 and 2016, respectively. The increase in net sales was partially offset by allowances and returns related to new business as discussed below in the Gross Profit paragraph.

Gross Profit. Our gross profit percentage remained substantially consistent at 27.3% for fiscal 2017 compared to 27.4% for fiscal 2016. Our gross profit for fiscal 2017 was impacted by $12,727,000 for customer allowances and initial return and stock units withadjustment accruals related to new business less a grant date fair valuecost of $100,000 upon their electiongoods sold offset of $568,000, and a cost of goods sold impact of $1,457,000 for start-up and ramp-up costs incurred related to our Boardlaunch of Directors. In addition, each non-employee director is awarded restrictedbrake power boosters. This decrease was partially offset by a 0.4% increase from the change in estimate relating to stock units withadjustments. Our gross profit for fiscal 2016 was impacted by $14,364,000 for customer allowances related to new business less a grant date fair valuecost of $50,000goods sold offset of $809,000, and a cost of goods sold impact of $43,000 for each full yearstart-up costs incurred related to our launch of service on our Board of Directors.brake power boosters and $453,000 for inventory step-up amortization.

IndemnificationIn addition, our gross profit was further impacted by the lower of Executive Officerscost or net realizable value revaluation for remanufactured cores held at customers’ locations of $5,788,000 for fiscal 2017 and Directors

Article Seven of our Restated Certificate of Incorporation provides, in part, that to the extent required by New York Business Corporation Law, or NYBCL, no director shall have any personal liability to us or our shareholders$2,700,000 for damage for any breach of duty as such director, provided that each such director shall be liable under the following circumstances: (a) in the event that a judgment or other final adjudication adverse to such director establishes that his acts or omissions were in bad faith, involved intentional misconduct or a knowing violation of law or that such director personally gained in fact a financial profit or other advantage to which such director was not legally entitled or that such director’s acts violated Section 719 of the NYBCL or (b) for any act or omission prior to the adoption of Article Seven of our Restated Certificate of Incorporation.

Article Nine of our Amended and Restated Bylaws provide that we shall indemnify any person, by reason of the fact that such person is or was a director or officer of our Company or served any other corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise in any capacity at our request, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorney’s fees incurred as a result of an action or proceeding, or any appeal therefrom, provided, however, that no indemnification shall be made to, or on behalf of, any director or officer if a judgment or other final adjudication adverse to such director or officer establishes that (a) his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated, or (b) he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.

We may purchase and maintain insurance for our own indemnification and for that of our directors and officers and other proper persons as described in Article Nine of our Amended and Restated Bylaws. We maintain and pay premiums for directors’ and officers’ liability insurance policies.

We are incorporated under the laws of the State of New York and Sections 721-726 of Article 7 of the NYBCL provide for the indemnification and advancement of expenses to directors and officers. Section 721 of the NYBCL provides that indemnification and advancement of expenses provisions contained in the NYBCL shall not be deemed exclusive of any rights which a director or officer seeking indemnification or advancement of expenses may be entitled, provided no indemnification may be made on behalf of any director or officer if a judgment or other final adjudication adverse to the director or officer establishes that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.

Section 722 of the NYBCL permits, in general, a New York corporation to indemnify any person made, or threatened to be made, a party to an action or proceeding by reason of the fact that he or she was a director or officer of that corporation, or served another entity in any capacity at the request of that corporation, against any judgment, fines, amounts paid in settlement and reasonable expenses, including attorney’s fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such person acted in good faith, for a purpose he or she reasonably believed to be in, or, in the case of service of another entity, not opposed to, the best interests of that corporation and, in criminal actions or proceedings, who in addition had no reasonable cause to believe that his or her conduct was unlawful. However, no indemnification may be made to, or on behalf of, any director or officer in a derivative suit in respect of (a) a threatened action or a pending action that is settled or otherwise disposed of or (b) any claim, issue or matter for which the person has been adjudged to be liable to the corporation, unless and only to the extent that a court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that the person is fairly and reasonably entitled to indemnify for that portion of settlement and expenses as the court deems proper.

Section 723 of the NYBCL permits a New York corporation to pay in advance of a final disposition of such action or proceeding the expenses incurred in defending such action or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount as, and to the extent, required by statute. Section 724 of the NYBCL permits a court to award the indemnification required by Section 722.fiscal 2016.
 
Section 725 provides for repayment of such expenses when the recipient is ultimately found not to be entitled to indemnification. Section 726 provides that a corporation may obtain indemnification insurance indemnifying itself and its directors and officers.

The foregoing is only a summary of the described sections of the NYBCL and our Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws and is qualified in its entirety by the reference to such sections and charter documents.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of our Board of Directors determines the compensation of our officers and directors. None of our executive officers currently serves on the compensation committee or board of directors of any other company of which any members of our Board of Directors or our Compensation Committee is an executive officer.
Item 12.
Security Ownership of Certain Beneficial Owners And Management and Related Stockholder Matters
Operating Expenses

The following table sets forth, assummarizes operating expenses:

  Fiscal Years Ended March 31, 
  2017  2016 
       
General and administrative $31,124,000  $49,665,000 
Sales and marketing  12,126,000   9,965,000 
Research and development  3,824,000   3,008,000 
         
Percent of net sales        
         
General and administrative  7.4%  13.5%
Sales and marketing  2.9%  2.7%
Research and development  0.9%  0.8%

General and Administrative. Our general and administrative expenses for fiscal 2017 were $31,124,000, which represents a decrease of July 20,$18,541,000, or 37.3%, from general and administrative expenses for fiscal 2016 certain information asof $49,665,000. The reduction in fiscal 2017 was primarily due to (i) a $3,764,000 gain recorded due to the common stock ownershipchange in the fair value of eachthe warrant liability during fiscal 2017 compared to a loss of $5,137,000 recorded during fiscal 2016, (ii) $8,805,000 of decreased legal expense as compared to fiscal 2016, which included $9,250,000 accrued in fiscal 2016 for the litigation settlement in the bankruptcy cases related to the discontinued subsidiaries partially offset by a $5,800,000 gain in connection with the settlement of litigation with Fenwick Automotive Products Limited and various of its subsidiaries, and (iii) $4,401,000 of decreased bad debt expense as compared to fiscal 2016, which included expense in fiscal 2016 resulting from the bankruptcy filing by one of our named executive officers, directors, all executive officerscustomers. These decreases were partially offset by (i) $974,000 of decreased gain recorded due to the change in the fair value of the contingent consideration in connection with our fiscal 2016 acquisition, (ii) $799,000 of increased share-based compensation, and directors as(iii) $700,000 of increased general and administrative expenses at our offshore locations due primarily to our growth initiatives.

Sales and Marketing. Our sales and marketing expenses for fiscal 2017 increased $2,161,000, or 21.7%, to $12,126,000 from $9,965,000 for fiscal 2016. This increase in fiscal 2017 was due primarily to (i) $1,045,000 for personnel added to support our growth initiatives, (ii) $710,000 of increased commissions, (iii) $167,000 of increased outside services, (iv) $127,000 of increased travel, and (v) $97,000 of increased trade show expense.

Research and Development. Our research and development expenses increased by $816,000, or 27.1%, to $3,824,000 for fiscal 2017 from $3,008,000 for fiscal 2016. This increase in fiscal 2017 was due primarily to (i) $550,000 for personnel added to support our growth initiatives, (ii) $144,000 of increased supplies, and (iii) $90,000 of increased outside services.

Interest Expense

Interest Expense, net. Our interest expense, net for fiscal 2017 decreased $3,150,000, or 19.4%, to $13,094,000 from $16,244,000 for fiscal 2016. The decrease in interest expense in fiscal 2017 was due primarily to (i) the write-off of previous debt issuance costs of $5,108,000 in fiscal 2016 in connection with the financing agreement which was terminated when we entered into a groupnew credit facility in June 2015 and all persons known(ii) lower interest rates and lower average outstanding balances on our loans. These decreases in interest expense were partially offset by us to be the beneficial owners of more than five percenthigher interest rates and increased use of our common stock. The percentage of common stock beneficially owned is based on 18,630,444 shares of common stock outstanding as of July 20, 2016.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership held by that person, shares of common stock subject to options held by that person that are currently exercisable or will become exercisable within 60 days of July 20, 2016 are deemed outstanding, while these shares are not deemed outstanding for determining the percentage ownership of any other person. Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Unless otherwise indicated in the footnotes below, the address of the stockholder is c/o Motorcar Parts of America, Inc. 2929 California Street, Torrance, CA 90503.accounts receivable discount programs during fiscal 2017.
 
 Name and Address of Beneficial Shareholder        
Amount and Nature of
Beneficial Ownership (1)
    
Percent of
Class
  
BlackRock Fund Advisors         
55 East 52nd Street, New York, NY 10055
 (2)  1,636,702   8.9%
Fine Capital Management, LLC           
590 Madison Avenue, 27th Floor, New York, New York 10022
 (2)   1,403,026   7.7 
Columbia Management Investment Advisers, LLC           
225 Franklin Street, Boston, MA 02110 (2)   1,086,717   5.9 
Selwyn Joffe (3)   458,694   2.4 
Scott Adelson (4)   51,184   * 
Rudolph Borneo (5)   45,184   * 
Philip Gay (6)   22,184   * 
Duane Miller (7)   28,184   * 
Jeffrey Mirvis (8)   46,184   * 
Doug Schooner (9)   18,148   * 
Steve Kratz (10)   64,373   * 
Michael Umansky (11)   35,604   * 
David Lee (12)   72,025   * 
Kevin Daly (13)   14,668   * 
Directors and executive officers as a group — 11 persons (14)  856,432   4.5%
Provision for Income Taxes

* Less than 1%Income Tax. Our income tax expense was $17,305,000, an effective tax rate of 31.5%, and $11,479,000, an effective tax rate of 52.1% during fiscal 2017 and 2016, respectively. Our income tax rate for fiscal 2017 was positively impacted by (i) a non-taxable gain in connection with the fair value adjustments on the warrants compared to a non-deductible loss in fiscal 2016 and (ii) $748,000 of excess tax benefits recorded through the provision for income taxes in fiscal 2017 as a result of the outstanding common stock.early adoption of the FASB’s new guidance on share-based compensation. In addition, the income tax rates for all periods are increased by the inclusion of state income taxes and non-deductible executive compensation under Internal Revenue Code Section 162(m). These increases in all periods were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdictions.

(1)The listed shareholders, unless otherwise indicated in the footnotes below, have direct ownership over the amount of shares indicated in the table.
Liquidity and Capital Resources

(2)Based on information contained in filings made by such stockholders with the SEC on as reported in each such stockholder's most recent Schedule 13F filing. Since there may have been subsequent purchases or sales of securities, this information may not reflect the current holdings by these stockholders.
Overview

(3)Includes 325,633 shares issuable upon exercise of options under the 2010 Long Term Incentive Plan.
We had negative working capital (current assets minus current liabilities) of $46,267,000 and $20,651,000, a ratio of current assets to current liabilities of 0.74:1.00 and 0.86:1.00, at March 31, 2018 and 2017, respectively. The long-term classification of our core inventory, the build-up of our inventory to support anticipated higher sales, new business with existing and potential new customers, and the addition of any new product lines have in the past, and will continue to require the use of working capital to grow our business.

(4)Includes 40,000 shares issuable upon exercise of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan.
We generated cash during fiscal 2018 from the use of receivable discount programs with certain of our major customers and their respective banks, as well as from our credit facility. The cash generated from these activities was used primarily to build our inventory to support anticipated higher sales.

(5)Includes 24,000 shares issuable upon exercise of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan.
In May 2018, we entered into the New Credit Facility consisting of a $200,000,000 revolving loan facility and a $30,000,000 term loan facility, maturing in June 2023.

(6)Includes 21,000 shares issuable upon exercise of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan.
We believe our cash and cash equivalents, short-term investments, use of receivable discount programs, amounts available under our credit facility, and other sources are sufficient to satisfy our expected future working capital needs, repayment of the current portion of our term loans, and lease and capital expenditure obligations over the next 12 months.

(7)Includes 26,000 shares issuable upon exercise of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan.
Cash Flows

(8)Includes 40,000 shares issuable upon exercise of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan.
The following summarizes cash flows as reflected in the consolidated statements of cash flows:

  Fiscal Years Ended March 31, 
  2018  2017  2016 
Cash provided by (used in):         
Operating activities $(13,944,000) $(5,269,000) $15,334,000 
Investing activities  (15,278,000)  (5,683,000)  (7,582,000)
Financing activities  33,142,000   (1,849,000)  (46,982,000)
Effect of exchange rates on cash and cash equivalents  100,000   (67,000)  (103,000)
Net increase (decrease) in cash and cash equivalents  4,020,000   (12,868,000)  (39,333,000)
             
Additional selected cash flow data:            
Depreciation and amortization $4,508,000  $3,714,000  $2,936,000 
Capital expenditures  9,933,000   4,929,000   3,747,000 

(9)Includes 10,948 shares issuable upon exercise of currently exercisable options under the 2010 Incentive Award Plan and includes 92 shares of common stock held by The Schooner 2003 Family Trust. Mr. Schooner expressly disclaims ownership of the shares held by The Schooner 2003 Family Trust.
Fiscal 2018 Compared to Fiscal 2017

(10)Includes 55,834 shares issuable upon exercise of currently exercisable options under the 2010 Incentive Award Plan
Net cash used in operating activities was $13,944,000 and $5,269,000 during fiscal 2018 and 2017, respectively. The significant changes in our operating activities during fiscal 2018 as compared to fiscal 2017 were due primarily to (i) decreased operating results (net income plus net add-back for non-cash transactions in earnings), (ii) increased payments of income taxes, (iii) decreases in accounts receivable and accounts payable during fiscal 2018 compared to increases during fiscal 2017, (iv) the build-up of our inventory to support anticipated higher sales, and (v) increased core purchases, including accrued core payments of $13,816,000 during fiscal 2018.

(11)Includes 28,367 shares issuable upon exercise of currently exercisable options under the 2010 Incentive Award Plan.
Net cash used in investing activities was $15,278,000 and $5,683,000 during fiscal 2018 and 2017, respectively. This change was due primarily to our increased capital expenditures and acquisition-related activities.
 
Net cash provided by financing activities was $33,142,000 during fiscal 2018 compared to net cash used in financing activities of $1,849,000 during fiscal 2017. This change was due mainly to (i) increased net borrowing primarily to build our inventory to support anticipated higher sales, (ii) repurchases of our common stock under our share repurchase program, and (iii) cash received upon exercise of the supplier warrant during fiscal 2018.

Fiscal 2017 Compared to Fiscal 2016

Net cash used in operating activities was $5,269,000 during fiscal 2017 compared to net cash provided by operating activities of $15,334,000 during fiscal 2016. The significant decreases in our operating activities were due primarily to (i) an increase in accounts receivable during fiscal 2017 compared to a decrease during fiscal 2016, (ii) payments made in connection with new business, (iii) a decrease in customer finished goods returns accrual during fiscal 2017 compared to an increase during fiscal 2016, and (iv) increased inventory levels to support our future growth. These decreases were partially offset by (i) increased operating results (net income plus net add-back for non-cash transactions in earnings) and (ii) decreased net repayments for Remanufactured Core inventory purchases recorded as accrued core payment in the consolidated balance sheets.

Net cash used in investing activities was $5,683,000 and $7,582,000 during fiscal 2017 and 2016, respectively. This change was due primarily to a decrease in cash used for the acquisition related activities during fiscal 2017 as compared to fiscal 2016.

Net cash used in financing activities was $1,849,000 and $46,982,000 during fiscal 2017 and 2016, respectively. This change was due mainly to (i) the net repayment of our long-term debt in fiscal 2016 in connection with the financing agreement which was terminated when we entered into a new credit facility in June 2015, (ii) the payment of debt issuance costs associated with this new credit facility, (iii) fewer stock options exercised during fiscal 2017 as compared to fiscal 2016, and (iv) the repurchase of shares under our share repurchase program during fiscal 2017.

Capital Resources

Debt

We are party to the following credit agreements.

Credit Facility

We are party to a $145,000,000 senior secured financing, as amended, (the “Credit Facility”) with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $120,000,000 revolving loan facility, subject to borrowing base restrictions and a $15,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $25,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 3, 2020. In connection with the Credit Facility, the lenders were granted a security interest in substantially all of our assets. The Credit Facility permits the payment of up to $10,000,000 of dividends per calendar year, subject to a minimum availability threshold and pro forma compliance with financial covenants. This amount was increased to $15,000,000 under the April 2017 amendment to the Credit Facility.

In April 2017, we entered into a consent and fourth amendment to the Credit Facility (the “Fourth Amendment”) which, among other things, (i) increased the borrowing base limit with respect to inventory located in Mexico, (ii) amended the definition and calculation of consolidated EBITDA to raise the limitation on the add-back for non-capitalized transaction expenses related to the expansion of operations in Mexico, (iii) increased the annual limit on permitted stock repurchases and dividends, and (iv) modified certain other categories (including increasing certain baskets for permitted acquisitions) and thresholds to, among other things, further accommodate the expansion of our operations in Mexico.

In July 2017, we entered into a fifth amendment to the Credit Facility (the “Fifth Amendment”) which, among other things, amended the definition of permitted acquisitions, permitted indebtedness, and pledge agreements.
The Term Loans require quarterly principal payments of $781,250. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.50%, 2.75% or 3.00% or a reference rate plus a margin of 1.50%, 1.75% or 2.00%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.25% to 0.375%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on our Term Loans and Revolving Facility was 4.42% and 4.52%, respectively, at March 31, 2018 and 3.29% and 3.55%, respectively, at March 31, 2017.

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

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

  
Calculation as of
March 31, 2018
  
Financial covenants
required per the Credit
Facility
 
       
Maximum senior leverage ratio  0.89   2.50 
Minimum fixed charge coverage ratio  1.34   1.15 

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

We had $54,000,000 and $11,000,000 outstanding under the Revolving Facility at March 31, 2018 and 2017, respectively. In addition, $260,000 was reserved for standby letters of credit for workers’ compensation insurance and $600,000 for commercial letters of credit at March 31, 2018. At March 31, 2018, $65,140,000, subject to certain adjustments, was available under the Revolving Facility.

WX Agreement

In August 2012, we entered into a Revolving Credit/Strategic Cooperation Agreement (the “WX Agreement”) with Wanxiang America Corporation (the “Supplier”) and the discontinued subsidiaries. In connection with the WX Agreement, we issued a warrant (the “Supplier Warrant”) to the Supplier to purchase up to 516,129 shares of our common stock for an exercise price of $7.75 per share exercisable at any time after August 22, 2014 and on or prior to September 30, 2017.

On September 8, 2017, the Supplier exercised the Supplier Warrant in full and paid us $4,000,000. As a result of the exercise, the Supplier Warrant is no longer outstanding. The fair value of the Supplier Warrant on the exercise date was $9,566,000 using level 3 inputs and the Monte Carlo simulation model. The following assumptions were used to calculate the fair value of the Supplier Warrant: dividend yield of 0%, expected volatility of 26.4%, risk-free interest rate of 0.96%, subsequent financing probability of 0%, and an expected life of 0.06 years. We recorded a non-cash reclassification of the Supplier Warrant’s fair value to shareholders’ equity on the exercise date, with no further adjustments to the fair value of the Supplier Warrant being required. The fair value of the Supplier Warrant was $11,879,000 at March 31, 2017 and was included in other liabilities in the consolidated balance sheet.

During the years ended March 31, 2018 and 2017, a gain of $2,313,000 and $3,764,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of this warrant liability.
Receivable Discount Programs

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

The following is a summary of the receivable discount programs:

  Years Ended March 31, 
  2018  2017 
       
Receivables discounted $357,224,000  $352,369,000 
Weighted average days  340   342 
Weighted average discount rate  3.3%  2.9%
Amount of discount as interest expense $11,182,000  $9,724,000 

Off-Balance Sheet Arrangements

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

Multi-year Customer Agreements

We have or are renegotiating long-term agreements with many of our major customers. Under these agreements, which in most cases have initial terms of at least four years, we are designated as the exclusive or primary supplier for specified categories of our products. Because of the very competitive nature of the market and the limited number of customers for these products, our customers have sought and obtained price concessions, significant marketing allowances and more favorable delivery and payment terms in consideration for our designation as a customer’s exclusive or primary supplier. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables in accordance with a schedule set forth in the relevant contract, (ii) support for a particular customer’s research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product, and (iv) other marketing, research, store expansion or product development support. These contracts typically require that we meet ongoing performance standards. Our contracts with major customers expire at various dates through April 2021.

While these longer-term agreements strengthen our customer relationships, the increased demand for our products often requires that we increase our inventories and personnel. Customer demands that we purchase their Remanufactured Core inventory also require the use of our working capital. The marketing and other allowances we typically grant our customers in connection with our new or expanded customer relationships adversely impact the near-term revenues, profitability and associated cash flows from these arrangements. However, we believe the investment we make in these new or expanded customer relationships will improve our overall liquidity and cash flow from operations over time.

Share Repurchase Program

On February 2, 2018, our board of directors increased our share repurchase program authorization from $15,000,000 to $20,000,000 of our common stock. As of March 31, 2018, $11,630,000 of the $20,000,000 had been utilized and $8,370,000 remained available to repurchase shares under the authorized share repurchase program, subject to the limit in our credit facility. We retired the 511,746 shares repurchased under this program through March 31, 2018. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.
Capital Expenditures and Commitments

Our total capital expenditures, including capital leases, were $13,411,000 and $5,731,000 for fiscal 2018 and 2017, respectively. These capital expenditures primarily include the purchase of equipment for our current operations and the expansion of our operations in Mexico. We expect to invest approximately $17,000,000 in fiscal 2019 to support our growth initiatives and continued expansion of our operations in Mexico. We have used and expect to continue using our working capital and additional capital lease obligations to finance these capital expenditures.

Contractual Obligations

The following summarizes our contractual obligations and other commitments as of March 31, 2018 and the effect such obligations could have on our cash flows in future periods:

  Payments Due by Period 
Contractual Obligations Total  
Less than
1 year
  
2 to 3
years
  
4 to 5
years
  
More than 5
years
 
                
Capital lease obligations (1) $5,598,000  $1,627,000  $2,519,000  $1,452,000   - 
Operating lease obligations (2)  53,061,000   5,873,000   8,938,000   7,426,000  $30,824,000 
Revolving loan  54,000,000   54,000,000   -   -   - 
Term loan (3)  18,559,000   3,820,000   14,739,000   -   - 
Accrued core payment (4)  36,778,000   17,421,000   14,516,000   4,841,000   - 
Unrecognized tax benefits (5)  -   -   -   -   - 
Other long-term obligations (6)  69,176,000   30,154,000   38,909,000   113,000   - 
                     
Total $237,172,000  $112,895,000  $79,621,000  $13,832,000  $30,824,000 
(12)(1)Includes 60,167 shares issuableCapital lease obligations represent amounts due under capital leases for various types of equipment.

(2)Operating lease obligations represent amounts due for rent under our leases for all our facilities (including our new distribution center in Tijuana, Mexico), certain equipment, and our Company automobile.

(3)Term loan obligations represent the amounts due for principal payments as well as interest payments to be made. Interest payments were calculated based upon exercisethe interest rate for our term loan using the LIBOR option at March 31, 2018, which was 4.42%.

(4)Accrued core payment represents the amounts due for principal and interest payments to be made in connection with the purchases of currently exercisable options underRemanufactured Cores from our customers, which are held by these customers and remain on their premises.

(5)We are unable to reliably estimate the 2010 Incentive Award Plan.timing of future payments related to uncertain tax position liabilities at March 31, 2018 in the amount of $1,219,000; therefore, this amount has been excluded from the table above. However, future tax payment accruals related to uncertain tax positions are included in our consolidated balance sheets, reduced by the associated federal deduction for state taxes.

(6)Other long-term obligations represent commitments we have with certain customers to provide marketing allowances in consideration for long-term agreements to provide products over a defined period. We are not obligated to provide these marketing allowances should our business relationships end with these customers.
 
(13)Item 7A.Includes 6,567 shares of unvested Restricted Stock issued under the 2010 Long Term Incentive Plan.
Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk relates to changes in interest rates, foreign currency exchange rates, and customer credit. We do not enter into derivatives or other financial instruments for trading or speculative purposes. As our overseas operations expand, our exposure to the risks associated with foreign currency fluctuations will continue to increase.

Interest rate risk

We are exposed to changes in interest rates primarily as a result of our borrowing and receivable discount programs, which have interest costs that vary with interest rate movements. Our credit facility bears interest at variable base rates, plus an applicable margin. At March 31, 2018, our net debt obligations totaled $70,981,000. If interest rates were to increase 1%, our net annual interest expense would have increased by approximately $710,000. In addition, for each $10,000,000 of accounts receivable we discount over a period of 180 days, a 1% increase in interest rates would increase our interest expense by $50,000.

Foreign currency risk

We are exposed to foreign currency exchange risk inherent in our anticipated purchases and expenses denominated in currencies other than the U.S. dollar. We transact business in the following foreign currencies; Mexican pesos, Malaysian ringit, Singapore dollar, Chinese yuan, and the Canadian dollar. Our primary currency risks result from fluctuations in the value of the Mexican peso and to a lesser extent the Chinese yuan. To mitigate these risks, we enter into forward foreign currency exchange contracts to exchange U.S. dollars for these foreign currencies. The extent to which we use forward foreign currency exchange contracts is periodically reviewed in light of our estimate of market conditions and the terms and length of anticipated requirements. The use of derivative financial instruments allows us to reduce our exposure to the risk that the eventual net cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in exchange rates. These contracts generally expire in a year or less. Any changes in the fair values of our forward foreign currency exchange contracts are reflected in current period earnings. Based upon our forward foreign currency exchange contracts related to these currencies, an increase of 10% in exchange rates at March 31, 2018 would have increased our general and administrative expenses by approximately $2,953,000. During fiscal 2018 and 2017, a gain of $752,000 and $843,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts.

Credit Risk

We regularly review our accounts receivable and allowance for doubtful accounts by considering factors such as historical experience, credit quality and age of the accounts receivable, and the current economic conditions that may affect a customer’s ability to pay such amounts owed to us. We maintain an allowance for doubtful accounts that, in our opinion, provides for an adequate reserve to cover losses that may be incurred.

Item 8.
Financial Statements and Supplementary Data

The information required by this item is set forth in the consolidated financial statements, commencing on page F-1 included herein.

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures 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 made known to the officers who certify the Company’s financial reports and to other members of senior management and the board of directors 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(b) 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 March 31, 2018.

Management’s Report on Internal Control Over Financial Reporting

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 State of America, applying certain estimates and judgments as required.

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

(14)1.Includes 487,516 shares issuable upon exercisePertain to the maintenance of currently exercisable options granted underrecords that, in reasonable detail, accurately and fairly reflect the 2010 Incentive Award Plantransactions and 151,000 shares issuable upon exercisedispositions of currently exercisable options granted under the 2004 Non-Employee Director Stock Option Plan.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.

Under the supervision and with the participation of management, including our chief executive officer, chief financial officer, and chief accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2018.

The effectiveness of our internal control over financial reporting as of March 31, 2018 has been audited by the Company’s independent registered public accounting firm, Ernst & Young LLP. Their assessment is included in the accompanying Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.
Changes in Internal Control Over Financial Reporting

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

Item 9B.
Other Information

None.
PART III

Item 10.
Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference to our Definitive Proxy Statement in connection with our next Annual Meeting of Stockholders (the “Proxy Statement”).

Item 11.
Executive Compensation

The information required by this item is incorporated by reference to the Proxy Statement.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference to the Proxy Statement.

Item 13.
Certain Relationships and Related Transactions, and Director Independence

In November 2014, Mr. Mel Marks was appointed to serve as a director for all of our Asian subsidiaries, in addition to his position as one of our directors. Mr. Marks received compensation at the annual rate of $150,000 for his services in addition to his regular compensation as one of our directors.  For additional information, see the discussion under the caption “Executive Compensation” “2016 Director Compensation.”

We do not have a written policy applicable to any transaction, arrangement or relationship between us and a related party. Our practice with regards to related party transactions has been for our Board of Directors, or a committee thereof, to review, approve and/or ratify such transactions as they arise. In making its determination to approve or ratify a transaction, our Board of Directors, or a committee thereof, would consider such factors as (i) the extent of the related party’s interest in the transaction, (ii) if applicable, the availability of other sources of comparable products or services, (iii) whether the terms of the related party transaction are no less favorable than terms generally available in unaffiliated transactions under like circumstances, (iv) the benefit to us, and (v) the aggregate value of the transaction.

Director Independence

Information regarding the independence of our directors can be found in Item 10 “Directors, Executive Officers and Corporate Governance - Corporate Governance, Board of Directors and Committees of the Board of Directors.”

Item 14.Principal Accountant Fees and Services

The following table summarizesinformation required by this item is incorporated by reference to the total fees we paid to our independent certified public accountants, Ernst & Young LLP, for professional services provided during the following fiscal years ended March 31:

  2016  2015  2014 
Audit Fees $1,623,000  $1,676,000  $1,564,000 
Tax Fees  234,000   168,000   542,000 
Total $1,857,000  $1,844,000  $2,106,000 

Audit fees in Fiscal 2016, 2015 and 2014 consisted of (i) the audit of our annual financial statements, (ii) the reviews of our quarterly financial statements, and (iii) audit of internal control over financial reporting.Proxy Statement.

Tax fees in Fiscal 2016 and 2015 related primarily
Item 14.
Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the preparation of federal and state tax returns, transfer pricing, and federal and state examinations. Tax fees in fiscal 2014 related primarily to the preparation of federal and state tax returns, impairment analysis, and federal and state examinations.

Our Audit Committee must pre-approve all audit and non-audit services to be performed by our independent auditors and will not approve any services that are not permitted by SEC rules. All of the audit and non-audit related fees in Fiscal 2016, 2015 and 2014 were pre-approved by the Audit Committee.Proxy Statement.
 
PART IV

Item 15.
Exhibits, Financial Statement Schedules.Schedules

Exhibits.
a.Documents filed as part of this report:

The following exhibits are filed with this Amendment:
(1)Index to Consolidated Financial Statements:

Reports of Independent Registered Public Accounting Firm54
Consolidated Balance SheetsF-1
Consolidated Statements of IncomeF-2
Consolidated Statements of Comprehensive IncomeF-3
Consolidated Statements of Shareholders’ EquityF-4
Consolidated Statements of Cash FlowsF-5
Notes to Consolidated Financial StatementsF-6

(2)Schedules:

Schedule II — Valuation and Qualifying AccountsS-1

(3)Exhibits:

Number Description of Exhibit Method of Filing
3.1Certificate of Incorporation of the CompanyIncorporated 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”).
3.2Amendment to Certificate of Incorporation of the CompanyIncorporated 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 (the “1995 Registration Statement”).
3.3
Amendment to Certificate of Incorporation of the CompanyIncorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
3.4
Amendment to Certificate of Incorporation of the CompanyIncorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1998 (the “1998 Form 10-K”).
3.5
Amendment to Certificate of Incorporation of the CompanyIncorporated by reference to Exhibit C to the Company’s proxy statement on Schedule 14A filed with the SEC on November 25, 2003.
3.6
Amended and Restated By-Laws of the CompanyIncorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on August 24, 2010.
3.7
Certificate of Amendment of the Certificate of Incorporation of the CompanyIncorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 17, 2014.
3.8
Amendment to the Amended and Restated By-Laws of the CompanyIncorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 14, 2016.
NumberDescription of ExhibitMethod of Filing
3.9
Amendment to the Amended and Restated By-Laws of the CompanyIncorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on February 22, 2017.
4.1
2004 Non-Employee Director Stock Option PlanIncorporated by reference to Appendix A to the Proxy Statement on Schedule 14A for the 2004 Annual Shareholders Meeting.
4.2
2010 Incentive Award PlanIncorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on December 15, 2010.
4.3
Amended and Restated 2010 Incentive Award PlanIncorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 5, 2013.
4.4
Second Amended and Restated 2010 Incentive Award PlanIncorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 3, 2014.
4.5
2014 Non-Employee Director Incentive Award PlanIncorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on March 3, 2014.
4.6
Third Amended and Restated 2010 Incentive Award PlanIncorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on November 20, 2017.
10.1Amendment to Lease, dated October 3, 1996, by and between the Company and Golkar Enterprises, Ltd. relating to additional property in Torrance, CaliforniaIncorporated by reference to Exhibit 10.17 to the December 31, 1996 Form 10-Q.
10.2Lease Agreement, dated September 19, 1995, by and between Golkar Enterprises, Ltd. and the Company relating to the Company’s facility located in Torrance, CaliforniaIncorporated by reference to Exhibit 10.18 to the 1995 Registration Statement.
10.3
Form of Indemnification Agreement for officers and directorsIncorporated by reference to Exhibit 10.25 to the 1997 Registration Statement.
10.4
Second Amendment to Lease, dated March 15, 2002, between Golkar Enterprises, Ltd. and the Company relating to property in Torrance, CaliforniaIncorporated by reference to Exhibit 10.44 to the 2003 10-K.
10.5*
Addendum to Vendor Agreement, dated May 8, 2004, between AutoZone Parts, Inc. and the CompanyIncorporated by reference to Exhibit 10.15 to the 2004 10-K.
10.6
Form of Orbian Discount Agreement between the Company and Orbian Corp.Incorporated by reference to Exhibit 10.17 to the 2004 10-K.
NumberDescription of ExhibitMethod of Filing
10.7
Form of Standard Industrial/Commercial Multi-Tenant Lease, dated May 25, 2004, between the Company and Golkar Enterprises, Ltd for property located at 530 Maple Avenue, Torrance, CaliforniaIncorporated by reference to Exhibit 10.18 to the 2004 10-K.
10.8
Build to Suit Lease Agreement, dated October 28, 2004, among Motorcar Parts de Mexico, S.A. de CV, the Company and Beatrix Flourie Geoffroy
Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on November 2, 2004.
10.9
Amendment No. 3 to Pay-On-Scan Addendum, dated August 22, 2006, between AutoZone Parts, Inc. and the CompanyIncorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on August 30, 2006.
10.10*
Amendment No. 1 to Vendor Agreement, dated August 22, 2006, between AutoZone Parts, Inc. and Motorcar Parts of America, Inc.Incorporated by reference to Exhibit 99.2 to Current Report on Form 8-K filed on August 30, 2006.
10.11
Lease Agreement Amendment, dated October 12, 2006, between the Company and Beatrix Flourie GeoffroyIncorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on October 20, 2006.
10.12
Third Amendment to Lease Agreement, dated as of November 20, 2006, between Motorcar Parts of America, Inc. and Golkar Enterprises, Ltd.Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on November 27, 2006.
10.13
Amended and Restated Employment Agreement, dated as of December 31, 2008, by and between the Company and Selwyn JoffeIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 7, 2009.
10.14*
Vendor Agreement dated as of March 31, 2009, between the Company and AutoZone Parts, Inc.Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed May 5, 2009.
10.15*
Core Amendment to Vendor Agreement, dated as of March 31, 2009, between the Company and AutoZone Parts, Inc.
Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed May 5, 2009.
10.16*
Vendor Agreement Addendum, dated as of March 31, 2009, between the Company and AutoZone Parts, Inc.Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K/A filed on December 23, 2009.
10.17*
Core Amendment to Vendor Agreement Addendum, dated as of March 31, 2009, between the Company and AutoZone Parts, Inc.Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A filed on December 23, 2009.
10.18*
Master Vendor Agreement, dated as of April 1, 2009, between the Company and O’Reilly Automotive, Inc.Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on January 13, 2010.
NumberDescription of ExhibitMethod of Filing
10.19*
Letter Agreement, dated as of April 1, 2009, between the Company and O’Reilly Automotive, Inc.Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on January 13, 2010.
10.20*
Vendor Agreement Addendum, dated as of April 1, 2009 between the Company and O’Reilly Automotive, Inc.Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on January 13, 2010.
10.21
Core Amendment No. 3 to Vendor Agreement, dated as of May 31, 2011, by and between Motorcar Parts of America, Inc. and AutoZone Parts, Inc.Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on June 16, 2011.
10.22
Core Amendment No. 4 to Vendor Agreement, dated as of May 31, 2011, by and between Motorcar Parts of America, Inc. and AutoZone Parts, Inc.Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on June 16, 2011.
10.23
Addendum No. 2 to Amendment No. 1 to Vendor Agreement, dated as of May 31, 2011, by and between Motorcar Parts of America, Inc. and AutoZone Parts, Inc.Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on June 16, 2011.
10.24
Fifth Amendment, dated as of November 17, 2011, to that certain Standard Industrial Commercial Single Tenant Lease-Gross, dated as of September 19, 1995, between Golkar Enterprises, Ltd and Motorcar Parts of America, Inc., as amendedIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on November 25, 2011.
10.25
Right of First Refusal Agreement, dated May 3, 2012Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 7, 2012.
10.26
Employment Agreement, dated as of May 18, 2012, between Motorcar Parts of America, Inc., and Selwyn JoffeIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 24, 2012.
10.27
Revolving Credit/Strategic Cooperation Agreement, dated as of August 22, 2012, by and among Motorcar Parts of America, Inc. (solely for purposes of provisions specified thereto), Fenwick Automotive Products Limited and Wanxiang America CorporationIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 28, 2012.
10.28
Guaranty, dated as of August 22, 2012, by Motorcar Parts of America, Inc. for the benefit of Wanxiang America CorporationIncorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on August 28, 2012.
10.29
Warrant to Purchase Common Stock, dated as of August 22, 2012, issued by Motorcar Parts of America, Inc. to Wanxiang America CorporationIncorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on August 28, 2012.
NumberDescription of ExhibitMethod of Filing
10.30
Form of Stock Option Notice for use in connection with stock options granted to Selwyn Joffe pursuant to the Motorcar Parts of America, Inc. 2010 Incentive Award PlanIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 12, 2013.
10.31
Form of Stock Option Agreement for use in connection with stock options granted to Selwyn Joffe pursuant to the Motorcar Parts of America, Inc. 2010 Incentive Award PlanIncorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on August 12, 2013.
10.32
Amended and Restated Financing Agreement, dated as of November 6, 2013, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agentIncorporated by reference to Exhibit 10.1 to Amended Quarterly Report on Form 10-Q/A filed on February 10, 2014.
10.33
Third Amendment to Amended and Restated Financing Agreement, dated as of December 11, 2014, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agentIncorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 12, 2014.
10.34
Fourth Amendment to Amended and Restated Financing Agreement, dated as of April 30, 2015, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agentIncorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 1, 2015.
10.35*
Revolving Credit, Term Loan and Security Agreement, dated as of June 3, 2015, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agentIncorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 8, 2015.
10.36
First Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of November 5, 2015, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agent
Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on November 9, 2015.
NumberDescription of ExhibitMethod of Filing
10.37
Consent and Second Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of May 19, 2016, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agentIncorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed on August 9, 2016.
10.38
Third Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of March 24, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto, and PNC Bank, National Association, as administrative agentIncorporated by reference to Exhibit 10.38 to Annual Report on Form 10-K filed on June 14, 2017.
10.39
Fourth Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of April 24, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agentIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 27, 2017.
10.40
Fifth Amendment to Revolving Credit, Term Loan and Security Agreement, dated as of July 18, 2017, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agentIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on July 24, 2017.
10.41**
Amended and Restated Credit Facility, dated as of June 5, 2018, among Motorcar Parts of America, Inc., each lender from time to time party thereto and PNC Bank, National Association, as administrative agentIncorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on June 11, 2018.
14.1
Motorcar Parts of America, Inc., Code of Business Conduct and Ethics, as amended, effective January 15, 2015Incorporated by reference to Exhibit 14.1 to Current Report on Form 8-K filed on January 20, 2015.
21.1
List of SubsidiariesFiled herewith.
23.1
Consent of Independent Registered Public Accounting Firm Ernst & Young LLPFiled herewith.
     
31.1
 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 Filed herewith.
     
31.2
 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 Filed herewith.
NumberDescription of ExhibitMethod of Filing
     
31.3
 Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 Filed herewith.
     
32.1
 Certifications of Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 Filed herewith.
101.INSXBRL Instance DocumentFiled herewith.
101.SCMXBRL Taxonomy Extension Schema DocumentFiled herewith.
101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentFiled herewith.
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentFiled herewith.
101.LABXBRL Taxonomy Extension Label Linkbase DocumentFiled herewith.
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentFiled herewith.
*Portions of this exhibit have been granted confidential treatment by the SEC.
**
Portions of this exhibit have been omitted pursuant to a confidential treatment request submitted separately to the SEC pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in those agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

Item 16.
Form 10-K Summary

None.
 
SIGNATURES

Pursuant to the requirements of Section 15(d) 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: July 29, 2016June 14, 2018By:/s/ David Lee
  David Lee
  Chief Financial Officer
   
Dated: July 29, 2016June 14, 2018By:/s/ Kevin Daly
  Kevin Daly
  Chief Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K/A10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated:

/s/ Selwyn JoffeChief Executive Officer and DirectorJuly 29, 2016June 14, 2018
Selwyn Joffe(Principal Executive Officer) 
   
/s/ David LeeChief Financial OfficerJuly 29, 2016June 14, 2018
David Lee(Principal Financial Officer) 
   
/s/ Kevin DalyChief Accounting OfficerJuly 29, 2016June 14, 2018
Kevin Daly(Principal Accounting Officer) 
   
/s/ Scott AdelsonDirectorJuly 29, 2016June 14, 2018
Scott Adelson  
   
/s/ Rudolph BorneoDirectorJuly 29, 2016June 14, 2018
Rudolph Borneo  
   
/s/ Philip GayDirectorJuly 29, 2016June 14, 2018
Philip Gay  
   
/s/ Duane MillerDirectorJuly 29, 2016June 14, 2018
Duane Miller  
   
/s/ Jeffrey MirvisDirectorJuly 29, 2016June 14, 2018
Jeffrey Mirvis  
   
/s/ David BryanDirectorJuly 29, 2016June 14, 2018
David Bryan  
   
/s/ Joseph FergusonDirectorJuly 29, 2016June 14, 2018
Joseph Ferguson  
/s/ Barbara WhittakerDirectorJune 14, 2018
Barbara Whittaker
/s/ Timothy VargoDirectorJune 14, 2018
Timothy Vargo
MOTORCAR PARTS OF AMERICA, INC.
AND SUBSIDIARIES

CONTENTS

Page
Reports of Independent Registered Public Accounting Firm54
Consolidated Balance SheetsF-1
Consolidated Statements of IncomeF-2
Consolidated Statements of Comprehensive IncomeF-3
Consolidated Statements of Shareholders’ EquityF-4
Consolidated Statements of Cash FlowsF-5
Notes to Consolidated Financial StatementsF-6
Schedule II — Valuation and Qualifying AccountsS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Motorcar Parts of America, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Motorcar Parts of America, Inc. and subsidiaries’ internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Motorcar Parts of America, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018, based on COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2018, and the related notes and schedule and our report dated June 14, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitation of Internal Control Over Financial Reporting

A company’s 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 generally accepted accounting principles. A company’s 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.

/s/ Ernst & Young LLP
Los Angeles, California
June 14, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Motorcar Parts of America, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Motorcar Parts of America, Inc. and subsidiaries
(the Company) as of March 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2018, and the related notes and financial statement schedule listed in the index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated June 14, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007
Los Angeles, California
June 14, 2018
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,

 2018  2017 
ASSETS      
Current assets:      
Cash and cash equivalents $13,049,000  $9,029,000 
Short-term investments  2,828,000   2,140,000 
Accounts receivable — net  15,738,000   26,017,000 
Inventory— net  76,275,000   67,516,000 
Inventory unreturned  7,508,000   7,581,000 
Income tax receivable  7,796,000   1,709,000 
Prepaid expenses and other current assets  11,491,000   8,139,000 
Total current assets  134,685,000   122,131,000 
Plant and equipment — net  28,322,000   18,437,000 
Long-term core inventory — net  301,656,000   262,922,000 
Long-term core inventory deposits  5,569,000   5,569,000 
Long-term deferred income taxes  10,556,000   13,546,000 
Goodwill  2,551,000   2,551,000 
Intangible assets — net  3,766,000   3,993,000 
Other assets  7,392,000   6,990,000 
TOTAL ASSETS $494,497,000  $436,139,000 
LIABILITIES AND SHAREHOLDERS’  EQUITY        
Current liabilities:        
Accounts payable $73,273,000  $85,960,000 
Accrued liabilities  11,799,000   10,077,000 
Customer finished goods returns accrual  17,805,000   17,667,000 
Accrued core payment  16,536,000   11,714,000 
Revolving loan  54,000,000   11,000,000 
Other current liabilities  4,471,000   3,300,000 
Current portion of term loan  3,068,000   3,064,000 
Total current liabilities  180,952,000   142,782,000 
Term loan, less current portion  13,913,000   16,935,000 
Long-term accrued core payment  18,473,000   12,349,000 
Long-term deferred income taxes  226,000   180,000 
Other liabilities  5,957,000   15,212,000 
Total liabilities  219,521,000   187,458,000 
Commitments and contingencies        
Shareholders’ equity:        
Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued   -   - 
Series A junior participating preferred stock; par value $.01 per share, 20,000 shares authorized; none issued  -   - 
Common stock; par value $.01 per share, 50,000,000 shares authorized; 18,893,102 and 18,648,854 shares issued and outstanding at March 31, 2018 and 2017, respectively  189,000   186,000 
Additional paid-in capital  213,609,000   205,646,000 
Retained earnings  66,606,000   50,290,000 
Accumulated other comprehensive loss  (5,428,000)  (7,441,000)
Total shareholders’ equity  274,976,000   248,681,000 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $494,497,000  $436,139,000 
The accompanying notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended March 31,
  2018  2017  2016 
          
Net sales $428,072,000  $421,253,000  $368,970,000 
Cost of goods sold  322,199,000   306,207,000   268,046,000 
Gross profit  105,873,000   115,046,000   100,924,000 
Operating expenses:            
General and administrative  35,527,000   31,124,000   49,665,000 
Sales and marketing  15,030,000   12,126,000   9,965,000 
Research and development  5,692,000   3,824,000   3,008,000 
Total operating expenses  56,249,000   47,074,000   62,638,000 
Operating income  49,624,000   67,972,000   38,286,000 
Interest expense, net  15,445,000   13,094,000   16,244,000 
Income before income tax expense  34,179,000   54,878,000   22,042,000 
Income tax expense  17,863,000   17,305,000   11,479,000 
             
Net income $16,316,000  $37,573,000  $10,563,000 
             
Basic net income per share $0.87  $2.02  $0.58 
             
Diluted net income per share $0.84  $1.93  $0.55 
Weighted average number of shares outstanding:            
Basic  18,854,993   18,608,812   18,233,163 
Diluted  19,514,775   19,418,706   19,066,093 

The accompanying notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended March 31,
  2018  2017  2016 
          
Net income $16,316,000  $37,573,000  $10,563,000 
Other comprehensive income (loss), net of tax:            
Unrealized gain (loss) on short-term investments (net of tax of $118,000, $111,000, and $(8,000), respectively)  218,000   196,000   (13,000)
Foreign currency translation gain (loss)  1,795,000   (2,785,000)  (2,321,000)
Total other comprehensive income (loss), net of tax  2,013,000   (2,589,000)  (2,334,000)
             
Comprehensive income $18,329,000  $34,984,000  $8,229,000 

The accompanying notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
For the Years Ended March 31,

  Common Stock             
  Shares  Amount  
Additional
Paid-in
Capital
Common
Stock
  
Retained
Earnings
(Accumulated
Deficit)
  
Accumulated
Other
Comprehensive
Income (Loss)
  Total 
                   
                   
Balance at March 31, 2015  17,974,598  $180,000  $191,279,000  $1,262,000  $(2,518,000) $190,203,000 
                         
Compensation recognized under employee stock plans  -   -   2,584,000   -   -   2,584,000 
Exercise of stock options  510,637   5,000   5,387,000   -   -   5,392,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  46,516   -   (913,000)  -   -   (913,000)
Tax benefit from employee stock options exercised  -   -   5,313,000   -   -   5,313,000 
Unrealized gain (loss) on investments, net of tax  -   -   -   -   (13,000)  (13,000)
Foreign currency translation  -   -   -   -   (2,321,000)  (2,321,000)
Net income  -   -   -   10,563,000   -   10,563,000 
                         
Balance at March 31, 2016  18,531,751  $185,000  $203,650,000  $11,825,000  $(4,852,000) $210,808,000 
                         
Cumulative-effect adjustment  -   -   -   892,000   -   892,000 
                         
Balance at April 1, 2016  18,531,751  $185,000  $203,650,000  $12,717,000  $(4,852,000) $211,700,000 
Compensation recognized under employee stock plans  -   -   3,383,000   -   -   3,383,000 
Exercise of stock options  133,731   1,000   1,661,000   -   -   1,662,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  53,031   1,000   (1,059,000)  -   -   (1,058,000)
Repurchase and cancellation of treasury stock, including fees  (69,659)  (1,000)  (1,989,000)  -   -   (1,990,000)
Unrealized gain (loss) on investments, net of tax  -   -   -   -   196,000   196,000 
Foreign currency translation  -   -   -   -   (2,785,000)  (2,785,000)
Net income  -   -   -   37,573,000   -   37,573,000 
                         
Balance at March 31, 2017  18,648,854  $186,000  $205,646,000  $50,290,000  $(7,441,000) $248,681,000 
                         
Compensation recognized under employee stock plans  -   -   3,766,000   -   -   3,766,000 
Exercise of stock options  55,351   1,000   480,000   -   -   481,000 
Issuance of common stock upon vesting of RSUs, net of shares withheld for employee taxes  47,508   1,000   (597,000)  -   -   (596,000)
Repurchase and cancellation of treasury stock, including fees  (374,740)  (4,000)  (9,247,000)  -   -   (9,251,000)
Exercise of warrant for shares of common stock  516,129   5,000   13,561,000   -   -   13,566,000 
Unrealized gain (loss) on investments, net of tax  -   -   -   -   218,000   218,000 
Foreign currency translation  -   -   -   -   1,795,000   1,795,000 
Net income  -   -   -   16,316,000   -   16,316,000 
                         
Balance at March 31, 2018  18,893,102  $189,000  $213,609,000  $66,606,000  $(5,428,000) $274,976,000 

The accompanying notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended March 31,

  2018  2017  2016 
Cash flows from operating activities:         
Net income $16,316,000  $37,573,000  $10,563,000 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:            
Depreciation  3,798,000   3,101,000   2,315,000 
Amortization of intangible assets  710,000   613,000   621,000 
Amortization of debt issuance costs  1,060,000   716,000   790,000 
Write-off of debt issuance costs  -   -   5,108,000 
Amortization of interest on accrued core payment  670,000   704,000   736,000 
(Gain) loss due to the change in the fair value of the warrant liability  (2,313,000)  (3,764,000)  5,137,000 
Gain due to the change in the fair value of the contingent consideration  -   (16,000)  (990,000)
Net provision for inventory reserves  8,491,000   3,864,000   4,518,000 
Net provision for (recovery of) customer payment discrepancies  998,000   718,000   (299,000)
Net provision for doubtful accounts  21,000   3,000   4,404,000 
Deferred income taxes  3,055,000   6,510,000   (3,781,000)
Share-based compensation expense  3,766,000   3,383,000   2,584,000 
Loss on disposal of plant and equipment  161,000   13,000   7,000 
Change in operating assets and liabilities, net of acquisitions:            
Accounts receivable  10,854,000   (18,145,000)  4,647,000 
Inventory  (6,847,000)  (10,058,000)  3,054,000 
Inventory unreturned  73,000   2,939,000   (2,687,000)
Income tax receivable  (6,081,000)  (1,686,000)  3,981,000 
Prepaid expenses and other current assets  (2,507,000)  (2,647,000)  (1,216,000)
Other assets  (384,000)  (3,339,000)  (477,000)
Accounts payable and accrued liabilities  (11,621,000)  12,446,000   6,620,000 
Customer finished goods returns accrual  138,000   (8,709,000)  6,698,000 
Long-term core inventory  (45,839,000)  (24,964,000)  (53,408,000)
Long-term core inventory deposits  -   -   26,002,000 
Accrued core payment  10,276,000   (3,180,000)  (11,266,000)
Other liabilities  1,261,000   (1,344,000)  1,673,000 
Net cash (used in) provided by operating activities  (13,944,000)  (5,269,000)  15,334,000 
Cash flows from investing activities:            
Purchase of plant and equipment  (9,933,000)  (4,929,000)  (3,747,000)
Purchase of business  (4,993,000)  (705,000)  (2,701,000)
Additions to short term investments  (352,000)  (49,000)  (1,134,000)
Net cash used in investing activities  (15,278,000)  (5,683,000)  (7,582,000)
Cash flows from financing activities:            
Borrowings under revolving loan  84,000,000   65,001,000   29,000,000 
Repayments under revolving loan  (41,000,000)  (61,001,000)  (22,000,000)
Borrowings under term loan  -   -   25,000,000 
Repayments of term loan  (3,125,000)  (3,125,000)  (86,063,000)
Payments for debt issuance costs  (462,000)  (433,000)  (2,337,000)
Payments on capital lease obligations  (905,000)  (591,000)  (374,000)
Payment of contingent consideration  -   (314,000)  - 
Exercise of stock options  481,000   1,662,000   5,392,000 
Excess tax benefits from stock-based compensation  -   -   5,313,000 
Cash used to net share settle equity awards  (596,000)  (1,058,000)  (913,000)
Repurchase of common stock, including fees  (9,251,000)  (1,990,000)  - 
Exercise of warrant  4,000,000   -   - 
Net cash provided by (used in) financing activities  33,142,000   (1,849,000)  (46,982,000)
Effect of exchange rate changes on cash and cash equivalents  100,000   (67,000)  (103,000)
Net increase (decrease) in cash and cash equivalents  4,020,000   (12,868,000)  (39,333,000)
Cash and cash equivalents — Beginning of period  9,029,000   21,897,000   61,230,000 
Cash and cash equivalents — End of period $13,049,000  $9,029,000  $21,897,000 
             
Supplemental disclosures of cash flow information:            
Cash paid during the period for:            
Interest, net $13,623,000  $11,674,000  $9,812,000 
Income taxes, net of refunds  19,657,000   12,378,000   3,762,000 
Non-cash investing and financing activities:            
Property acquired under capital lease $3,478,000  $802,000  $2,454,000 
Contingent consideration  -   -   1,320,000 
The accompanying notes to consolidated financial statements are an integral part hereof.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. Company Background and Organization

Overview

Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading manufacturer, remanufacturer, and distributor of aftermarket automotive and light truck applications. The Company also, to a lesser extent, is a manufacturer, remanufacturer, and distributor of heavy duty truck and industrial and agricultural application parts. These replacement parts are sold for use on vehicles after initial vehicle purchase. These automotive parts are sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The Company’s products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake master cylinders, and (iv) other products which include turbochargers, brake power boosters, and diagnostic equipment. The Company added turbochargers through an acquisition in July 2016. The Company began selling brake power boosters in August 2016. As a result of an acquisition in July 2017, its business also now includes developing and selling diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles.

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

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

2. Summary of Significant Accounting Policies

New Accounting Pronouncements Not Yet Adopted

Revenue Recognition

In May 2014, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, codified in Accounting Standards Codification (“ASC”) 606, “Revenue Recognition - Revenue from Contracts with Customers” (“ASC 606”), which amends the guidance in the former ASC 605, “Revenue Recognition”. ASC 606 as initially issued was effective for annual periods beginning after December 15, 2016, and interim periods within that reporting period for a public entity. The Company may elect either a full retrospective transition method, which requires the restatement of all periods presented, or a modified retrospective transition method, which requires a cumulative-effect adjustment as of the date of initial adoption. In August 2015, the FASB delayed the effective date by one year to annual periods beginning after December 15, 2017, and interim periods within that reporting period for a public entity. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company will adopt the new standard on April 1, 2018 and has elected to utilize the full retrospective transition method.

ASC 606 establishes the requirements for recognizing revenue from contracts with customers.  The standard requires entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under the new standard, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for the good or service. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Due to the impact of the new standard, the Company has made changes to its business processes, systems, and controls. A project team was formed and evaluated and guided the implementation process. The Company performed a preliminary assessment, which included the identification of the key contractual terms in its primary revenue streams and the comparison of historical accounting policies and practices to the requirements of the new standard by revenue stream. The preliminary assessment resulted in the identification of potential accounting differences that will arise from the application of the new standard. The implementation team completed its contract review phase of the project during the third quarter, which included identifying the population of contracts and completing an analysis of the potential accounting impacts of the new standard on individual contracts. During the fourth quarter, the implementation team identified the changes to business processes, systems, and controls to support recognition, presentation, and disclosure under the new standard and will implement these changes during the first quarter of fiscal 2019 as described in the subsequent paragraphs.

The Company’s primary revenue stream is derived from the sale of remanufactured products to its customers pursuant to long-term customer contracts.  The Company will continue to recognize revenue at a point in time as it satisfies its performance obligation of transferring control of the product to the customer.  The Company recognizes revenues net of anticipated returns, marketing allowances, volume discounts, and other forms of variable consideration more fully described below.  The Company also reviewed customer options to acquire additional goods or services and has preliminarily determined no material rights exist within its contracts.  The Company does not currently anticipate that the adoption of ASU 2014-09 will have a material impact on previously reported revenue amounts.  See discussion regarding Remanufactured Cores below.

The Company currently anticipates that the adoption of ASU 2014-09 will primarily impact reclassifications to certain balance sheet accounts to conform to the presentation and disclosure requirements of ASC 606. For example, the Company currently accounts for Remanufactured Cores anticipated to be returned as long-term core inventory and the refund liability as a contra-account receivable account as illustrated in Note 6. Under ASC 606, the Company currently anticipates it will reclassify this asset to a contractual asset and recognize a contractual liability for amounts expected to be refunded to customers.

The Company also analyzed specific contractual provisions related to sales contracts that include Remanufactured Cores.  The Company recognizes revenue for sales of cores not expected to be replaced by a similar Used Core sent back under the core exchange program only upon meeting certain criteria as noted under the caption “Revenue Recognition” below. The adoption of ASU 2014-09 may result in an acceleration of revenue recognition, as it requires the Company to estimate the amount of cores not expected to be returned upon the initial recognition of revenue for contracts that include Remanufactured Cores.  As the Company has elected the full retrospective method of adoption, the impact to each reporting period will be measured as the net impact of (i) the acceleration of revenue into a prior period versus what was previously recorded in that period and (ii) the acceleration of revenue into that period previously recognized in a later period (the change in the estimated volume of returns in the comparable recast periods). Given that third-party information available to meet the criteria outlined in Note 2, Summary of Significant Accounting Policies, may be available at different points of time in a given fiscal period, the timing of the revenue recognized in these periods may be less predictive under ASC 605 as compared to the estimation process required under ASU 2014-09. The anticipated increase to previously reported revenues for the year ended March 31, 2016 is less than $2.0 million. The anticipated decrease to previously reported revenues for the year ended March 31, 2017 is less than $0.9 million. The anticipated decrease to reported revenues in the current fiscal year ended March 31, 2018 is less than $0.4 million.

In order to properly determine the transaction price related to its sales contracts, the Company has also analyzed its various forms of consideration paid to its vendors including up-front payments for future contracts. Based on the analysis completed through the year ended March 31, 2018, the Company currently does not anticipate a change to its legacy accounting practices as a result of the adoption of ASU 2014-09 to account for up-front payments to its vendors. Under current accounting practices, if the Company expects to generate future revenues associated with an up-front payment, then an asset is recognized and amortized over the appropriate period of time as a reduction of revenue. If the Company does not expect to generate additional revenue then the up-front payment is recognized in the consolidated statements of income when payment occurs as a reduction of revenue.
ASU 2014-09 also codified the guidance on other assets and deferred costs relating to contracts with customers with the addition of ASC 340-40.  This guidance relates to the accounting for costs of an entity to obtain and fulfill a contract to provide goods or services to the customer.  Under the new guidance, an entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs. In the Company’s review of the various costs to obtain contracts with its customers, it has preliminarily determined that currently no significant costs are incurred that meet the capitalization criteria.  The Company’s primary cost to fulfill contracts, other than inventory related costs, relates to shipping and handling activities, which continue to be expensed as incurred consistent with historical accounting practices.

The new guidance provides several practical expedients, which the Company anticipates adopting. The first of these practical expedients allows a company to expense incremental costs of obtaining a contract as incurred if the amortization period would have been one year or less. As noted above, the Company has preliminarily concluded that it does not have any such costs that qualify for capitalization but will apply the practical expedient to the extent that such costs incurred in prospective periods qualify. Similarly, the Company plans to adopt guidance which allows for the effects of a significant financing component to be ignored if a company expects that the period between the transfer of the goods and services to the customer and payment will be one year or less. Finally, the Company plans to adopt guidance that allows a company to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations.

Financial Instruments

In January 2016, the FASB issued guidance that amends the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company expects to apply the amendments in the new guidance by means of a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the first quarter of fiscal 2019. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

Leases

In February 2016, the FASB issued new guidance that requires balance sheet recognition of a right-of-use asset and lease liability by lessees for operating leases. The new guidance also requires new disclosures providing additional qualitative and quantitative information about the amounts recorded in the financial statements. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new guidance requires a modified retrospective approach with optional practical expedients. The Company will adopt this guidance in the first quarter of fiscal 2020. The Company is currently evaluating the impact the provisions of this guidance will have on its consolidated financial statements, but expects that it will result in a significant increase to its long-term assets and liabilities on the consolidated balance sheets.

Business Combinations

In January 2017, the FASB issued guidance which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. A reporting entity should apply the amendment prospectively. The adoption of this guidance in the first quarter of fiscal 2019 is not expected to have any material impact on the Company’s consolidated financial statements.

Goodwill Impairment

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

In May 2017, the FASB issued guidance to provide clarity and reduce (i) the diversity in practice and (ii) the cost and complexity when applying the accounting guidance for equity-based compensation to a change to the terms or conditions of a share-based payment award. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. This guidance should be applied prospectively to an award modified on or after that adoption date. The adoption of this guidance in the first quarter of fiscal 2019 is not expected to have any material impact on the Company’s consolidated financial statements.

Derivatives and Hedging

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

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Motorcar Parts of America, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Reclassification of Prior Period Balances

The income tax receivable has been reclassified from prepaid and other current assets in the consolidated balance sheet at March 31, 2017 to conform to the consolidated balance sheet presentation at March 31, 2018. In addition, the income tax receivable has been reclassified from prepaid and other current assets in the consolidated statements of cash flows for the years ended March 31, 2017 and 2016 to conform to the consolidated statement of cash flow presentation for the year ended March 31, 2018.

Segment Reporting

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

Cash and Cash Equivalents

Cash primarily consists of cash on hand and bank deposits. Cash equivalents consist of money market funds. The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.
Accounts Receivable

The allowance for doubtful accounts is developed based upon several factors including customer credit quality, historical write-off experience and any known specific issues or disputes which exist as of the balance sheet date. Accounts receivable are written off only when all collection attempts have failed. The Company does not require collateral for accounts receivable.

The Company has receivable discount programs that have been established with certain major customers and their respective banks. Under these programs, the Company has the option to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. Once the customer chooses which outstanding invoices are going to be made available for discounting, the Company can accept or decline the bundle of invoices provided. The receivable discount programs are non-recourse, and funds cannot be reclaimed by the customer or its bank after the related invoices have been discounted.

Inventory

Non-core Inventory

Non-core inventory is comprised of (i) non-core raw materials, (ii) the non-core value of work in process, (iii) the non-core value of remanufactured finished goods, and (iv) purchased finished goods. Used Cores, the Used Core value of work in process and the Remanufactured Core portion of finished goods are classified as long-term core inventory as described below under the caption “Long-term Core Inventory.” Used Cores are a source of raw materials used in the manufacturing of the Company’s products.

Non-core inventory is stated at the lower of cost or net realizable value. The cost of non-core remanufactured inventory approximates average historical purchase prices paid for raw materials, and is based upon the direct costs of material and an allocation of labor and variable and fixed overhead costs. The cost of purchased finished goods inventory approximates average historical purchase prices paid, and an allocation of fixed overhead costs. The cost of non-core inventory is evaluated at least quarterly during the fiscal year and adjusted as necessary to reflect current lower of cost or net realizable value levels. These adjustments are determined for individual items of inventory within each of the three classifications of non-core inventory as follows:

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

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

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

The Company records an allowance for potentially excess and obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and a forecast of potential use of the inventory. The Company periodically reviews inventory to identify excess quantities and part numbers that are experiencing a reduction in demand. Any part numbers with quantities identified during this process are reserved for at rates based upon management’s judgment, historical rates, and consideration of possible scrap and liquidation values which may be as high as 100% of cost if no liquidation market exists for the part. The Company had recorded reserves of $6,682,000 and $4,125,000 for excess and obsolete inventory at March 31, 2018 and 2017, respectively. The quantity thresholds and reserve rates are subjective and are based on management’s judgment and knowledge of current and projected industry demand. The reserve estimates may, therefore, be revised if there are changes in the overall market for the Company’s products or market changes that in management’s judgment, impact its ability to sell or liquidate potentially excess or obsolete inventory.
The Company records vendor discounts as a reduction of inventories that are recognized as a reduction to cost of sales as the inventories are sold.

Inventory Unreturned

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

Inventory unreturned is valued in the same manner as the Company’s finished goods inventory.

Long-term Core Inventory

Long-term core inventory consists of:

Used Cores purchased from core brokers and held in inventory at the Company’s facilities,

Used Cores returned by the Company’s customers and held in inventory at the Company’s facilities,

Used Cores returned by end-users to customers but not yet returned to the Company are classified as Remanufactured Cores until they are physically received by the Company,

Remanufactured Cores held in finished goods inventory at the Company’s facilities; and

Remanufactured Cores held at customer locations as a part of the finished goods sold to the customer. For these Remanufactured Cores, the Company expects the finished good containing the Remanufactured Core to be returned under the Company’s general right of return policy or a similar Used Core to be returned to the Company by the customer, in each case, for credit.

Long-term core inventory is recorded at average historical purchase prices determined based on actual purchases of inventory on hand. The cost and net realizable value of Used Cores for which sufficient recent purchases have occurred are deemed the same as the purchase price for purchases that are made in arm’s length transactions.

Long-term core inventory recorded at average historical purchase prices is primarily made up of Used Cores for newer products related to more recent automobile models or products for which there is a less liquid market. The Company purchases these Used Cores from core brokers to supplement the yield from returned cores and the under return by consumers.

Used Cores obtained in core broker transactions are valued based on average purchase price. The average purchase price of Used Cores for more recent automobile models is retained as the cost for these Used Cores in subsequent periods even as the source of these Used Cores shifts to the core exchange program.

Long-term core inventory is recorded at the lower of cost or net realizable value. In the absence of sufficient recent purchases the Company uses the net selling price its customers have agreed to pay for Used Cores that are not returned to the Company under the Company’s core exchange program to assess whether Used Core cost exceeds Used Core net realizable value on a customer by customer basis.
The Company classifies all of its core inventories as long-term assets. The determination of the long-term classification is based on its view that the value of the cores is not consumed or realized in cash during the Company’s normal operating cycle, which is one year for most of the cores recorded in inventory. According to guidance provided under the FASB ASC, current assets are defined as “assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.” The Company does not believe that the economic value of core inventories, which the Company classifies as long-term, is consumed because the credits issued upon the return of Used Cores offset the amounts invoiced when the Remanufactured Cores included in finished goods were sold. The Company does not expect the economic value of core inventories to be consumed, and thus the Company does not expect to realize cash, until its relationship with a customer ends, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience.

However, historically for certain finished goods sold, the Company’s customer will not send the Company a Used Core to obtain the credit the Company offers under its core exchange program. Therefore, based on the Company’s historical estimate, the Company derecognizes the core value for these finished goods as the Company believes the economic value has been consumed and the Company has realized cash.

For these reasons, the Company concluded that it is more appropriate to classify core inventory as long-term assets.

Long-term Core Inventory Deposit

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

Customer Finished Goods Returns Accrual

The customer finished goods returns accrual represents the Company’s estimate of its exposure to customer returns, including warranty returns, under its general right of return policy to allow customers to return items that their end user customers have returned to them and from time to time, stock adjustment returns when the customers’ inventory of certain product lines exceeds the anticipated sales to end-user customers. The customer finished goods returns accrual represents the non-core sales value of the estimated returns and is classified as a current liability due to the expectation that these returns will occur within the normal operating cycle of one year.

Accrued Core Payment

The accrued core payment represents the full Remanufactured Core sales price of Remanufactured Cores the Company has purchased from its customers, generally in connection with new business, which are held by these customers and remain on their premises. At the same time, the Company records the long-term core inventory for the Remanufactured Cores purchased at its cost, determined as noted under the caption “Long-term Core Inventory”. The difference between the full Remanufactured Core sales price of Remanufactured Cores and its related cost is treated as sales allowance reducing revenue when the purchases are made. The Company expects to realize the selling value and the related cost of these Remanufactured Cores should its relationship with a customer end, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience.

The repayments for these Remanufactured Core inventory purchases are made through the issuance of credits against that customer’s receivables either on a one-time basis or over an agreed-upon period. The accrued core payment is recorded as a current and noncurrent liability in the consolidated balance sheets based on whether repayments will occur within the normal operating cycle of one year.
Income Taxes

The Company accounts for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance is provided to reduce deferred tax assets when it is more likely than not that a portion of the deferred tax asset will not be realized.

The primary components of the Company’s income tax provision are (i) the current liability or refund due for federal, state and foreign income taxes and (ii) the change in the amount of the net deferred income tax asset, including the effect of any change in the valuation allowance.

In December 2017, new tax legislation was enacted in the United States (Tax Reform Act) which resulted in significant changes to income tax expense.  As a result of the Tax Reform Act, the Company re-measured certain deferred tax assets and liabilities based on the newly enacted federal rate of 21%.  Accordingly, the federal net deferred tax assets were written down to account for the change. These tax changes represent provisional amounts based on the Company’s current interpretation of the Tax Reform Act and may change as it receives additional clarification and implementation guidance. The Company will continue to analyze the effects of the Tax Reform Act on its financial statements and operations. Any additional impacts from the enactment of the Tax Reform Act will be recorded as they are identified during the measurement period as provided for in accordance with Staff Accounting Bulletin No. 118.

Realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The Company makes these estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s future plans. A valuation allowance is established when the Company believes it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers all available positive and negative evidence. Deferred tax assets arising primarily as a result of net operating loss carry-forwards and research and development credits in connection with the Company’s July 2017 acquisition have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Should the actual amount differ from the Company’s estimates, the amount of the valuation allowance could be impacted.

Plant and Equipment

Plant and equipment are stated at cost, less accumulated depreciation. The cost of additions and improvements are capitalized, while maintenance and repairs are charged to expense when incurred. Depreciation is provided on a straight-line basis in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Machinery and equipment are depreciated over a range from five to ten years. Office equipment and fixtures are depreciated over a range from three to ten years. Leasehold improvements are depreciated over the lives of the respective leases or the service lives of the leasehold improvements, whichever is shorter. Depreciation of assets recorded under capital leases is included in depreciation expense.

Intangible Assets

The Company’s intangible assets other than goodwill are finite–lived and amortized on a straight-line basis over their respective useful lives. Finite-lived intangible assets are analyzed for impairment when and if indicators of impairment exist. At March 31, 2018, the Company’s intangible assets were $3,766,000 and there were no indicators of impairment.
Goodwill

The Company evaluates goodwill for impairment at least annually during the fourth quarter of each fiscal year or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company has concluded that there is one reporting unit and therefore, tests goodwill for impairment at the entity level. In testing for goodwill impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company’s qualitative assessment indicates that goodwill impairment is more likely than not, a two-step impairment test is performed. The Company tests goodwill for impairment under the two-step impairment test by first comparing the carrying value of net assets to the fair value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered impaired and no further testing is required. If the carrying value of the reporting unit exceeds the fair value, goodwill is potentially impaired and the second step of the impairment test must be performed. In the second step, the Company would compare the implied fair value of the goodwill to its carrying value to determine the amount of the impairment loss, if any. The Company completed the required annual testing of goodwill for impairment during the fourth quarter of the year ended March 31, 2018, and determined through the qualitative assessment that its goodwill of $2,551,000 is not impaired.

Debt Issuance Costs

Debt issuance costs include fees and costs incurred to obtain financing. Debt issuance costs related to the Company’s term loans are presented in the balance sheet as a direct deduction from the carrying amount of the term loans. Debt issuance costs related to the Company’s revolving loan are presented in prepaid expenses and other current assets in the accompanying consolidated balance sheets, regardless of whether or not there are any outstanding borrowings under the revolving loan. These fees and costs are amortized using the straight-line method, which approximates the effective interest rate method, over the terms of the related loans and are included in interest expense in the Company’s consolidated statements of income.

Foreign Currency Translation

For financial reporting purposes, the functional currency of the foreign subsidiaries is the local currency. The assets and liabilities of foreign operations for which the local currency is the functional currency are translated into the U.S. dollar at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average exchange rates during the year. The accumulated foreign currency translation adjustment is presented as a component of comprehensive income or loss in the consolidated statements of shareholders’ equity.

Revenue Recognition

The Company recognizes revenue when performance by the Company is complete and all of the following criteria have been met:

Persuasive evidence of an arrangement exists,

Delivery has occurred or services have been rendered,

The seller’s price to the buyer is fixed or determinable, and

Collectability is reasonably assured.

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

The price of a finished remanufactured product sold to customers is generally comprised of separately invoiced amounts for the Remanufactured Core included in the product (“Remanufactured Core value”) and for the value added by remanufacturing (“unit value”). Unit value revenue is recorded based on the Company’s price list, net of applicable discounts and allowances. The Company allows customers to return slow moving and other inventory. The Company provides for such returns of inventory by reducing revenue and cost of sales for the unit value of goods sold that are expected to be returned based on a historical return analysis and information obtained from customers about current stock levels as further described under the captions “Customer Finished Goods Returns Accrual” and “Inventory Unreturned”.
The Company accounts for revenues and cost of sales on a net-of-core-value basis. The Company has determined that its business practices and contractual arrangements result in a significant portion of the Remanufactured Cores sold being replaced by similar Used Cores sent back for credit by customers under the Company’s core exchange program. Accordingly, the Company excludes the value of Remanufactured Cores from revenue.

When the Company ships a product, it recognizes an obligation to accept a similar Used Core sent back under the core exchange program by recording a contra receivable account based upon the Remanufactured Core price agreed upon by the Company and its customer. Upon receipt of a Used Core, the Company grants the customer a credit based on the Remanufactured Core price billed and restores the Used Core to on-hand inventory.

When the Company ships a product, it invoices certain customers for the Remanufactured Core portion of the product at full Remanufactured Core sales price. For these Remanufactured Cores, the Company recognizes core revenue based upon an estimate of the rate at which the Company’s customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the Company’s core exchange program.

In addition, the Company recognizes revenue related to Remanufactured Cores originally sold at a nominal price and not expected to be replaced by a similar Used Core under the core exchange program. Unlike the full price Remanufactured Cores, the Company only recognizes revenue from nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program when the Company believes it has met all of the following criteria:

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

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

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

The amount must be billed to the customer.

Marketing Allowances

The Company records the cost of all marketing allowances provided to its customers. Such allowances include sales incentives and concessions. Voluntary marketing allowances related to a single exchange of product are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered. Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in accordance with a schedule set forth in the relevant contract. Sales incentive amounts are recorded based on the value of the incentive provided. See Note 15 for a description of all marketing allowances.

Advertising Costs

The Company expenses all advertising costs as incurred. Advertising expenses for the years ended March 31, 2018, 2017 and 2016 were $610,000, $525,000 and $474,000, respectively.

Net Income Per Share

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

  Years Ended March 31, 
  2018  2017  2016 
Net income $16,316,000  $37,573,000  $10,563,000 
             
Basic shares  18,854,993   18,608,812   18,233,163 
Effect of dilutive stock options and warrants  659,782   809,894   832,930 
Diluted shares  19,514,775   19,418,706   19,066,093 
Net income per share:            
Basic net income per share $0.87  $2.02  $0.58 
             
Diluted net income per share $0.84  $1.93  $0.55 

The effect of dilutive options and warrants excludes (i) 448,039 shares subject to options with exercise prices ranging from $27.40 to $34.17 per share for the year ended March 31, 2018, (ii) 293,239 shares subject to options with exercise prices ranging from $28.68 to $34.17 per share for the year ended March 31, 2017, and (iii) 1,100 shares subject to options with an exercise price of $34.17 per share for the year ended March 31, 2016, which were anti-dilutive.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an on-going basis, the Company evaluates its estimates, including those related to the carrying amount of plant and equipment; valuation of acquisition-related intangible assets including goodwill, impairment of long-lived assets, valuation and return allowances for receivables, inventories, and deferred income taxes; accrued liabilities, warrant liability, share-based compensation, and litigation and disputes.

The Company uses significant estimates in the calculation of sales returns. These estimates are based on the Company’s historical return rates and an evaluation of estimated sales returns from specific customers.

The Company uses significant estimates in the calculation of the lower of cost or net realizable value of long-term core inventory.

The Company’s calculation of inventory reserves involves significant estimates. The basis for the inventory reserve is a comparison of inventory on hand to historical production usage or sales volumes.

The Company uses significant estimates in the calculation of its income tax provision or benefit by using forecasts to estimate whether it will have sufficient future taxable income to realize its deferred tax assets. There can be no assurances that the Company’s taxable income will be sufficient to realize such deferred tax assets.

The Company uses significant estimates in the ongoing calculation of potential liabilities from uncertain tax positions that are more likely than not to occur.

A change in the assumptions used in the estimates for sales returns, inventory reserves and income taxes could result in a difference in the related amounts recorded in the Company’s consolidated financial statements.

Financial Instruments

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

In accounting for share-based compensation awards, the Company follows the accounting guidance for equity-based compensation, which requires that the Company measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost associated with stock options is estimated using the Black-Scholes option-pricing model. The cost associated with restricted stock units is measured based on the number of shares granted and the closing price of the Company’s common stock on the grant date, subject to continued employment. The cost of equity instruments is recognized in the consolidated statements of income on a straight-line basis over the period during which an employee is required to provide service in exchange for the award. In addition, the Company accounts for forfeitures as they occur.

The Black-Scholes option-pricing 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 summarizes the Black-Scholes option-pricing model assumptions used to derive the weighted average fair value of the stock options granted during the periods noted.

  Years Ended March 31, 
  2018  2017  2016 
Weighted average risk free interest rate  1.92%  1.39%  1.73%
Weighted average expected holding period (years)  5.82   5.84   5.76 
Weighted average expected volatility  47.28%  47.42%  46.84%
Weighted average expected dividend yield  -   -   - 
Weighted average fair value of options granted $12.63  $13.09  $14.14 

Credit Risk

The majority of the Company’s sales are to leading automotive aftermarket parts suppliers. Management believes the credit risk with respect to trade accounts receivable is limited due to the Company’s credit evaluation process and the nature of its customers. However, should the Company’s customers experience significant cash flow problems, the Company’s financial position and results of operations could be materially and adversely affected, and the maximum amount of loss that would be incurred would be the outstanding receivable balance, Used Cores expected to be returned by customers, and the value of the Remanufactured Cores held at customers’ locations.

Deferred Compensation Plan

The Company has a deferred compensation plan for certain members of management. The plan allows participants to defer salary and bonuses. The assets of the plan are held in a trust and are subject to the claims of the Company’s general creditors under federal and state laws in the event of insolvency. Consequently, the trust qualifies as a Rabbi trust for income tax purposes. The plan’s assets consist primarily of mutual funds and are classified as available for sale. The investments are recorded at market value, with any unrealized gain or loss recorded as other comprehensive income or loss in shareholders’ equity. Adjustments to the deferred compensation liability are recorded in operating expenses. The Company did not redeem any of its short-term investments for the payment of deferred compensation liabilities during the years ended March 31, 2018 and 2017. The carrying value of plan assets was $2,828,000 and $2,140,000, and deferred compensation liability was $2,828,000 and $2,140,000 at March 31, 2018 and 2017, respectively. During the years ended March 31, 2018, 2017, and 2016, an expense of $118,000, $(14,000) and $409,000, respectively, was recorded for each year related to the deferred compensation plan.
Comprehensive Income or Loss

Comprehensive income or loss is defined as the change in equity during a period resulting from transactions and other events and circumstances from non-owner sources. The Company’s total comprehensive income or loss consists of net unrealized income or loss from foreign currency translation adjustments and unrealized gains or losses on short-term investments.

3. Acquisition

Pursuant to a share repurchase agreement dated July 18, 2017, the Company completed the acquisition of all the equity interests of D&V Electronics Ltd. (“D&V”) based in Ontario, Canada, a privately held developer and manufacturer of leading edge diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles.

The Company allocated the final purchase consideration to acquire D&V to finite-lived intangible assets of $308,000 for developed technology with an estimated useful life of 3 years and $185,000 for trademarks with an estimated useful life of 2 years, $3,379,000 for inventory, and other net assets of $1,121,000. The assets and results of operations of D&V were not significant to the Company’s consolidated financial position or results of operations, and thus pro forma information is not presented.

4. Goodwill and Intangible Assets

Goodwill

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

  Years Ended March 31, 
  2018  2017 
Balance at beginning of period $2,551,000  $2,053,000 
Goodwill acquired  -   498,000 
Translation adjustment  -   - 
Impairment  -   - 
         
Balance at end of period $2,551,000  $2,551,000 

Intangible Assets

The following is a summary of acquired intangible assets subject to amortization at March 31:

    2018  2017 
 
Weighted
Average
Amortization
Period
 
Gross Carrying
Value
  
Accumulated
Amortization
  
Gross Carrying
Value
  
Accumulated
Amortization
 
Intangible assets subject to amortization              
Trademarks 9 years $885,000  $316,000  $705,000  $191,000 
Customer relationships 13 years  5,900,000   2,937,000   5,900,000   2,421,000 
Developed technology 3 years  301,000   67,000   -   - 
Total   $7,086,000  $3,320,000  $6,605,000  $2,612,000 

The Company did not retire any fully amortized intangible assets during the year ended March 31, 2018. The Company retired $33,000 of fully amortized intangible assets during the year ended March 31, 2017.
Amortization expense for acquired intangible assets is as follows:

  Years Ended March 31, 
  2018  2017  2016 
          
Amortization expense $710,000  $613,000  $621,000 

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

Year Ending March 31,
   
2019 $771,000 
2020  711,000 
2021  613,000 
2022  580,000 
2023  580,000 
Thereafter  511,000 
Total $3,766,000 

5. Short-Term Investments

The short-term investments contain the assets of the Company’s deferred compensation plan. The plan’s assets consist primarily of mutual funds and are classified as available for sale. The Company did not redeem any short-term investments for the payment of deferred compensation liabilities during the years ended March 31, 2018 and 2017. At March 31, 2018 and 2017, the fair market value of the short-term investments was $2,828,000 and $2,140,000, and the deferred compensation liability to plan participants was $2,828,000 and $2,140,000, respectively.

6. Accounts Receivable — Net

Included in accounts receivable — net are significant offset accounts related to customer allowances (see Note 15), customer payment discrepancies, returned goods authorizations (“RGA”) issued for in-transit unit returns, estimated future credits to be provided for Used Cores returned by the customers (see Note 2) and potential bad debts. Due to the forward looking nature and the different aging periods of certain estimated offset accounts, they may not, at any point in time, directly relate to the balances in the accounts receivable—trade account.

Accounts receivable — net is comprised of the following at March 31:

  2018  2017 
Accounts receivable — trade $83,700,000  $76,902,000 
Allowance for bad debts  (4,142,000)  (4,140,000)
Customer allowances earned  (11,370,000)  (7,880,000)
Customer payment discrepancies  (1,110,000)  (751,000)
Customer returns RGA issued  (15,274,000)  (12,710,000)
Customer core returns accruals  (36,066,000)  (25,404,000)
Less: total accounts receivable offset accounts  (67,962,000)  (50,885,000)
Total accounts receivable — net $15,738,000  $26,017,000 
Warranty Returns

The Company allows its customers to return goods that their customers have returned to them, whether or not the returned item is defective (“warranty returns”). The Company accrues an estimate of its exposure to warranty returns based on a historical analysis of the level of this type of return as a percentage of total unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales. At March 31, 2018 and 2017, the Company’s total warranty return accrual was $16,646,000 and $14,286,000, respectively, of which $7,204,000 and $5,303,000, respectively, was included in the customer returns RGA issued balance in the above table for expected credits to be issued against accounts receivable and $9,442,000 and $8,983,000, respectively, was included in the customer finished goods returns accrual in the consolidated balance sheets for estimated future warranty returns.

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

  Years Ended March 31, 
  2018  2017  2016 
Balance at beginning of period $14,286,000  $10,845,000  $10,904,000 
Charged to expense  105,156,000   99,673,000   80,099,000 
Amounts processed  (102,796,000)  (96,232,000)  (80,158,000)
Balance at end of period $16,646,000  $14,286,000  $10,845,000 

7. Inventory

Non-core inventory, inventory unreturned, long-term core inventory, and long-term core inventory deposits are as follows at March 31:

  2018  2017 
Non-core inventory      
Raw materials $25,805,000  $21,515,000 
Work in process  635,000   641,000 
Finished goods  53,973,000   48,337,000 
   80,413,000   70,493,000 
Less allowance for excess and obsolete inventory  (4,138,000)  (2,977,000)
Total $76,275,000  $67,516,000 
         
Inventory unreturned $7,508,000  $7,581,000 
Long-term core inventory        
Used cores held at the Company's facilities $53,278,000  $38,713,000 
Used cores expected to be returned by customers  12,970,000   11,752,000 
Remanufactured cores held in finished goods  34,201,000   27,667,000 
Remanufactured cores held at customers' locations (1)  203,751,000   185,938,000 
   304,200,000   264,070,000 
Less allowance for excess and obsolete inventory  (2,544,000)  (1,148,000)
Total $301,656,000  $262,922,000 
         
Long-term core inventory deposits $5,569,000  $5,569,000 

(1)Remanufactured cores held at customers’ locations represent the core portion of the Company’s customers’ finished goods at the Company’s customers’ locations.
8. Plant and Equipment

The following summarizes plant and equipment, at cost, at March 31:

  2018  2017 
Machinery and equipment $42,976,000  $32,589,000 
Office equipment and fixtures  11,380,000   11,806,000 
Leasehold improvements  7,832,000   7,641,000 
   62,188,000   52,036,000 
Less accumulated depreciation  (33,866,000)  (33,599,000)
Total $28,322,000  $18,437,000 

Plant and equipment located in the foreign countries where the Company has facilities, net of accumulated depreciation, totaled $14,919,000 and $3,855,000 at March 31, 2018 and 2017, respectively. These assets constitute substantially all the long-lived assets of the Company located outside of the United States.

9. Capital Lease Obligations

The Company leases various types of machinery and computer equipment under agreements accounted for as capital leases and included in plant and equipment as follows at March 31:

  2018  2017 
Cost $7,092,000  $3,663,000 
Less: accumulated depreciation  (1,446,000)  (893,000)
         
Total $5,646,000  $2,770,000 

Future minimum lease payments for the capital leases are as follows:

Year Ending March 31,
   
2019 $1,627,000 
2020  1,474,000 
2021  1,045,000 
2022  839,000 
2023  613,000 
Total minimum lease payments  5,598,000 
Less amount representing interest  (514,000)
Present value of future minimum lease payments  5,084,000 
Less current portion of lease payments  (1,388,000)
Long-term portion of  lease payments $3,696,000 

The current portion of lease payments of $1,388,000 is included in other current liabilities and the long-term portion of lease payments of $3,696,000 is included in other liabilities in the accompanying consolidated balance sheet at March 31, 2018.

10. Accrued Core Payment

At March 31, 2018 and 2017, the Company recorded $35,009,000 and $24,063,000, respectively, representing the net accrued core payment for the Remanufactured Core inventory purchased from its customers, which are held by these customers and remain on their premises.
Future repayments for accrued core payment are as follows:

Year Ending March 31,
    
2019 $17,421,000 
2020  7,865,000 
2021  6,651,000 
2022  4,841,000 
Total accrued core payment  36,778,000 
Less amount representing interest  (1,769,000)
Present value of accrued core payment  35,009,000 
Less current portion of accrued core payment  (16,536,000)
Long-term portion of  accrued core payment $18,473,000 

11. Debt

The Company has the following credit agreements.

Credit Facility

The Company is party to a $145,000,000 senior secured financing, as amended, (the “Credit Facility”) with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $120,000,000 revolving loan facility, subject to borrowing base restrictions and a $15,000,000 sublimit for letters of credit (the “Revolving Facility”) and (ii) a $25,000,000 term loan facility (the “Term Loans”). The loans under the Credit Facility mature on June 3, 2020. In connection with the Credit Facility, the lenders were granted a security interest in substantially all of the assets of the Company. The Credit Facility permits the payment of up to $10,000,000 of dividends per calendar year, subject to a minimum availability threshold and pro forma compliance with financial covenants. This amount was increased to $15,000,000 under the April 2017 amendment to the Credit Facility.

In April 2017, the Company entered into a consent and fourth amendment to the Credit Facility (the “Fourth Amendment”) which, among other things, (i) increased the borrowing base limit with respect to inventory located in Mexico, (ii) amended the definition and calculation of consolidated EBITDA to raise the limitation on the add-back for non-capitalized transaction expenses related to the expansion of operations in Mexico, (iii) increased the annual limit on permitted stock repurchases and dividends, and (iv) modified certain other categories (including increasing certain baskets for permitted acquisitions) and thresholds to, among other things, further accommodate the expansion of operations in Mexico.

In July 2017, the Company entered into a fifth amendment to the Credit Facility (the “Fifth Amendment”) which, among other things, amended the definition of permitted acquisitions, permitted indebtedness, and pledge agreements.

The Term Loans require quarterly principal payments of $781,250. The Credit Facility bears interest at rates equal to either LIBOR plus a margin of 2.50%, 2.75% or 3.00% or a reference rate plus a margin of 1.50%, 1.75% or 2.00%, in each case depending on the senior leverage ratio as of the applicable measurement date. There is also a facility fee of 0.25% to 0.375%, depending on the senior leverage ratio as of the applicable measurement date. The interest rate on the Company’s Term Loans and Revolving Facility was 4.42% and 4.52%, respectively, at March 31, 2018 and 3.29% and 3.55%, respectively, at March 31, 2017.

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 financial covenants as of March 31, 2018.

In addition to other covenants, the Credit Facility places limits on the Company’s ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, redeem or repurchase capital stock, alter the business conducted by the Company and its subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.
The following summarizes information about the Company’s Term Loans at March 31:

  2018  2017 
Principal amount of term loan $17,188,000  $20,312,000 
Unamortized financing fees  (207,000)  (313,000)
Net carrying amount of term loan  16,981,000   19,999,000 
Less current portion of term loan  (3,068,000)  (3,064,000)
Long-term portion of term loan $13,913,000  $16,935,000 

Future repayments of the Company’s Term Loans are as follows:
Year Ending March 31,
   
2019 $3,125,000 
2020  3,125,000 
2021  10,938,000 
Total payments $17,188,000 
The Company had $54,000,000 and $11,000,000 outstanding under the Revolving Facility at March 31, 2018 and 2017, respectively. In addition, $260,000 was reserved for standby letters of credit for workers’ compensation insurance and $600,000 for commercial letters of credit at March 31, 2018. At March 31, 2018, $65,140,000, subject to certain adjustments, was available under the Revolving Facility.

WX Agreement

In August 2012, the Company entered into a Revolving Credit/Strategic Cooperation Agreement (the “WX Agreement”) with Wanxiang America Corporation (the “Supplier”) and the discontinued subsidiaries. In connection with the WX Agreement, the Company issued a warrant (the “Supplier Warrant”) to the Supplier to purchase up to 516,129 shares of the Company’s common stock for an exercise price of $7.75 per share exercisable at any time after August 22, 2014 and on or prior to September 30, 2017.

On September 8, 2017, the Supplier exercised the Supplier Warrant in full and paid the Company $4,000,000. As a result of the exercise, the Supplier Warrant is no longer outstanding. The fair value of the Supplier Warrant on the exercise date was $9,566,000 using level 3 inputs and the Monte Carlo simulation model. The following assumptions were used to calculate the fair value of the Supplier Warrant: dividend yield of 0%, expected volatility of 26.4%, risk-free interest rate of 0.96%, subsequent financing probability of 0%, and an expected life of 0.06 years. The Company recorded a non-cash reclassification of the Supplier Warrant’s fair value to shareholders’ equity on the exercise date, with no further adjustments to the fair value of the Supplier Warrant being required. The fair value of the Supplier Warrant was $11,879,000 at March 31, 2017 and was included in other liabilities in the consolidated balance sheet.

During the years ended March 31, 2018 and 2017, a gain of $2,313,000 and $3,764,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of this warrant liability.

12. Accounts Receivable Discount Programs

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

  Years Ended March 31, 
  2018  2017 
       
Receivables discounted $357,224,000  $352,369,000 
Weighted average days  340   342 
Weighted average discount rate  3.3%  2.9%
Amount of discount as interest expense $11,182,000  $9,724,000 

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 facilities overseas, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign currency. 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. The Company does not hold or issue financial instruments for trading purposes. The forward foreign currency exchange contracts are designated for forecasted expenditure requirements to fund foreign operations.

The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $31,304,000 and $26,880,000 at March 31, 2018 and 2017, respectively. These contracts generally expire in a year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade or better credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are reflected in current period earnings and accounted for as an increase or offset to general and administrative expenses.

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

  Gain (Loss) Recognized within General and Administrative Expenses 
Derivatives Not Designated as Years Ended March 31, 
Hedging Instruments 2018  2017  2016 
          
Forward foreign currency exchange contracts $752,000  $843,000  $777,000 

The fair value of the forward foreign currency exchange contracts of $1,179,000 and $427,000 are included in prepaid and other current assets in the accompanying consolidated balance sheets at March 31, 2018 and 2017, respectively.

14. Fair Value Measurements

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a three-tier valuation hierarchy based upon observable and unobservable inputs:
Level 1 — Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 — Valuation is based upon unobservable inputs that are significant to the fair value measurement.

The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The following sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis according to the valuation techniques the Company used to determine their fair values at:

  March 31, 2018  March 31, 2017 
     
Fair Value Measurements
Using Inputs Considered as
     
Fair Value Measurements
Using Inputs Considered as
 
  Fair Value  Level 1  Level 2  Level 3  Fair Value  Level 1  Level 2  Level 3 
Assets                        
Short-term investments                        
Mutual funds $2,828,000  $2,828,000   -   -  $2,140,000  $2,140,000   -   - 
Prepaid expenses and other current assets                                
Forward foreign currency exchange contracts  1,179,000   -  $1,179,000   -   427,000   -  $427,000   - 
                                 
Liabilities                                
Other current liabilities                                
Deferred compensation  2,828,000   2,828,000   -   -   2,140,000   2,140,000   -   - 
Other liabilities                                
Warrant liability  -   -   -   -   11,879,000   -   -  $11,879,000 

Short-term Investments and Deferred Compensation

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

Forward Foreign Currency Exchange Contracts

The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers and classified as Level 2. During the years ended March 31, 2018 and 2017, gains of $752,000 and $843,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts.
Level 3 Fair Value Measurements

The following summarizes the activity for Level 3 fair value measurements:

  Years Ended March 31, 
  2018  2017 
  
Supplier
Warrant
  
Contingent
Consideration
  
Supplier
Warrant
  
Contingent
Consideration
 
Beginning balance $11,879,000  $-  $15,643,000  $330,000 
Newly issued  -   -   -   - 
Total (gain) loss included in net income  (2,313,000)  -   (3,764,000)  (16,000)
Exercises/settlements (1)  (9,566,000)  -   -   (314,000)
Net transfers in (out) of Level 3  -   -   -   - 
Ending balance $-  $-  $11,879,000  $- 

(1)Represents the fair value of the Supplier Warrant as of the exercise date (see Note 11).

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

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

15. Commitments and Contingencies

Operating Lease Commitments

The Company leases various facilities in North America and Asia under operating leases expiring through December 2032, which includes the 15-year lease for a new 410,000 square foot facility in Tijuana, Mexico. The Company also has short-term contracts of one year or less covering its third party warehouses that provide for contingent payments based on the level of sales that are processed through the third party warehouse.

The remaining future minimum rental payments under the above operating leases are as follows:


Year Ending March 31,
   
2019 $5,873,000 
2020  4,437,000 
2021  4,501,000 
2022  4,360,000 
2023  3,066,000 
Thereafter  30,824,000 
     
Total minimum lease payments $53,061,000 
During the years ended March 31, 2018, 2017 and 2016, the Company incurred total operating lease expenses of $4,362,000, $3,495,000 and $3,263,000, respectively.

Commitments to Provide Marketing Allowances under Long-Term Customer Contracts
The Company has or is renegotiating long-term agreements with many of its major customers. Under these agreements, which in most cases have initial terms of at least four years, the Company is designated as the exclusive or primary supplier for specified categories of the Company’s products. Because of the very competitive nature of the market and the limited number of customers for these products, the Company’s customers have sought and obtained price concessions, significant marketing allowances, and more favorable delivery and payment terms in consideration for the Company’s designation as a customer’s exclusive or primary supplier. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables in accordance with a schedule set forth in the relevant contract, (ii) support for a particular customer’s research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product, and (iv) other marketing, research, store expansion or product development support. These contracts typically require that the Company meet ongoing performance standards. The Company’s contracts with major customers expire at various dates through April 2021. While these longer-term agreements strengthen the Company’s customer relationships, the increased demand for the Company’s products often requires that the Company increase its inventories and personnel. Customer demands that the Company purchase their Remanufactured Core inventory also require the use of the Company’s working capital.

The marketing and other allowances the Company typically grants its customers in connection with its new or expanded customer relationships adversely impact the near-term revenues, profitability, and associated cash flows from these arrangements. Such allowances include sales incentives and concessions and typically consist of: (i) allowances which may only be applied against future purchases and are recorded as a reduction to revenues in accordance with a schedule set forth in the long-term contract, (ii) allowances related to a single exchange of product that are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered, and (iii) allowances that are made in connection with the purchase of inventory from a customer.

The following summarizes the breakout of allowances discussed above, recorded as a reduction to revenues:
  Years Ended March 31, 
  2018 2017 2016 
        
Allowances incurred under long-term customer contracts $24,829,000  $23,684,000  $29,845,000 
Allowances related to a single exchange of product  79,813,000   67,262,000   47,451,000 
Allowances related to core inventory purchase obligations  2,545,000   5,470,000   2,268,000 
Total customer allowances recorded as a reduction of revenues $107,187,000  $96,416,000  $79,564,000 

The following presents the Company’s commitments to incur allowances, excluding allowances related to a single exchange of product, which will be recognized as a charge against revenue, and customer Remanufactured Core purchase obligations, which will be recognized in accordance with the terms of the relevant long-term customer contracts:
Year Ending March 31,
   
2019 $30,154,000 
2020  21,927,000 
2021  16,982,000 
2022  113,000 
     
Total marketing allowances $69,176,000 
16. Significant Customer and Other Information

Significant Customer Concentrations

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

  Years Ended March 31, 
  2018  2017  2016 
Customer A  41%  44%  48%
Customer B  24%  20%  18%
Customer C  19%  19%  21%
Customer D  4%  4%  3%

The Company’s largest customers accounted for the following total percentage of accounts receivable — trade at March 31:

  2018  2017 
Customer A  36%  33%
Customer B  16%  18%
Customer C  22%  12%
Customer D  5%  16%

Geographic and Product Information

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

  Years Ended March 31, 
  2018  2017  2016 
Rotating electrical products  78%  78%  78%
Wheel hub products  17%  19%  20%
Brake master cylinders products  2%  3%  2%
Other products  3%  -%  -%
   100%  100%  100%

Significant Supplier Concentrations

No suppliers accounted for more than 10% of the Company’s inventory purchases for the years ended March 31, 2018, 2017 and 2016.

17. Income Taxes

On December 22, 2017, comprehensive tax reform legislation known as the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act amends the Internal Revenue Code to reduce U.S. tax rates and modify policies, credits and deductions for individuals and businesses. The effects of the Tax Reform Act on the Company are as follows:

Remeasurement of Deferred Taxes

The Tax Reform Act permanently reduces the U.S. federal corporate income tax rate from 35% to 21%, effective for tax years beginning after 2017. GAAP requires an adjustment to deferred taxes as a result of a change in the corporate tax rate in the period that the change is enacted, with the change recorded to the current year tax provision. Accordingly, the Company has remeasured its deferred tax assets and liabilities at the new tax rate and recorded a one-time noncash tax charge of $4,863,000 to deferred income taxes for the year ended March 31, 2018. This charge is reflected in the Company’s increased effective tax rate for the year.
Mandatory Transition Tax

In connection with the move by the U.S. to a partial territorial tax system, the Tax Reform Act provides for the exclusion of foreign-sourced dividends received by a U.S. corporation from its foreign-owned corporations beginning in 2018. In addition, the Tax Reform Act imposes a toll charge in 2017 on the deemed repatriation of a U.S. shareholder’s pro-rata share of certain foreign subsidiaries’ post-1986 accumulated earnings. The toll charge assesses an effective tax rate of 15.5% on cash and other liquid assets of U.S.-owned foreign corporations, while subjecting all other property of such corporations to an effective tax rate of 8.0%, and allows for available foreign tax credits to reduce the resulting toll charge. Taxpayers may elect to pay this tax liability over eight years on an interest-free basis. The Company has accrued an estimated toll charge liability of $530,000, reflected in current taxes payable as of March 31, 2018.

Executive Compensation

The Tax Reform Act maintains the $1,000,000 limitation on deductible compensation to cover employees. However, it eliminates the current exception for performance-based compensation and expands the definition of covered employees to include the chief financial officer. The expansion of executive compensation limitations are effective in 2018. The modifications do not apply to remuneration paid pursuant to a written binding contract in effect on November 2, 2017 if it was not materially modified on or after that date.

As a result of the Tax Reform Act, the SEC provided guidance (Staff Accounting Bulletin 118 (“SAB 118”)) that allows public companies to record provisional amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment. As of March 31, 2018, the Company has not completed the accounting for the tax effects of the Tax Reform Act. Therefore, the Company has recorded provisional amounts for the effects of the Tax Reform Act, including but not limited to, the following primary impacts of the Tax Reform Act: remeasurement of deferred tax assets and liabilities and the estimated calculation of the one-time mandatory transition tax on undistributed earnings of foreign affiliates.

The income tax expense is as follows:
  Years Ended March 31, 
  2018  2017  2016 
Current tax expense         
Federal $12,153,000  $9,451,000  $12,400,000 
State  1,406,000   318,000   1,995,000 
Foreign  1,215,000   1,455,000   803,000 
             
Total current tax expense  14,774,000   11,224,000   15,198,000 
             
Deferred tax expense (benefit)            
Federal  2,779,000   4,291,000   (2,929,000)
State  333,000   2,174,000   (757,000)
Foreign  (23,000)  (384,000)  (33,000)
             
Total deferred tax expense (benefit)  3,089,000   6,081,000   (3,719,000)
             
Total income tax expense $17,863,000  $17,305,000  $11,479,000 
Deferred income taxes consist of the following at March 31:
  2018  2017 
Assets      
Accounts receivable valuation $3,915,000  $4,697,000 
Allowance for customer incentives  2,038,000   2,894,000 
Inventory obsolescence reserve  1,666,000   1,608,000 
Stock options  1,728,000   1,971,000 
Intangibles, net  59,000   339,000 
Estimate for returns  1,115,000   3,191,000 
Accrued compensation  1,152,000   1,785,000 
Net operating losses  1,079,000   834,000 
Tax credits  1,363,000   - 
Other  2,091,000   2,065,000 
         
Total deferred tax assets $16,206,000  $19,384,000 
         
Liabilities        
Property and equipment, net  (1,025,000)  (1,605,000)
Other  (3,072,000)  (4,413,000)
         
Total deferred tax liabilities $(4,097,000) $(6,018,000)
         
Less valuation allowance $(1,779,000) $- 
         
Net deferred tax assets $10,330,000  $13,366,000 
         
Net long-term deferred income tax liability  (226,000)  (180,000)
Net long-term deferred income tax asset  10,556,000   13,546,000 
         
Total $10,330,000  $13,366,000 


At March 31, 2018, the Company had state net operating loss carryforwards of $932,000. The net operating loss carryforwards expire between fiscal years 2022 and 2036.

Realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income. Significant judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets. The Company makes these estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s future plans. A valuation allowance is established when the Company believes it is not more likely than not all or some of a deferred tax assets will be realized. In evaluating the Company’s ability to recover deferred tax assets within the jurisdiction in which they arise, the Company considers all available positive and negative evidence. Deferred tax assets arising primarily as a result of net operating loss carry-forwards and research and development credits in connection with the Company’s July 2017 acquisition have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. Should the actual amount differ from the Company’s estimates, the amount of the valuation allowance could be impacted.

For the years ended March 31, 2018, 2017, and 2016, the primary components of the Company’s income tax expense were (i) the impact of the changes as a result of the Tax Reform Act, (ii) foreign income taxed at rates that are different from the federal statutory rate, (iii) non-deductible expenses in connection with the fair value adjustments on the warrants, (iv) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m), (v) the impact of uncertain tax positions, (vi) the change in the blended state rate, and (vii) the excess tax benefit relating to share-based compensation.
The difference between the income tax expense at the federal statutory rate and the Company’s effective tax rate is as follows:
  Years Ended March 31, 
  2018  2017  2016 
          
Statutory federal income tax rate  31.5%  35.0%  35.0%
State income tax rate, net of federal benefit  3.3%  2.2%  4.0%
Excess tax benefit from stock compensation  (0.7)%  (1.4)%  -%
Foreign income taxed at different rates  (2.6)%  (0.7)%  (0.8)%
Warrants  (2.1)%  (2.4)%  8.2%
Non-deductible executive compensation  1.0%  0.8%  2.2%
Change in valuation allowance  4.9%  -%  -%
Effects of mandatory redeemed repatriation  1.6%  -%  -%
Effects of U.S. tax rate changes  14.2%  -%  -%
Uncertain Tax Positions  0.6%  (0.2)%  0.4%
Other income tax  0.6%  (1.8)%  3.1%
             
   52.3%  31.5%  52.1%
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions with varying statutes of limitations. At March 31, 2018, the Company is not under examination in any jurisdiction and the years ended March 31, 2017, 2016, and 2015 remain subject to examination. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
  Years Ended March 31, 
  2018  2017  2016 
Balance at beginning of period $1,092,000  $1,181,000  $1,117,000 
Additions based on tax positions related to the current year  234,000   141,000   57,000 
Additions for tax positions of prior year  -   106,000   217,000 
Reductions for tax positions of prior year  (107,000)  -   (210,000)
Settlements  -   (336,000)  - 
             
Balance at end of period $1,219,000  $1,092,000  $1,181,000 

At March 31, 2018, 2017 and 2016, there are $1,054,000, $840,000 and $678,000 of unrecognized tax benefits that if recognized would affect the annual effective tax rate.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as part of income tax expense. During the years ended March 31, 2018, 2017, and 2016, the Company recognized approximately $5,000, $51,000, and $34,000 in interest and penalties. The Company had approximately $146,000 and $141,000 for the payment of interest and penalties accrued at March 31, 2018 and 2017, respectively.

18. Defined Contribution Plans

The Company has a 401(k) plan covering all employees who are 21 years of age with at least six months of service. The plan permits eligible employees to make contributions up to certain limitations, with the Company matching 50% of each participating employee’s contribution up to the first 6% of employee compensation. Employees are immediately vested in their voluntary employee contributions and vest in the Company’s matching contributions ratably over five years. The Company’s matching contribution to the 401(k) plan was $389,000, $353,000, and $347,000 for the years ended March 31, 2018, 2017, and 2016, respectively.
19. Share-based Payments

At March 31, 2018, there were 342,000 shares of the Company’s common stock reserved for grants to the Company’s non-employee directors under the 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”). Under the 2014 Plan, (i) 35,659 and 37,383 of restricted stock units were issued and (ii) 236,976 and 263,078 shares of common stock were available for grant under this plan at March 31, 2018 and 2017, respectively.

At March 31, 2018, there were 3,950,000 shares of common stock reserved for grant to all employees of the Company under the 2010 Incentive Award Plan (the “2010 Plan”). Under the 2010 Plan, (i) 98,169 and 88,894 shares of restricted stock units were outstanding, (ii) options to purchase 1,046,298 and 898,009 shares of common stock were outstanding, and (iii) 1,573,810 and 688,765 shares of common stock were available for grant at March 31, 2018 and 2017, respectively.

In addition, at March 31, 2018 and 2017, options to purchase 97,000 and 128,000 shares of common stock, respectively, were outstanding under the 2004 Non-Employee Director Stock Option Plan. There were no options outstanding to purchase common stock under the 2003 Long-Term Incentive Plan at March 31, 2018 and options to purchase 10,350 shares of common stock were outstanding under this plan at March 31, 2017. No options remain available for grant under these plans.

The shares of common stock issued upon exercise of a previously granted stock option are considered new issuances from shares reserved for issuance upon adoption of the various plans. The Company requires that the option holders provide a written notice of exercise to the stock plan administrator and payment for the shares prior to issuance of the shares.

Stock Options

The following is a summary of stock option activity during the year:

  
Number of
Shares
  
Weighted Average
Exercise Price
 
Outstanding at March 31, 2016  1,036,359  $14.92 
Granted  170,890  $27.27 
Exercised  (55,351) $8.65 
Forfeited  (8,600) $28.92 
Outstanding at March 31, 2017  1,143,298  $16.97 

At March 31, 2018, options to purchase 325,274 shares of common stock were unvested at the weighted average exercise price of $28.23.

Based on the market value of the Company’s common stock at March 31, 2018, 2017, and 2016, the pre-tax intrinsic value of options exercised was $913,000, $2,477,000, and $14,002,000, respectively. The total fair value of stock options vested during the years ended March 31, 2018, 2017, and 2016 was $1,572,000, $1,290,000, and $905,000, respectively.
The following summarizes information about the options outstanding at March 31, 2018:

   Options Outstanding Options Exercisable
Range of
Exercise price
  
Shares
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Life
In Years
  
Aggregate
Intrinsic
Value
 
Shares
  
Weighted
Average
Exercise
Price
  
Aggregate
Intrinsic
Value
$4.17 to $6.25   49,000  $4.87   1.35     49,000  $4.87   
$6.26 to $7.43   354,534   6.48   4.70     354,534   6.48   
$7.44 to $19.94   211,132   9.86   5.23     211,132   9.86   
$19.95 to $34.17   528,632   27.96   8.12     203,358   27.54   
    1,143,298  $16.97   6.24  $8,555,000  818,024  $12.49 $8,555,000

The aggregate intrinsic values in the above table represent the pre-tax value of all in-the-money options if all such options had been exercised on March 31, 2018 based on the Company’s closing stock price of $21.43 as of that date.

At March 31, 2018, there was $2,795,000 of total unrecognized compensation expense from stock-based compensation granted under the plans, which is related to non-vested shares. The compensation expense is expected to be recognized over a weighted average vesting period of 1.7 years.

Restricted Stock Units (“RSUs”)

During the years ended March 31, 2018 and 2017, the Company granted 77,854 and 62,637 shares of RSUs, respectively, with an estimated grant date fair value of $2,157,000 and $1,774,000, respectively, which was based on the closing market price on the date of grant. The fair value related to these awards is recognized as compensation expense over the vesting period. These awards generally vest in three equal installments beginning each anniversary from the grant date, subject to continued employment. Upon vesting, these awards may be net share settled to cover the required withholding tax with the remaining amount converted into an equivalent number of shares of common stock. Total shares withheld during the years ended March 31, 2018 and 2017 were 21,361 and 36,586, respectively, and was based on the value of these awards as determined by the Company’s closing stock price on the vesting date.

The following is a summary of changes in the status of non-vested RSUs during the year:

  
Number of
Shares
  
Weighted Average
Grant Date Fair
Value
 
Non-vested at March 31, 2017  126,277  $28.26 
Granted  77,854  $27.70 
Vested  (68,869) $27.41 
Forfeited  (1,434) $28.37 
Non-vested at March 31, 2018  133,828  $28.37 

As of March 31, 2018, there was $2,648,000 of unrecognized compensation expense related to these awards, which will be recognized over the remaining vesting period of approximately 1.9 years.

20. Litigation

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. Management does not believe that the outcome of these other matters will have a material adverse effect on its financial position or future results of operations.
21. Share Repurchase Program

As of March 31, 2018, the Company’s board of directors had approved a stock repurchase program of up to $20,000,000 of its common stock. As of March 31, 2018, $11,630,000 of the $20,000,000 had been utilized and $8,370,000 remained available to repurchase shares under the authorized share repurchase program, subject to the limit in the Company’s credit facility. The Company retired the 511,746 shares repurchased under this program through March 31, 2018. The Company’s share repurchase program does not obligate it to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

22. Accumulated Other Comprehensive Income (Loss)

The following summarizes the changes in accumulated other comprehensive income (loss) for the years ended March 31:
  2018  2017 
  
Unrealized
Gain
on Short-Term
Investments
  
Foreign
Currency
Translation
  Total  
Unrealized
Gain
on Short-Term
Investments
  
Foreign
Currency
Translation
  Total 
                   
Beginning balance $528,000  $(7,969,000) $(7,441,000) $332,000  $(5,184,000) $(4,852,000)
Other comprehensive income (loss), net of tax  218,000   1,795,000   2,013,000   196,000   (2,785,000)  (2,589,000)
Amounts reclassified from other comprehensive income (loss), net of tax  -   -   -   -   -   - 
Ending balance $746,000  $(6,174,000) $(5,428,000) $528,000  $(7,969,000) $(7,441,000)

23. Subsequent Events

Credit Facility

On June 5, 2018 the Company entered into an Amended and Restated Credit Facility (the “New Credit Facility”), with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $200,000,000 revolving loan facility, subject to borrowing base restrictions, a $20,000,000 sublimit for borrowings by Canadian borrowers, and a $15,000,000 sublimit for letters of credit (the “New Revolving Facility) and (ii) a $30,000,000 term loan facility (the “New Term Loans”). The loans under the New Credit Facility mature on June 5, 2023. In connection with the New Credit Facility, the lenders were granted a security interest in substantially all of the assets of the Company.
24. Unaudited Quarterly Financial Data

The following summarizes selected quarterly financial data for the year ended March 31, 2018.
   
First
Quarter
    
Second
Quarter
    
Third
Quarter
    
Fourth
Quarter
  
             
Net sales $95,063,000  $111,774,000  $100,127,000  $121,108,000 
Cost of goods sold  69,224,000   84,612,000   77,583,000   90,780,000 
Gross profit  25,839,000   27,162,000   22,544,000   30,328,000 
Operating expenses:                
General and administrative  6,187,000   8,615,000   11,915,000   8,810,000 
Sales and marketing  3,394,000   3,457,000   4,048,000   4,131,000 
Research and development  1,002,000   1,240,000   1,678,000   1,772,000 
Total operating expenses  10,583,000   13,312,000   17,641,000   14,713,000 
Operating income  15,256,000   13,850,000   4,903,000   15,615,000 
Other expense:                
Interest expense, net  3,314,000   3,522,000   3,953,000   4,656,000 
Income before income tax expense  11,942,000   10,328,000   950,000   10,959,000 
Income tax expense  4,316,000   4,027,000   7,756,000   1,764,000 
                 
Net income (loss) $7,626,000  $6,301,000  $(6,806,000) $9,195,000 
                 
Basic net income (loss) per share $0.41  $0.34  $(0.36) $0.48 
                 
Diluted net income (loss) per share $0.39  $0.33  $(0.36) $0.47 

The following summarizes selected quarterly financial data for the year ended March 31, 2017:

  
First
Quarter
  
Second
Quarter
  
Third
Quarter
  
Fourth
Quarter
 
             
Net sales $85,412,000  $108,836,000  $112,595,000  $114,410,000 
Cost of goods sold  65,021,000   78,178,000   80,225,000   82,783,000 
Gross profit  20,391,000   30,658,000   32,370,000   31,627,000 
Operating expenses:                
General and administrative  3,625,000   9,869,000   7,952,000   9,678,000 
Sales and marketing  2,634,000   2,707,000   3,234,000   3,551,000 
Research and development  869,000   905,000   1,039,000   1,011,000 
Total operating expenses  7,128,000   13,481,000   12,225,000   14,240,000 
Operating income  13,263,000   17,177,000   20,145,000   17,387,000 
Other expense:                
Interest expense, net  2,819,000   3,189,000   3,357,000   3,729,000 
Income before income tax expense  10,444,000   13,988,000   16,788,000   13,658,000 
Income tax expense  2,936,000   4,845,000   5,678,000   3,846,000 
                 
Net income $7,508,000  $9,143,000  $11,110,000  $9,812,000 
                 
Basic net income per share $0.40  $0.49  $0.59  $0.53 
                 
Diluted net income per share $0.39  $0.47  $0.57  $0.50 

Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year shown elsewhere in the Annual Report on Form 10-K.
Schedule II — Valuation and Qualifying Accounts

Accounts Receivable — Allowance for doubtful accounts
Years Ended
March 31,
 Description 
Balance at
beginning of
period
  
Charge to
(recovery of)
bad debts
expense
  Acquisition  
Amounts
written off
  
Balance at
end of
period
 
2018 Allowance for doubtful accounts $4,140,000  $21,000  $-  $19,000  $4,142,000 
2017 Allowance for doubtful accounts $4,284,000  $3,000  $-  $147,000  $4,140,000 
2016 Allowance for doubtful accounts $629,000  $4,404,000  $-  $749,000  $4,284,000 

Accounts Receivable — Allowance for customer-payment discrepancies

Years Ended
March 31,
 Description 
Balance at
beginning of
period
  
Charge to
(recovery of)
discrepancies
expense
  Acquisition  
Amounts
Processed
  
Balance at
end of
period
 
2018 Allowance for customer-payment discrepancies $751,000  $998,000  $-  $639,000  $1,110,000 
2017 Allowance for customer-payment discrepancies $703,000  $718,000  $-  $670,000  $751,000 
2016 Allowance for customer-payment discrepancies $852,000  $(299,000) $-  $(150,000) $703,000 
Inventory — Allowance for excess and obsolete inventory
Years Ended
March 31,
 Description 
Balance at
beginning of
period
  
Provision for
excess and
obsolete
inventory
  Acquisition  
Amounts
written off
  
Balance at
end of
period
 
2018 Allowance for excess and obsolete inventory $4,125,000  $8,491,000  $77,000(1) $6,011,000  $6,682,000 
2017 Allowance for excess and obsolete inventory $3,626,000  $3,864,000  $-  $3,365,000  $4,125,000 
2016 Allowance for excess and obsolete inventory $2,675,000  $4,518,000  $-  $3,567,000  $3,626,000 

(1)Allowance for excess and obsolete inventory established in the opening balance sheet in connection with the Company’s July 2017 acquisition.
 
 
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